The 2008 Credit Agreements Directive and its focus on information
A main objective of the new directive is to promote a single credit market through legal harmonization, on the basis of Article 114 TFEU (ex Article 95 EC). The directive aims to increase cross-border services and to provide a high level of consumer protection, focusing on transparency and consumer rights. The biggest innovations are the harmonized rules concerning the early repayment of credit, the standardized information provided to consumers, and the consumer’s right to withdraw within 14 days, as well as responsible lending to prevent over-indebtedness.
The scope of the directive is set out in Article 2. The directive applies generally to all credit agreements ranging from 200 Euros to 75,000 Euros, with the exception of the exclusions under Article 2(2). Credit agreements that are exempted include, for instance, (a) mortgages; (d) most of the leasing agreements; (e) credit agreements in the form of an overdraft facility, and where the credit has to be repaid within one month; (f) credit agreements where the credit is granted free of interest or charges; and (g) credit granted by employers to the employees.
Article 3(c) of the directive offers a definition of credit agreement as ‘an agreement whereby a creditor grants or promises to grant to a consumer credit in the form of deferred payment, loan or other similar financial accommodation’. The consumer is described as ‘a natural person who, in transactions covered by this Directive, is acting for purposes which are outside his trade, business or profession’ (Article 3(a)). In turn, Article 3(b) defines creditors as a natural or legal person who grants or promises to grant credit in the course of his profession.
The 2008 directive features three types of instruments that aim to protect consumers and to increase market transparency: (1) information requirements; (2) a standard method of cost calculation; and (3) specific rights. They are meant to balance the asymmetrical contractual position of the consumer in relation to the professional in the market. In particular, the disequilibrium in knowledge and bargaining power is compensated through increased information and additional reflection time for consumers after a contract has been agreed.
First, the directive is based on the main regulatory technique of ‘information disclosure’ for consumers. This means that detailed information has to be provided to the consumer at different stages of the pre-contractual and contractual process. Already at the early stage of the credit advertising of a particular interest rate, standard information must be included on credit conditions, such as maximum amount, fees, and annual percentage rate of charges (Article 4). Later, at the pre-contractual stage, Articles 5 and 6 oblige the creditor to provide detailed information on the conditions of the loan before the transaction of the final credit agreement. This information should be provided to consumers well in advance, so that they have time to compare the different options available (Article 5(1)). Furthermore, it has to be made available on a ‘durable medium’ and by means of a ‘Standard European Consumer Credit Information’ form (included in Annex II of the directive). The information required includes inter alia (a) the type of credit; (b) the identity and address of the creditor; (c-d) the total amount and duration of the credit; (g) the annual percentage rate of charge and the total amount payable; and (h) the amount, number, and frequency of payments to be made by the consumer (Article 5(1)). Finally, at the contractual stage, key information must be included in the actual credit agreement, which is mentioned in Article 10. The objective is to render the consumer aware of the total cost, risks, and conditions, which is facilitated by the use of standard agreements, as well as to eliminate hidden costs or unfair business practices.
Secondly, this objective is also promoted by the use of a harmonized Annual Percentage Rate of Charge (APR), which should facilitate comparison and better evaluation of credit costs. Article 19 of the directive defines the APR as a unified calculation method of charges, which provides the consumer with a simple cost indicator, allowing quick and simple comparison of different credit offers. This facilitates comparison of credit conditions, which is clearly beneficial for consumers, and can promote market integration by improving competition.
Thirdly, the directive provides consumers with two key instruments so that they can release themselves from the contract: the right of withdrawal from a credit agreement (Article 14) and the possibility of early repayment, limiting penalty impositions by the provider (Article 16). According to Article 14, the consumer can withdraw from the credit agreement within 14 days of the conclusion of the contract without need ofjustification. In turn, Article 16 provides the consumer with the option of terminating the agreement through early repayment, conditional on adequate compensation being paid to the creditor. Finally, the directive newly includes a provision to facilitate dispute resolution. Article 24 mentions that Member States should ensure that adequate and effective out-of-court dispute resolution procedures for the settlement of consumer disputes concerning credit agreements are put in place.
Over all, the new directive shows a strong tendency to increase consumer information as a regulatory tool. This will augment consumer financial capability, by helping them to understand and compare different financial services. However, information alone is not sufficient to ensure an adequate level of financial understanding. Various studies have demonstrated that only a small proportion of European consumers possess sufficient financial knowledge. Even when information is provided, lack of financial experience and complex contractual terms often impede an adequate assessment of the credit agreement and of the financial transaction. Thus, it is essential to improve the financial literacy of consumers through education and adequate advice. The importance of raising financial education and awareness has been highlighted by a number of public and international institutions, including the OECD, which will be discussed later in this chapter.
Interestingly, the new EU directive introduces, to some degree, a shift of responsibility, imposing on the lender an obligation to provide ‘responsible credit’. This includes the duty to advise the consumer adequately not withstanding the potential conflict of interest between the consumer and the lender, and can be considered one way to enhance financial literacy.
-  See preliminary notes of the new Credit Agreements Directive, notes 4-9 and Art. 1 of this directive.
-  A cooling-off period gives consumers the possibility to reflect on their decision and to withdraw from the contract within 14 days; Weatherill, EU Consumer Law and Policy (n 25), p. 84.
-  Directive 2008/48/EC of 23 April 2008 on credit agreements for consumers, OJ L 133/66,22.5.2008.
-  Other important information requirements concern (m) a warning on the consequences ofpayments; (o) the right of early repayment; and (r) the right to be supplied with a copy of the draftcredit agreement (Art. 5(1)).
-  G. Nicolini, ‘A Regulatory Perspective on Consumer Financial Capability’ , in EuropeanCredit Research Institute (ECRI) (ed.), Consumer Financial Capability, Empowering EuropeanConsumers (Brussels: ECRI, 2006), pp. 78-9.
-  See also the report of European Credit Research Institute, Consumer Financial Capability:Empowering European Consumers (n 39), pp. 1 and 78-90; see OECD study: Improving FinancialLiteracy: Analysis of Issues and Policies (Paris: OECD, 2005).
-  See G. Pearson, ‘Financial Literacy and the Creation of the Financial Citizen’ , in M.Kelly-Louw, J. Nehf, & P. Rott (eds), The Future of Consumer Credit Regulation, Creative Approaches toEmerging Problems (Markets and the Law) (Aldershot: Ashgate Publishing, 2008), pp. 3-29.
-  See section 4.2 of this chapter.