Consumer Credit Directive

The Consumer Credit Directive is a group of new regulations on the way financial products are sold and advertised that came fully into force on 1st February 2011. The legislation is the result of Government interpretation and review of the European Union Consumer Credit Directive which was passed in 2008.

The Consumer Credit Directive (CCD) actually contains six sets of regulations about a wide variety of financial instruments, but the rule changes that have attracted the most scrutiny and comment are those that affect the way that credit cards products are structured and marketed.

The overall purpose of the CCD is to simplify and clarify the way credit cards are packaged to make it easier for consumers to understand and compare different products. Many commentators believe however that the new rules do little to make credit card deals easier to understand.

In fact there’s evidence that because the Consumer Credit Directive may limit the credit card issuer’s ability to make money (because it forces changes to the way credit card charges are structured) some consumers will be excluded from the very best deals. Risk Based Pricing is now common practice in the credit card and loan industries. This means that consumers will be offered an interest rate based on their credit history and credit score, and the new regulations are designed to help consumers understand this.

However, under the new rules only 51% of new customers will have to be offered the issuer’s best advertised rates. Prior to the CCD coming into force, 66% had to be offered the best advertised deal. This means nearly half the public won’t have access to the headline advertised deal.

The CCD puts a lot of emphasis on the importance to the consumer of the new “Representative Example”. This is supposed to help the customer understand the likely charges or interest rate they may be charged, and has to be included in all product advertising for credit cards and loans. However the rules on what information goes into the Representative Example have been defined by the Department for Business, Innovation and Skills (BIS) and few consumers actually understand what it means to them.

The CCD also makes Positive Payment Order compulsory which means that credit card holder’s payments are allocated to their balances in a much fairer way.

The key elements of the Consumer Credit Directive:-

  1. As from February 1st 2011 unsecured personal loan and credit card providers should no longer refer to “typical APR”. They must use “Representative APR”. There is a new way for APR to be calculated. Secured lending such as mortgages and secured loans will continue to use the old phrase of typical APR. There’s no change currently to the “equivalent annual rate” (EAR) used to show overdraft costs.
  2. There are new rules and provisions on consumer’s rights to change their mind for up to 14 days after signing an agreement for taking out a loan or applying for a new credit card. Obviously people exercising their right to withdraw need to repay the credit, and also any interest for the days the credit was drawn down. This is designed to give people the right to walk away from impulse buys more easily or to think twice about taking out a loan or credit card agreement that they can’t really afford.
  3. There’s now a standard way of setting out the information relating to your credit card or loan agreement. This means it’s easier to compare different providers Terms and Conditions. This standardised information has to be provided to consumers before they take out any new credit card or loan agreements.
  4. There’s new emphasis on the credit card or loan provider’s obligation to check the creditworthiness of consumers applying for credit, although still no obligation to make their criteria and checking process transparent and public. Expect to be asked to provide more substantive proofs of income and expenditure.
  5. Consumers will have the right to settle loans or credit cards early (or ahead of the agreed term) in whole or in part without penalty.
  6. Consumers must be informed if their debts are sold on to debt collection agencies or other intermediaries.
  7. Consumers will now have more control of their credit limits and will be able to reject increases or request decreases in their credit limits, and set-up a standing payment to reduce any outstanding balances.

So Consumer Credit Directive; Friend or Foe!

There’s no doubt that parts of the CCD will make borrowing fairer and cheaper for many people. However the one of the key aims of the legislation is to make comparing financial products easier and to make charges easier to understand and consumer feedback is that the revised advertising guidelines don’t do this.

This biggest downside of the new regulations is that fewer borrowers than before are now likely to be offered the best advertised rate, and that’s clearly a step in the wrong direction.

Here’s the full Government breakdown of the legislation.

Here’s a simplified breakdown of the new rules from the Department of Business Education and Skills.

Follow us on FacebookFollow us on TwitterSubcribe to Compare credit cards feed
Subcribe to Cardchoices email alert