Current status and recap on background to CCD II
The European Commission adopted a legislative proposal on the proposed CCD II on 30 June 2021. On 2 December 2022, the Council and the Parliament announced that they had reached provisional political agreement on the revised text of the proposal. The European Parliament adopted the proposed Directive at first reading on 12 September 2023.
The General Secretariat of the Council stated in an information note published on 15 September 2023 that the Council should be in a position to approve the Parliament's position, as it reflected the political agreement on the proposed Directive reached by the institutions in December 2022 - as to which, take a look at our previous Engage article.
On 20 September 2023, the Council of the EU published the text of the proposed Directive and on 9 October it announced its adoption.
CCD II is part of the Commission’s New Consumer Agenda, which was launched in 2020 to update the EU’s overall strategic framework for its consumer policy.
The CCD II proposal was introduced following the Commission’s review of the current Consumer Credit Directive (part of its 2020 work programme), which found that it had not kept pace with emerging consumer credit products, consumer behaviour and technological developments. Added to this was the fact that imprecise wording of certain provisions had led to member states adopting diverging provisions, resulting in a highly fragmented regulatory framework across the EU in a number of aspects of consumer credit, impeding the opportunities created by digitalisation, in particular, to develop the cross-border consumer credit market.
What’s the likely impact of CCD II for firms providing consumer credit?
CCD II will introduce new harmonised rules, in particular:
- Changes to scope: The scope of European regulation will be expanded to include, among others, credit agreements under EUR 200 and up to EUR 100,000, Buy-Now Pay-Later (BNPL) products and certain deferred payment arrangements between large merchants and consumers. Under the current rules, these arrangements are typically out of scope of consumer credit regulations. Member States may, however, have already introduced local rules governing these arrangements. For instance:
- Germany already requires creditworthiness assessments for financial assistance provided by merchants and 0% interest loans.
- Ireland introduced a licensing regime for BNPL credit in 2022.
- Poland has included credit agreements under EUR 200 in the scope of its national legislation.
- In Luxembourg, the current legal framework does not yet contemplate this enlarged scope. The Luxembourg Consumer Code specifically excludes from its scope any credit agreements of an amount under EUR 200 or higher than EUR 75,000. In addition, BNPL products are only caught by the Luxembourg Consumer Code to the extent these qualify as consumer credit agreements under the general definition of the Luxembourg Consumer Code. It is also worth noting that the Code excludes credit agreements at zero interest rate as well as those which have to be reimbursed within a maximum of three months.
- Authorisation requirement: Firms will need to become authorised or at least registered to provide consumer credit. No passporting rules are available and there are no harmonised rules on application and ongoing supervision, meaning that there might be a considerable degree of divergence between Member States. However, credit institutions and payment and e-money institutions may be able to rely on their existing authorisations (and passporting rights) in relation to credit activities, which are considered sufficient for the purposes of CCD II. Mandatory conduct of business rules will, however, also apply.
- Technical changes impacting credit agreement process: A number of technical changes will be introduced which could have a potentially significant impact on firms’ current consumer credit practices Some of them will also be relevant to merchants that partner with BNPL providers or deferred payment arrangements mainly as an alternative payment method and incentive for consumers. In particular, the following changes may have a significant impact on processes for agreeing a consumer loan:
- Non-discriminatory treatment of applicants for consumer loans: It will not be possible to differentiate on the basis of a consumer’s nationality or place of residence. However, objectively justified reasons for different credit conditions remain possible.
- Advertising rules: Among other things, Member States will be required to stipulate that advertising concerning credit agreements includes a clear and prominent warning to make consumers aware that borrowing costs money, using the wording: ‘Caution! Borrowing money costs money’ or equivalent wording. They must prohibit certain types of advertising for credit products, for example that which encourages consumers to seek credit by suggesting that credit would improve the financial situation of those consumers. Member States may also prohibit advertising for credit products which highlights the ease or speed with which credit can be obtained.
- Precontractual information: This must be provided “in good time before and not at the same time as the conclusion of the credit agreement”; if pre-contractual information is provided less than one day before the conclusion of the consumer credit agreement, a reminder of the statutory withdrawal right has to be provided between one and seven days after the conclusion of the agreement. Under CCD II, consumers will have a right to withdraw without giving any reason within 14 calendar days of conclusion of the agreement (or receipt of the contractual terms and conditions and other required information, if later).
- Restrictions on bundling consumer credit with insurance and other financial products: On insurance, while a creditor should be able to require the consumer to have a relevant insurance policy in order to guarantee repayment of the credit or to insure the value of the security, the consumer should have the opportunity to choose their own insurance provider.
- Creditworthiness checks, including affordability checks (e.g. wages; current obligations etc.) must be carried out: If conducted using automated (AI) processes, such checks will be subject to the consumer’s right to: request and obtain from the creditor a clear and comprehensible explanation of the creditworthiness assessment, including on the logic and risks involved in the automated processing of personal data as well as its significance and effects on the decision; express the consumer’s own point of view to the creditor; and request a review of the creditworthiness assessment and the decision on the granting of the credit by the creditor.
- Measures limiting high interest rates and total costs of credits: Contrary to the initial proposal of the Commission, CCD II does not provide for mandatory hard caps on credit rates, annual percentage rates of charges or total costs of credits. CCD II leaves it to the Member States to introduce measures to protect consumers from excessively high rates. Member States that already have such measures in place can maintain their current legal regime, others may introduce caps. The European Banking Authority (EBA) will compare and assess the measures in the different Member States and publish a report on the effectiveness of these measures after six years.
- Cancer survivors’ right to be forgotten: Cancer survivors applying for credit for which insurance is required will have the "right to be forgotten" after a relevant period of time to ensure that their former illness does not affect insurance rates. That period should not exceed 15 years following the end of the consumers’ medical treatment.
- Linked credit agreements: CCD II introduces a common framework for linked agreements. Where the consumer exercises the right of withdrawal in respect of the purchase agreement, based on Union law, the linked credit agreement is revoked simultaneously and vice versa. CCD II specifically states that national law applicable to linked credit agreements shall not be affected by CCD II. Therefore, even after implementation of CCD II, some national differences regarding the treatment of linked contracts will remain.
Some aspects, however, will not be harmonised. In particular, there will be no harmonised framework for the form of consumer credit agreements. This means that it will be left to Member States to determine how consumer credit agreements need to be agreed, e.g. if qualified electronic signatures are required for online loans. Some Member States such as Germany have generally required that consumer credit agreements are made in writing or using qualified electronic signature. It will therefore be important for firms with cross-border business to also monitor the relevant Member State implementation processes.
After being signed by the Presidents of the Parliament and the Council, CCD II will be published in the Official Journal of the European Union and will enter into force on the twentieth day following its publication.
Member states will then have 24 months to adopt and publish the laws, regulations and administrative provisions necessary to comply with CCD II, and the implementing measures will have to be applied 12 months from the transposition date, which is also the point at which CCD I will be repealed.
However, CCD I will continue to apply to any credit agreements concluded between entry into force of CCD II and its date of application until their termination. There is one exception to this in relation to certain provisions of CCD II which shall apply to all open-end credit agreements existing on its date of application (see Article 47 - ‘Repeal and transitional provisions’ - for more detail).
Please contact us if you would like to discuss any aspect of this development.
The UK perspective: BNPL regulation and Consumer Credit Act reform
In the UK, the government has consulted on draft legislation to bring BNPL products within the regulatory perimeter (see our Engage article ‘Buy-Now Pay-Later: UK government consults on draft legislation’). Publication of the consultation response and revised draft legislation is awaited.
In July 2023 the government also published its response to a first-stage consultation on the strategic approach to reforming the Consumer Credit Act 1974 (CCA), described in the response as ‘an ambitious overhaul’ of the regime. The government is now working on policy development to produce more detailed proposals, with the aim of publishing a second stage consultation in 2024. For more on the consultation response, take a look at this Engage article: ‘UK Consumer Credit Act 1974: HM Treasury responds to first stage consultation on reform’.
Authored by Eimear O’Brien, Andreas Doser, Viktoria Winde, Mathilde Soetens, Mateusz Ozdzenski and Virginia Montgomery.
Hogan Lovells (Luxembourg) LLP is registered with the Luxembourg bar.