DTT To Consult Further on EU Credit Directive

The DTI has announced a further consultation on the UK's position with regard to the proposed EU Consumer Credit Directive. Previous UK positions have been to oppose inclusion of responsible lending requirements in the EU Directive and within the current consultation document, the position of the Government remains at best ambiguous. For example, question 58 in the DTI document reads:

'Given our doubts about the value of a "responsible lending" provision, is the removal of the specific reference to it in relation to penalties to be welcomed?'.

This is a bizarre position for the DTI given its recent acceptance of the need for a responsible lending amendment to the Consumer Credit Bill. The current EU Directive also provides for exemptions for loans below 300 Euros - which would include many payday loans and some home credit - and for loans above 50,000 Euros. Pawnbroking is also to be exempted from the provisions. Of great concern was the issue reported by the Chair of the European Committee on the Internal Market and Consumer Protection, Arlene McCarthy MEP, to the House of Lords Inquiry into the EU proposal earlier this month, that would mean credit agreements would be governed by the laws present in the lenders country of origin as opposed to those where the borrower resides. The following is an extract from the debate in the Lords inquiry:

Chairman: Is there not a draft regulation on contractual obligations which says that consumer contracts should be governed by the law of the Member State in which the consumer has habitual residence?

Ms McCarthy: Yes, that is the case.

Chairman: Why does that still allow the lender’s rules to apply under this new regulation on consumer credit? That is where we are finding a bit of difficulty in understanding. It is a contractual obligation.

Ms McCarthy: Yes.

Chairman: So why does one law or may one law apply to contractual obligations in some senses and not in other senses?

Ms McCarthy: The best answer I can give to this, because we have not discussed this in detail, is that mutual recognition related to the country of origin principle, for the very reasons that you mention, is under a great deal of scrutiny at the moment. How we solved that problem in the Services Directive, for example, was to say that you can provide a service, so in this case you could provide a loan, on the basis of how you operate in your own Member State. However, the Member State, as is the European Court of Justice Rule on the country of origin principle, can impose additional public policy requirements. So you would be able to impose the rule, for example – and again, under Rome I, I believe that is what will apply in the case of delivering a service or indeed in the case of a loan or a credit – that the consumer has the right to contract to conclude the agreement in their own Member State, but would be able to go to court, for example, if something goes wrong in terms of redress in their own Member State, not where the company is based. That has been a very important issue for us.

Chairman: That is the location of cases.

Ms McCarthy: Yes, the applicable law issue as well. This is an issue that we are continually now trying to clarify and refine, not just in this Directive but looking at how we get the balance right between ensuring that a company does not have to comply with 25 different sets of rules, but the consumer has the right of redress if something goes wrong in their own courts.

Chairman: Yes, I understand that. That is an interesting point. When I was on a different Committee I actually worked on that issue, so it is something that finally I understand. These legal points are not always immediately apparent to every member ofevery committee in their Lordship’s House, I can assure you. What about the more detailed point where the whole question of the creditor’s rights applies only where maximum harmonisation applies, but that you do not have to notify a debtor that that is the situation? In other words, the debtor does not necessarily know when he contracts an obligation to a creditor that the creditor’s law is the law that applies if something goes wrong with the debt. There is no apparent need to inform the debtor or person taking out the loan that this is an obligation. I am interested in your point about where the case takes place, but this is a slightly different point.

Ms McCarthy: Yes. We have not had a discussion on this issue as yet, and I would not want to pre-empt what the Committee members would say. All I would say is the question you are asking is a question for us in the Committee, and we have concerns whether we can solve that issue, again, through the information requirement, so it is made very clear to the consumer that the credit agreement that they are signing is based on the terms and conditions of that company where it is based. However, the right of redress is in their country of residence. That would need to be clarified in some way.

Debt on our Doorstep remains extremely concerned that simply stating that a lenders law is the one that applies (the 'information requirement') is being seen as adequate to protect borrowers' interests. In relation to the current consultation, we should aim to ensure that consumers are able to have redress to the law that is applicable in their own countries - not those of the lender - as many consumers are unlikely to have sufficient knowledge of the consumer protections that are available outside of their own nation. We would be grateful if supporters would take the time to look at the DTI consultation as the Government does not have a clear position on this and on the issue of responsible lending matters. The deadline for responses is the 10th May 2006, and Debt on our Doorstep would be grateful for comments for inclusion in our own response by the end of April 2006. The consultation paper is available here