Consumer Credit Directive as a Consumer Protection Regulation - Essay Example

CONSUMER CREDIT DIRECTIVE (Directive 2008/48/EC) Introduction In any international trade dis the trader is seen to be the profit making entity and the consumer is regarded as the unprofessional entity that bears much risk in consenting to assurances made by the trader to guarantee quality of business.1 The locus of most of these laws has been to ensure that the need for businesses and traders to make profit from consumers do not result in any acts of taking undue advantage of them.2 Consumer credit is one of the most common forms of business that ensue between financial institutions as profit making ventures and creditors as consumers.3 In some cases, consumer credit transactions take place between any two ordinary individuals, but as far as the six Cs of credit, namely character, capacity, collateral, conditions, credit and capital, are met, it is important that the creditor who acts as the consumer receives some level of consumer protection in terms of rights of consumers.4 This paper seeks to critically discuss the notion that the consumer credit directive (Directive 2008/48/EC) as a consumer protection regulation has only come to lessen rights of consumers since its implementation in the United Kingdom. Overview of the Consumer Credit Directive The first Consumer Credit Directive (CCD) came into existence in December 1986. This was criticised for having minimal harmonisation leading to most member states adopting their own versions of standards, which they deemed to be higher than the CCD.5 Since the old CCD never achieved any single market for consumer credit, there was the need for a more formidable regulation.6 A new CCD (2008/48/EC) therefore came into force on 23 April 2008. The CCD (2008/48/EC) known hereafter as the CCD sought to cover all known aspects of consumer credit lending transactions. As a result, there were two major agreements that the CCD focused on; these were regulated consumer credit agreement and regulated consumer hire agreements. Under the CCD, a regulated consumer credit agreement is one in which an agreement exists between a debtor and a creditor for which credit is provided of any amount which is not exempt of section 8 of the CCA.7 From Dimond v Lovell, credit is said to exist because one person gives credit to another person with a contractual right to defer payment of an existing debt.8 Effect of the Directive on the Consumer Credit Regime Based on the main elements of the CCD, there are a number changes that has been experienced on the UK consumer credit regime. The first of these has to do with the provision of standard European consumer credit information form. By this element of the CCD, consumers have been granted the right to receive a comprehensible set of information in good time prior to the completion of the credit or hire contract.9 Such comprehensible set of information is expected to be part of the whole credit agreement. The effect that this element has had on the consumer credit regime is that it has brought about a moment where consumers are not just expected to be given information, but rather information that is better understandable and gives room for consumers to compare their credit provisions with other offers available on the market.10 Consumers have thus been empowered through the directive to take more informed decisions, especially those that ensure fair trade and freedom of selection of creditor. There is also an element of the directive defining the extent of duty to assess the creditworthiness of consumers so as to reduce their credit risk.11 By this provision, creditors or traders are obliged to assess the consumer’s creditworthiness based on sufficient information provided especially by the consumer. This particular element of the CCD continues to be challenged as defeating the rights of consumers, especially their right to privacy of credit information. More importantly is the fact that the duty of assessment is given to the creditor rather than the debtor. Such provisions have been noted by critiques to create an unfair imbalance where the creditor is given more right to know than the consumer can know about the creditor.12 For example through this provision, the creditor may take advantage to ask from the consumer several personal information that border on their account. Meanwhile, the consumer may also want to have the opportunity of knowing what make the creditor credible to operate but this is not covered under the provision.13 In brief, there has been an influence on the consumer credit regime where due process has been taken very seriously. This is because where any credit transaction is effected, thorough investigations must be taken using either information from the consumer or other forms of consultation.14 Unlike those in the first school of thought, some actually see such investigations as advantageous to the consumer because it protects them against likely events non-payment due to bad credit worthiness.15 Another major change that the CCD has brought is a regime where consumer credit agreements can be entered into in an open ended state where there are definitions for absolute entry and exit. This effect has been produced based on the element of the CCD requiring credit agreement. Apart from the fact that the credit agreement allows an open-end transition, it has also been commended for the provision of credit agreement that comes in the form of overdraft facility.16 With such overdraft facility, consumers are given the right to be kept informed about matters such as period of statement of account, amount and dates of drawdown, balance from payments, new balance, borrowing rate applied, charges applicable, and minimum amounts that have been paid.17 Most commentators believe that this has been a provision that has brought much sanity to the credit market as it has enhanced transparency to the highest level.18 With such level of sanity to the credit market, which has been noted to also protect the consumer, it can be stated in a very emphatic manner at this point that change in the directive have come to strengthen, more than weaken the rights of the consumer. For example, consumers who did not have much knowledge about the implication of going for extra credit when they are not in a state of credit worthiness now have a means by which such states will be known to avoid possible defaulting. Consumer Right Provisions of the Directive In a lot of ways, the right of the consumer has been protected under the provisions of the new directive. Most of these rights focus on the need to ensure that creditors do not take undue advantage over consumers, especially consumers who may be new to credit related issues. In the this section and following the arguments made under this section, this position is defended, using four clear distinct consumer right provisions that the CCD has come to cater for. Right to Contract Information The CCD has come with the need to promote the consumer’s right to information. Based on the notion that information makes the consumer well knowledgeable about all that a piece of credit contract entails, this right has been enshrined in the CCD to ensure that there will be much openness in the contract process.19 As part of the provisions of the directive, creditors are expected to keep consumers informed about specific information ahead of the contract in terms of all forms of fees that are supposed to be paid. There is also information about all forms of monthly repayments available for the consumer to honour. More so, information about the Annual Percentage Rate of charge (APR) involved in the whole transaction are expected to be paid. Other researchers have actually criticised the quantum of information required as part of Information Disclosure in the EU CCD and said that it comes with the limitation of possibly confusing the consumer even more as it the directive was made on the assumption that every other consumer is in the position to vividly read and comprehend.20Such disagreements notwithstanding, it is opined that the right to contract information has come to be more beneficial in promoting the right of the consumer than to harm it. Researchers who argue that too much information can confuse the consumer will be disagreed with as this is not necessarily a situation that abuses the right of the consumer.21 Rather, the consumer has the opportunity to learn and know more about a contract – if not directly, through someone else who can act as a legal aid. Right to Early Withdrawal In order to ensure that the right of the consumer to enjoy freedom of association is protected, the CCD allows that after the first 14 days of joining, consumer can withdraw without having any liabilities to honour. The right to withdraw from the contract after 14 days has actually been noted to be an important right given to the consumer that makes the first right about information workable and meaningful22. This is because for most consumers, they require a lot of time to take full decisions about what they read about in the contract by way of the contractual agreements. Within the 14 days grace period therefore, such consumers will have the freedom to consult with knowledgeable people, including legal aids who can give them prudent counsel on the best actions to take towards the credit contract. Out of such counsel if consumers feel the need to withdraw, this right then caters for that. The writer takes the position that this is a very aspect of the law that protects the right of consumers against possible cases of deteriorated credit worthiness if withdrawal is not given at a very early stage. Right to Early Repayment For most of these credit contracts, the quantum sum of money expected to be paid increases with increasing payment periods. This is because the elasticity of payment requires higher or increased interest rate for consumers.23 Meanwhile, the consumer has the right to protect his investment and ensure that there is value for money. As a result, the CCD makes provisions for this right to be honoured by making provisions for consumers to make early repayment. This means that the right to engage in gainful credit venture is protected for the consumer.24 The writer opines that in this term, there is a level of protection given to the investment made by the lender as well. This is because the lender has his rights covered under the fair and objective compensation to ensure that there is covering of the lender’s cost of processing the credit.25 Right to Absolute Withdrawal Based on the background that lenders and for that matter credit businesses could engage in unfair transactional terms that will only come to their benefit, the right for the consumer to be protected against such unfair transactions have been provided in the CCD. Based on the right to absolute withdrawal, consumers have the right to probe for any associated purchase cancellation. Once such associated purchase is cancelled, consumers have the right to absolutely withdraw from the credit contract.26 As with most other forms of credit engagements, the party to the credit contract found to be legally responsible for the situation leading to the absolute withdrawal would have penalties to the other party.27 In the opinion of the writer, this provision whereby the consumer can absolutely withdraw from the contract is a way of consolidating the right to contract information. This is because this provision has come to ensure that the need to disclose information to the consumer is not only done by words on a paper but that they are adhered to by all parties. This is because creditors who fail to adhere to the contract information would know that such defaults can lead to absolute withdrawal by the consumer. Factors that make the CCD unnecessary The effect of the CCD on the consumer credit regime notwithstanding, there are many who argue that these changes have been largely unnecessary and resulted in a lessening, rather than strengthening of the rights of consumers. This is because there are several weaknesses with the CCD that come to render most of the rights that have been discussed above absolutely inapplicable, and thus rendering the whole law unnecessary. The writer shares the position taken by such researchers that the CCD is unnecessary when it comes to the protection of the right of the consumer, based on some of the weaknesses discussed as follows. First, it will be noted that in the UK adaptation of the directive, there are several areas of consumer credit issues that were not covered. A typical example is the fact that the directive does not apply to agreements secured on land. Meanwhile, the use of land titles as credit agreements have been noted to be a very common practice for most credit consumers in the UK.28 In effect, all consumers whose credit needs has to do with agreements secured on land do not have their consumer rights covered. What is more, the CCD does not also apply to agreements with credit that are under 200 Euro or over 75,000 Euro or their equivalents in Pound Sterling. Meanwhile, there are several consumers whose needs for credit are genuinely focused around such quantum of monies. Because of the exemption, payday loan companies such as Wonga continue to take advantage over consumers whose credit needs are only within such smaller quota.29 The question then remains what happens to consumers whose needs fall within these provisions of money. As this new CCD came to replace an existing one, it is expected that all forms of shortfalls will be adequately identified and addressed to cover enough consumers as consumer needs come in different proportions. Again, all forms of hire agreement and hire-purchase agreements are not covered, even though these remain some of the most important credit needs of citizens. It can be concluded in this section that regardless of the several attempts made by the CDD, these weaknesses make it unnecessary to a good number of consumers whose needs have not been addressed. Conclusion Like most other consumer regulations, the CCD has its own high and low points. This paper has highlighted four major changes that the directive has brought on the UK consumer credit regime. Even though some of these changes are debated as going against the consumer, such as investigations into the creditworthiness of consumers, it remains a fact that there has been much serenity, fairness and orderliness in the consumer credit regime. Unlike before, the number of lawsuits that came about from undisclosed information about payments of credit and lack of information for consumers have now become a thing of the past.30 Even though there are exceptions that have not been adequately covered to consolidate the right of consumers, future amendments can take care of these to ensure that there is an extension on existing levels of consumer protection to credit, especially areas that are not currently covered, such as short-term credit and credit provided over the Internet.31 For these reasons, the writer submits that the CCD has strengthened consumer rights and consequently shifted the balance of power between creditors and consumers to a more equitable level. References Cases Dimond v Lovell [2002] 1 AC 384 TRM Copy Centres (UK) Limited v Lanwall Services Limited [2009] 1 WLR 1375 EU Legislation Consumer Credit Directive (Directive 2008/48/EC) [2008] Sec 8 Consumer Credit Directive (Directive 2008/48/EC) [2008] Sec 15 Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC. – OJ L 133/66, 22.5.2008. Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market [2005] OJ L 149/22 Consumer Credit Directive (Directive 2008/48/EC) [2008] Article 8 Consumer Credit Directive (Directive 2008/48/EC) [2008] Article 16 Consumer Credit Directive (Directive 2008/48/EC) [2008] Article 11 Consumer Credit Directive (Directive 2008/48/EC) [2008] Article 14 Books Chris Edwards, The fragmented world: competing perspectives on trade, money, and crisis (Methuen & Co, 2005) Finlay Samuel, Consumer Credit Fundamentals (Palgrave Macmillan, 2009) L Overbeck, and C Wagner. An Introduction to Credit Risk Modeling. (Chapman & Hall/CRC, New York, 2002). 76 D Brigo and M Masetti. Counterparty Credit Risk Modeling: Risk Management, Pricing and Regulation. (Risk Books, London, 2013) 86 D Duffie and K J Singleton. Credit Risk: Pricing, Measurement, and Management. 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Van Boom, ‘Information Disclosure in the EU Consumer Credit Directive: Opportunities and Limitations’ (2009) 4(3) Research Gate accessed 04, April 2014 Wintour Patrick. ‘IPPR proposes payday-loan levy to help fund affordable lending’ (2014) Ashurst LLP ‘UK Competition Law and Land Agreements’ (2014) accessed 04 April 2014 European Parliament, ‘Report on the implementation of the Consumer Credit Directive 2008/48/EC’ (EC, 2012) accessed 03, April 2014 Read More