EXPLANATORY MEMORANDUM TO THE CONSUMER CREDIT (EU DIRECTIVE) REGULATIONS 2010 2010 No. 1010 THE CONSUMER CREDIT (TOTAL CHARGE FOR CREDIT) REGULATIONS 2010 2010 No. 1011 THE CONSUMER CREDIT (ADVERTISEMENTS) REGULATIONS 2010 2010 No. 1012 THE CONSUMER CREDIT (DISCLOSURE OF INFORMATION) REGULATIONS 2010 2010 No. 1013 THE CONSUMER CREDIT (AGREEMENTS) REGULATIONS 2010 2010 No. 1014 1. This explanatory memorandum has been prepared by the Department for Business, Innovation & Skills and is laid before Parliament by Command of Her Majesty. 2. Purpose of the instrument 2.1 These Regulations implement an EU Directive on consumer credit. They enhance existing consumer rights on the provision of information before and during the life of a credit agreement. They also introduce certain new consumer rights in relation to credit agreements, such as the right to withdraw from an agreement within 14 days and the right to repay early in part at any time. 3. Matters of special interest to the Joint Committee on Statutory Instruments 3.1 None. 4. Legislative Context 4.1 These Regulations implement the 2008 EC Consumer Credit Directive,1 which revokes the 1987 Consumer Credit Directive2. 1 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 L133, Page 66, 22 May 2008. 2 Directive 1987/102/EEC of 22 December 1986 for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit. OJ L042, Page 48, 12 February 1987. 4.2 The EU Directive Regulations make a number of amendments to the Consumer Credit Act 1974 (CCA 1974)3 and associated secondary legislation. The other four sets of regulations replace existing secondary legislation made under the CCA 1974. The Consumer Credit Directive is maximum harmonisation and therefore the UK has had limited flexibility in how to implement it. Member States cannot impose different or additional requirements in those areas covered by the Directive. The UK already has a detailed consumer credit framework. Some of the Directive’s requirements are new to the UK but many are already covered in whole or part by existing law. Where possible we have maintained existing requirements and made only the necessary changes to existing UK law. The key changes are outlined in section 7 of this Explanatory Memorandum. 4.3 However, certain types of credit agreements are excluded from the scope of the Consumer Credit Directive. It covers a narrower range of agreements than provided for in the CCA 1974. In order to preserve the integrity of the existing UK consumer credit framework and maintain the current consistent approach across the range of credit agreements, the UK has extended the scope of the measures implementing the Directive requirements to all agreements currently covered by the CCA 1974. There are a few exceptions to this. For the most part we are retaining the status quo for agreements secured on land (more specifically to agreements for second charge mortgages) because this area is under review4 and it was not considered appropriate to make changes before the outcome of the review is known. For other categories of agreement that are not covered by the Directive but are covered by the CCA 1974, we have applied specific new requirements of the Directive on a case-by- case basis. For example, in respect of business lending agreements, we are applying all of the main provisions of the Directive on the basis that small business customers need the same kinds of protections as ordinary consumers. On the other hand, we are applying fewer of the Directive’s provisions to agreements where the value of the loan is above £60,260 (the Directive’s upper threshold) on the basis that these will involve loans to more sophisticated consumers who generally do not need the same level of protection. The table in Annex A provides details of which provisions of the Directive are being applied to which type of agreement outside its scope. 4.4 A Transposition Note is attached at Annex B. 4.5 DTI submitted an EM on Council doc no. 14246/04 on 30 November 2004 relating to "Amended proposal for a Directive of the European Parliament and of the Council on the harmonisation of the laws, regulations and administrative provisions of the Member States concerning credit for consumers repealing Directive 87/102/EC and modifying Directive 93/13/EC". The Commons European Scrutiny Committee considered it politically important and cleared it (Report 1, Session 05/06). The Lords Select Committee on the EU cleared it (PoS 21 Nov 2005, Report 13, Session 05/06). 4.6 DTI submitted an EM on Council doc no. 13193/05 on 1 November 2005 relating to "Modified proposal for a Directive of the European parliament and of the Council on credit agreements for consumers amending Council Directive 93/13/EC". 3 We have obtained approval from Parliamentary Counsel for the changes to the CCA 1974. 4 HM Treasury consultation document “Mortgage Regulation: a consultation” published 25 November 2009. The Commons European Scrutiny Committee considered it politically important and cleared it (Report 10, Session 05/06). The Lords Select Committee on the EU cleared it by letter on 27 April 2007 (PoS 27 April 2007, Report 27, Session 06/07). 4.7 BERR submitted an EM on Council doc no. 9948/2/07 REV 2 on 12 November 2007 relating to "Common Position adopted by the Council on 20 September 2007 with a view to the adoption of a Directive of the European Parliament and of the Council on credit agreements for consumers and repealing Council Directive 87/102/EEC". The Commons European Scrutiny Committee considered it politically important and cleared it (Report 4, Session 07/08). The Lords Select Committee on the EU cleared it (PoS 7 Feb 2008, Session 07/08). 5. Territorial Extent and Application 5.1 This instrument extends to all of the United Kingdom. Although consumer credit is transferred to Northern Ireland, it has been agreed that these Regulations shall extend to Northern Ireland. 6. European Convention on Human Rights The Minister for Further Education, Skills, Apprenticeships and Consumer Affairs, Kevin Brennan, has made the following statement regarding Human Rights: In my view the provisions of the Consumer Credit (EU Directive) Regulations 2010/1010; The Consumer Credit (Total Charge for Credit) Regulations 2010/1011; The Consumer Credit (Advertisements) Regulations 2010/1012; The Consumer Credit (Disclosure of Information) Regulations 2010/1013; The Consumer Credit (Agreements) Regulations 2010/1014 are compatible with the Convention rights. 7. Policy background x What is being done and why 7.1 The European Commission found that there had been little growth in cross border transactions since the 1987 Consumer Credit Directive was adopted and significant barriers remained. It decided to overhaul the 1987 Directive to ensure that its provisions would allow consumers and companies to take full advantage of a single consumer credit market. The objective of the 2008 Consumer Credit Directive is therefore to provide a harmonised Community framework in order to facilitate the emergence of a well-functioning internal market in consumer credit. It aims to provide a sufficiently high and equivalent level of consumer protection across the Community to foster consumer confidence in the provision of cross border credit. 7.2 There are other barriers to increased cross border consumer credit which the Directive will not address, for example language and culture. However, the Impact Assessment indicates that the benefits of European financial market integration are such that even if only 1% of these potential benefits were realised as a result of implementing the Directive, this would generate benefits to EU consumers of around €13-39 billion. 7.3 The UK already has a long-standing and well developed consumer credit framework. In many cases the Directive therefore has required only relatively small amendments to UK consumer credit law, although it also introduces some new rights and requirements. The new rights and requirements in these Regulations are: x A duty for lenders to provide adequate explanations to consumers about the credit on offer to enable them to decide whether it is suited to their needs and circumstances. This is in addition to the provision of written pre-contractual information. The Directive gives Member States considerable freedom to decide exactly what explanation should be given. The Regulations set out the specific matters which must be explained and require lenders to give consumers the opportunity to ask questions. In face-to-face situations certain explanations must be given orally. (Regulations 3 and 4 of the EU Directive Regulations) x An obligation for lenders to assess the creditworthiness of consumers before concluding a credit agreement or increasing the amount of credit available under an existing agreement, including increasing the credit ceiling in the case of running account credit. Lenders can decide how to go about assessing creditworthiness, but are required to base their assessment on information obtained from the consumer where this is appropriate and from a credit reference agency where this is necessary. (Regulation 5 of the EU Directive Regulations) x If an application for credit is declined on the basis of information from a credit reference agency, when the creditor informs the consumer that the application has been declined, he must tell the consumer that this is on the basis of information from a credit reference agency database. He must also provide contact details for the credit reference agency. (Regulation 40 of the EU Directive Regulations) x The consumer has the right to withdraw from a credit agreement within 14 days, without giving any reason. The consumer must repay the amount borrowed and the interest accrued between drawing down the credit and repaying it.