Make consumer credit directive accord to real-life conditions

by Finanzplatz München Initiative

Munich Financial Center Initiative (mfci) views the second draft submitted by the EU Commission of the consumer credit directive as containing key points still requiring improvement. Should the draft be implemented in its present form, it would inevitably make consumer credit more expensive, and would make it more difficult for bank customers with weak credit ratings to secure credit. These factors would be to the direct detriment of consumers. The draft also fails to manifest the ideal propagated by Brussels of treating consumers like adults capable of managing their own affairs. Another point of criticism: the implementation of the current draft would burden banks with even more bureaucracy.

In February of this year, fpmi presented to EU representatives in Brussels a position paper detailing its proposals for alterations. The paper showed how the requirements stipulated by the EU Commission of briefing, on a face-to-face basis, consumers prior to their taking out credits could well have negative side-effects. They would enable consumers not being able to repay the loans to lodge "claims vis-à-vis the issuing banks for recompense for the damages arising from the banks' failure to not adequately have explained to them the disadvantages arising from the contracts of credit".

fpmi's contentions received the backing of Germany's Federal Council, which issued a resolution in mid-February taking a searching look at the consumer credit directive. The resolution called for the making of considerably-sized alterations in the current draft.

The statements made by mfci members on the consumer credit directive are contained below, as are fpmi's position paper (in German) of February 1st and Bundesratsbeschluss (in German) of February 10, 2006.

Allianz Group: further corrections urgently needed
The second draft submitted by the EU Commission on the consumer credit directive contains certain improvements over its predecessor. Further corrections are, however, urgently needed. The "responsible issuing of credit" is in fact a matter of course today, as it is one of the key courses of action mandated by the public sector. Doing such is also in the banks' basic interest. These facts have to be included in the directive's text. For this reason, no new liability for the incorrect assessment of creditworthiness has to be established. Another source of concern would be the directive's permitting at any time the repayment of the consumer credit supplied, without having to supply an important reason for doing such, and without having to pay recompense for prior-to-term repayment. The result of all this would be the consumers' loss of the option of protecting themselves, on a long-term basis, from interest rate swings by taking out fixed-interest loans at today's low rates. These loans provide consumers with security of planning. The proposed extension of the information supply and briefing requirement go far beyond the bounds of reasonable behavior, and would burden consumers and credit suppliers with further expenses.

The requirement to inform consumers about effective rates of interest and about the costs of ancillary services could best be met by detailing these on a per-product basis. This requirement does not currently form part of Germany's legislative code. In this arrangement, the effective rate of interest reported would apply solely to consumer repayments and the costs of fees for the provision and management of the credits. This would be a change from current practices, which meld the prices of two products into a single effective rate of interest. This approach is fundamentally misguided, and accordingly leads to results not justified by the matter at hand. How accurate is the reporting of an effective rate of interest which is derived from both credit costs and from the premiums for full-coverage automobile insurance? The variety of the possible combinations of products would confuse consumers, rather than benefiting them.

The ever-greater strivings to add a so-called "constructive compulsion" to the previously existing legal requirement to offer insurance covering outstanding debts can be best taken into account by returning to the original reason for reporting effective rates of interest: to create comparability among the loans being offered and among the suppliers. This reporting facilitates consumers' strivings to get the desired credit at the lowest possible price. It is only in those cases in which banks are not prepared to divulge the component comprised by insurance for remaining debt in the price of the credit that the customers require a translation of the fees for this insurance into interest payments, so as to compare the sum of the costs of the credit and insurance for remaining debts with those products reporting interest rates on loans and not having such insurance.

To enhance comparability, the price of the insurance for remaining debt should be reported discretely, along with a listing of the insurance's effective rate of interest. This module-based reporting of prices, comprised of two addable effective rates of interest, constitutes the only way for consumers to compare the offers made by a supplier only prepared to provide the credit with an accompanying insurance on remaining debts with those of suppliers willing to grant a loan not accompanied by this insurance.

Association of Bavaria's banks: no further bureaucracy
Germany's consumers and businesses already have to contend with high costs. Now urgently needed is a revision of the code of employment imparting greater flexibility, tax cuts, as well as a reduction of bureaucracy. We reject all regulations contravening these objectives. One of these regulations is the EU Commission's consumer credit directive. This would impose far-reaching requirements on the provision of information prior to the conclusion of contract. These may make sense for those EU countries, which, in contrast to Germany, do not have rights of recall. Such provisions are not required in Germany, which gives consumers the right to recall any credit within the first 14 days of contractual life. These provisions would deluge our customers with a wave of information. These would cause uncertainties as to legalities.

A further point of criticism is the EU proposals' far-reaching linkage of credit and purpose. This would lead to the abolition of consumer credit as a whole, and would rob consumers of a way of quickly and easily securing loans. Association of Bavaria's banks: no further bureaucracy Germany's consumers and businesses already have to contend with high costs. Now urgently needed is a revision of the code of employment imparting greater flexibility, tax cuts, as well as a reduction of bureaucracy. We reject all regulations contravening these objectives. One of these regulations is the EU Commission's consumer credit directive. This would impose far-reaching requirements on the provision of information prior to the conclusion of contract. These may make sense for those EU countries, which, in contrast to Germany, do not have rights of recall. Such provisions are not required in Germany, which gives consumers the right to recall any credit within the first 14 days of contractual life. These provisions would deluge our customers with a wave of information. These would cause uncertainties as to legalities. A further point of criticism is the EU proposals' far-reaching linkage of credit and purpose. This would lead to the abolition of consumer credit as a whole, and would rob consumers of a way of quickly and easily securing loans.
 

Further Information

Position paper (in German)
Bundesratsbeschluss (in German)

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