As the EU is preparing a new amendment to the Consumer Credit Directive, DECO and 14 other non-governmental organisations have come together to find solutions to protect consumers from irresponsible credit.
Consumer credits can be a great tool, as it makes it possible for millions of people to fulfil their desires and dreams that may otherwise be very difficult to achieve. However, taking out multiple credits that you won't be able to repay can be a terrible trap. That's why 15 consumer associations across Europe, including DECO, have drawn up some recommendations.
According to the coalition there are many factors that nowadays drive consumer harm, such as:
The fact that “the creditworthiness assessment does not consider possible negative scenarios, such as possible increases in interest rates during the contract performance as well as the fact consumers are not able to easily contest decisions based on credit scoring models and are not aware of the types of information considered to feed such models”.
Also with digitalisation and big data, “it becomes increasingly easy to exploit consumers’ behavioural biases to make them sign a consumer credit contract which is not adapted to their individual and financial circumstances”. In addition, consumer credit products are increasingly complex and sold online without being adapted to the consumer’s situation.
All of these situations can drive many consumers to take out loans that they will have trouble repaying in the future because the product has not been personalised to the consumer's needs or contains hidden or excessive fees. In addition, they will not be able to fulfil their obligations without cutting back on basic living needs.
On the other hand, if loans are taken according to responsible practices the coalition see several benefits from it as it improves access to credit and qualitative inclusion, as well as protecting households from financial distress and over-indebtedness, increasing creditors’ financial resilience.
Furthermore, in this sense, there is a bill to revise the consumer directive under study by the European Parliament and by the Council of Europe. Although it includes advances in measures to defend the interests of consumers, the Coalition believes that it is possible to go further to eliminate irresponsible credit and prevent over-indebtedness.
The coalition “welcomes the European Commission’s proposal to revise the Consumer Credit Directive (Directive 2008/48/EC) as the new proposal, published at the end of June 2021, does bring a series of positive advances related to the protection of consumers in consumer credit markets”.
In turn, “the revised rules significantly broaden the scope of products that will need to comply with stricter lending obligations. They will include small loans below €200, loans offered through crowd-lending platforms (online financing that connects people willing to loan money to those looking for funding) and ‘buy-now-pay-later’ products increasingly offered to consumers online”, the coalition said.
In addition: “The Commission also proposes to limit the sometimes-egregious costs of consumer loans, by requiring countries to cap interest rates and/or the total cost of credit. This is already common practice in several EU countries, protecting consumers from predatory loans.”
Not far enough
However, according to the coalition there is still so much to do in this regard. “The advances proposed do not go far enough and will not prevent the marketing of consumer credit to households that are unable to manage the repayments”, they said, adding that “the digitalisation of financial services is still rapidly expanding, and regulation should be designed to foresee and prevent any major detriment for consumer credit users, in particular for the most vulnerable consumers in the EU”.
In this regard, the coalition recommends banning marketing practices that push consumers to consumer credit products that they cannot pay for or reimburse in due time, ensure that consumers are properly informed about the categories of data used to access their credibility, and ensuring they can effectively challenge credit decisions, providing troubled consumers with immediate and personalised debt counselling solutions, among others.