On the Bumpy Road to Responsible Lending in the Digital Marketplace: The New EU Consumer Credit Directive

On 18 October 2023, the EU adopted the long-awaited New Consumer Credit Directive. This directive will replace the 2008 Consumer Credit Directive which has been criticised for two main reasons. First, the information paradigm of consumer protection reflected in the directive has been widely regarded as incapable of protecting consumers against irresponsible lending. Second, the directive has been viewed unfit for ensuring consumer protection in an increasingly digital marketplace. Indeed, the old directive proved unable to prevent the mass mis-selling of high-cost small value credit products, such as payday loans, or credit-related products, such as payment protection insurance, across Europe. Neither did it prove well-equipped to respond to the challenges posed by new credit products and services, such as Buy Now, Pay Later (BNPL) and peer-to-peer lending (P2PL).

In a recently published article, I draw on my studies for the European Parliament and the European Commission to explore the potential of the New Consumer Credit Directive to ensure responsible lending in the digital marketplace. The article critically assesses the key changes introduced by the revised directive, considering the large-scale irresponsible lending practices that have troubled the EU consumer credit markets since the adoption of the old directive.

The main novelties of the New Consumer Credit Directive can be summarised as follows. It includes (i) a broader scope of the directive’s application which encompasses, among others, small value loans below EUR 200 and the BNPL offered by creditors and credit intermediaries; (ii) adapted rules to facilitate informed consumer decision-making in the digital marketplace, including the creditor’s duty to inform consumers about personalised pricing as well as the bans on pre-ticked boxes and unsolicited sales; (iii) the general prohibition of tying practices when another financial product is made mandatory to obtain a loan from a particular creditor; (iv) stricter rules on the consumer’s creditworthiness assessment, notably the creditor’s duty to carry out a ‘borrower-focused’ test and refuse credit to uncreditworthy consumers as well as the consumer’s right to human intervention; (v) measures to prevent excessively high borrowing rates, annual percentage rates of charge or total costs of credit as well as caps on certain default charges; (vi) the creditor and the credit intermediary’s general duty of care, which, among others, encompasses consumer credit product design and remuneration policies; and (vii) the creditor’s obligation to take reasonable forbearance measures before enforcement proceedings are initiated.

Unlike the 2008 Consumer Credit Directive, the new directive thus regulates the whole life cycle of consumer credit products from development through distribution until repayment, albeit to a varying degree. While the core of the directive is still concerned with the distribution phase, new rules, such as the general duty of care and the duty to exercise reasonable forbearance, also touch upon product development and repayment post-sale. Furthermore, the revised regulatory regime is no longer dominated by the information paradigm that relies on information disclosure as the primary tool of consumer protection. Importantly, information requirements are complemented by substantive safeguards against irresponsible lending, such as the creditor’s duty to conduct a borrower-focused creditworthiness assessment and refuse credit in the case of a negative outcome, the general ban on tying practices, and measures to prevent usury—thus reflecting the recommendations to the European Parliament and the European Commission put forward in my previous work. The adoption of these safeguards, together with the broadening of the directive’s scope of application, represents a major step forward in combating irresponsible lending practices and protecting European consumers against over-indebtedness in the digital age. The regulatory regime for unsecured consumer credit is now also in line with the one for mortgage credit. 

At the same time, however, the effectiveness of the New Consumer Credit Directive in ensuring responsible lending will depend to a considerable extent on its implementation and enforcement in the Member States. While it tightens the regulatory grip on the consumer credit markets, the revised directive does not apply, for instance, to the provision of BNPL by the suppliers of goods and services (including large companies, such as Amazon) if certain conditions are met. Neither does it apply to direct P2PL where a credit agreement is concluded between a consumer borrower and a consumer lender and the role of the P2PL platform is limited to connecting and matching these two consumers. Additional measures at EU or national level may be needed to fill these gaps.

Moreover, the new directive leaves considerable leeway for national legislators, administrative agencies and lenders in fleshing out the harmonised standards with more details. A particularly broad leeway is available with respect to product governance, measures to prevent usury, and reasonable forbearance measures. Some room to manoeuvre also remains with respect to the consumer’s creditworthiness assessment. The European Banking Authority could play an important role in monitoring the implementation of the respective provisions in national legal systems and clarifying the meaning of the open-ended concepts contained therein.

In addition, Member States may derogate from the general prohibition of tying practices to allow lenders to make the provision of consumer credit conditional on the purchase of an insurance policy. In the absence of a European duty on the part of lenders to ensure the basic suitability of credit-related products for consumer borrowers, this tying practice could lead to consumer detriment. To protect consumers against irresponsible product tying, therefore, those Member States that make use of the derogation at issue could impose a duty on the creditor to ensure the basic suitability of the insurance policy tied to the consumer credit product.

 Last but not least, the enforcement of the new directive remains largely unharmonised. While containing few new rules on administrative penalties, the directive is silent on private law remedies. How effectively the revised rules will be enforced, therefore, largely depends on national administrative agencies, administrative courts, and private law courts. Judicial activism of the Court of Justice of the EU could ensure greater harmonisation of administrative sanctions and private law remedies for breach of the revised directive.

In a nutshell, the New Consumer Credit Directive is on the road to responsible lending in the digital marketplace, but the road ahead remains bumpy.

The author’s complete article can be accessed here.

Olha O. Cherednychenko is a Professor of European Private Law and Comparative Law at the University of Groningen, and Director of the Groningen Centre for European Financial Services Law (GCEFSL).