The Consumer Credit Directive revamped - Part 1

By Catherine Formosa & Kelly Cini

Catherine Formosa is a Senior Associate and Kelly Cini is a Trainee Advocate, both within Ganado Advocates’ Banking & Finance Team.

Personal loans and overdrafts, credit cards and short-term credit products are amongst the commonest consumer lending products offered by banks and financial institutions to satisfy a variety of consumer needs.

These products need to be distinguished from home loans (typically secured by hypothecs over immovable property) and which are the subject of a different, albeit complementary regulation.  Consumer credit regulation also may however also impact other “non-bank” lenders (or creditors) such as merchants or businesses offering their customers deferred payments options for goods and services.

On the 9 October 2023, the European Council adopted the revised Consumer Credit Directive (“CCD II” or the “Revised Directive”) which forms part of the European Commission’s ‘New Consumer Agenda’. CCD II supersedes Directive 2008/48/EC (“CCD I”) implemented a decade and a half ago across the EU.  CCD I had been transposed into Maltese law in 2010 by the Consumer Credit Regulations, Subsidiary Legislation 378.12.

These will now need to be replaced by a new set of local regulations to reflect the Revised Directive. The European Union’s recent endeavours to update the current framework were necessitated primarily by the need to adapt to digitalisation challenges in the consumer credit market and to remedy certain shortcomings in the current regulation in so far as protecting against irresponsible consumer lending.

This two-part article will consider some of the salient aspects of the Revised Directive.

A wider scope of application

It is evident that lenders will be required to reassess which of their products fall within the Revised Directive and to prepare for the relative implications since CCD II has a wider scope of application. In terms of value, the current framework is limited to consumer credit agreements ranging between €200 and €75,000.

In the Revised Directive, while the €200 minimum threshold has been removed the maximum value has been increased to €100,000. Unsecured loans of more than €100,00, where the purpose of the credit is the renovation of a residential immovable property are however captured by the Revised Directive.

Credit agreements in the form of an overdraft facility to be repaid within one month have also been brought within the purview of CCD II.

Moreover, it is significant that hiring or leasing agreements with an express option to buy and certain “buy now pay later” (“BNPL”) credit contracts traditionally exempted from regulation have been brought into the fold.

On the guise that these BNPL products may lead to high costs in the event of late payments or promote hasty uninformed decisions from consumers considering the ease with which these contracts are entered into, the legislator significantly revamped the current BNPL exemption.

For an agreement to fall outside the CDD, sellers will have to offer BNPL products without the intervention of a third party, the deferred payment must be totally free of charge and the repayment deadline cannot be longer than 50 days, 14 days for large online suppliers. Otherwise, the deferred payment arrangement will be considered as consumer credit, although a light touch regime is contemplated, and certain obligations may be disapplied.

In this regard, it is noteworthy that certain merchants or businesses which may qualify as creditors under CCD II (other than banks and financial institutions) will find themselves subject to a new admission, registration and supervision regime which Member States will be required to put in place, although certain exemptions are being contemplated.

Additional Rules Regarding Pre-Contractual Information

Significantly CCD II reinforces the rules relating to the provision of pre-contractual information. Amongst other things, the Revised Directive divides the precontractual information which the creditor is bound to provide consumers into two – prescribed key information which must be exhibited prominently in the first part of the Standard European Consumer Credit Information form (the so-called “SECCI form”), and preferably on one page (two pages at most), and other information which must follow in a clearly delineated manner.

Creditors must also ensure that the information is tailored to the technological mediums through which it will be digested by the consumer, including mobile phone screens. Changes to creditors documentation and systems will be necessary to ensure compliance.

Creditworthiness Assessments

The Revised Directive regulates more stringently the quality of creditworthiness assessments aiming to combat the risk of mis-selling and potential over-indebtedness.

While deviations may be made in certain circumstances such as in case of loans for medical expenses, creditors are now expressly prohibited from lending money to consumers if the creditworthiness assessment shows that the consumer is unlikely to meet his obligations.

Information on consumers can be obtained from a variety of sources, including from the consumer himself and from databases, although such information must be appropriately verified by the creditor.

Information should include at least the income and expenses of the consumer but should not include special categories of personal data such as health data including cancer data, nor information obtained from social networks.

Considering the increased use of profiling and other automated processing of personal data, the consumer is being given new rights including the right to request an explanation of the assessment, to express his own views and to request a review of the assessment and the relevant decision.

The second part of this article will delve into other aspects of CCD II including forbearance and measures against costly lending.