The Consumer Credit Directive added protections for credit card customers to ensure changes to interest rates were fairly advertised and set rules about representative APRs and fees.
Customers were also given the option to overpay on their personal loans and find out more about why their credit applications were rejected.
The Directive was transferred into the Consumer Credit Act 1974 and the protections remain part of UK law.
What did the Consumer Credit Directive include?
The Consumer Credit Directive (CCD) was a piece of European Union legislation that came into force in 2011. It was adopted into UK law and now forms part of the Consumer Credit Act 1974.
Now the UK has left the EU, there have been minor changes to the language of the Act (and the rules related to the Directive) but the substance of it remains the same.
Here are six key elements of the CCD that UK credit customers should be aware of.
1. Right to notice of interest rate increases
The Consumer Credit Directive stated that borrowers must always be notified of changes in interest rates and that this should generally be done in writing before the change takes effect.
So, if our credit card provider plans to change the interest rate on our credit card, they must let us know.
However, the way credit card companies go about this is governed by principles agreed by the industry - they are not set out in the CCD or elsewhere yet.
A couple of these principles are worth highlighting:
- Credit card providers should give at least 30 days' notice of interest rate changes
- Credit card providers should explain in clear language what the interest rate changes are going to be, what it will cost and what a customer's options are
- Customers do not have to accept the new interest rate and can choose to close their account or potentially transfer credit elsewhere
All this should mean that customers are informed properly about changes to their interest rates and given time to make a decision about what they want to do.
However, simply closing the account will not be an option for many customers, so it's important to look at other options such as balance transfer credit cards to get a full overview of the options available.
2. Changes to interest advertising
Another key element of the CCD came in the form of new Advertising Regulations. These required that lenders provide a 'representative example' of the cost of credit.
There were a couple of major elements to this:
- It must contain standard information including a representative APR and the information must be clear and concise
- The representative APR must be available to at least 51% of applicants
However, these were widely seen as regressive steps that did not simplify borrowing for many customers because of in-built issues such as:
- Even if 51% get the representative APR, up to 49% of customers do not and therefore the representative APR is not clear for all
- The representative APR of a credit card is usually based on purchases rather than balance transfers or cash withdrawals which can increase the APR
These mean that some customers may not be getting a clear picture before they make a firm application for credit (one that will appear on their credit report).
An additional element of this ensured that mandatory fees and charges were included in the calculation of the representative APR to give a clear overall picture of how much the credit would cost a customer.
3. Right to overpay on personal loans
Personal loan customers were given the right to overpay on their loans at any time under the CCD.
This means that we can make extra payments to help us pay off our loans more quickly if, for example, we receive some unexpected money we want to put towards our debts.
Before this came into force, customers were either forced to pay the whole amount off in one go if they wanted to overpay on their loan or stick to the initial agreement and pay it off over the timescale initially agreed.
There is one catch that allows providers to recoup some costs.
Lenders are allowed to claim compensation for overpayments as long as the decision is fair and objectively justified. To put a cap on it, providers can charge up to 1% of the extra payment in fees, reduced to 0.5% if the loan has less than a year left to run.
Find out more about paying your loan off early and what to expect.
4. Increase in 'section 75' protection
The Consumer Credit Directive increased protections for consumers utilising one of the most widely used protection laws: section 75 of the Consumer Credit Act 1974.
Under that law, when cardholders make a credit card purchase or purchase through a borrowing agreement between £100 and £30,000, the lender and the supplier are equally responsible for making sure they're provided with the goods or service.
The CCD enhanced these protections, allowing borrowers to seek redress in certain circumstances where section 75 does not apply as long as the cash value of the goods/services are more than £30,000 and the credit value is less than £60,260.
These improved protections are welcome and still remain part of the legislation, but the reality is that the section 75 limit of £30,000 is more than enough to protect most of us from poor quality goods or services.
5. Right to a draft credit agreement
Under the Consumer Credit Directive, customers were given the right to see a copy of the draft agreement before signing up for a credit product.
The CCD also doubled the cooling off period for credit cards and loans to 14 days, giving borrowers a fortnight to change their minds after making an application for credit. The credit must be repaid and any interest owed must also be cleared.
It's worth pointing out that lenders were providing summaries of such information before the CCD came into force.
One of the main things to remember about these Pre-contract Credit Information forms is that they are required to be as clear as possible and must be easily understood.
Customers should also be able to take the form away with them to compare with other lenders' offers if they wish to.
6. More information on applications
Another rule in the CCD required lenders to inform customers if their application for credit has been declined on the basis of information obtained through a credit reference agency, even if it was only partly declined on that basis.
In simpler terms, if a lender decided not to approve an applicated based on information from a credit reference agency, the customer has the right to know that. They also have the right to know which agency the lender used to make the decision and to be supplied with their address and telephone number.
This is important because there are three major credit agencies in the UK (Equifax, Experian and TransUnion) and each one may give us a different score based on our credit histories and which companies report to them. So, knowing which one we might have an issue with can be useful.
However, although failing to supply this information is an offence under section 157 of the Consumer Credit Act, there is still anecdotal evidence that lenders are not complying.
Part of the problem is that, although credit scores are one element of a lender's decision, there are other internal processes, so it could be that a person with a good credit score is turned down in spite of that.
As with all policy, the CCD rules brought into UK law are set in stone for now - but not necessarily forever.
Now that the UK has left the EU, the decision on whether to amend the rules or enhance protections lies with Westminster rather than Brussels.
The Financial Conduct Authority (FCA) conducted a regular review of the Consumer Credit Act in 2019, looking at whether the Act continues to protect customers and whether any of it needed to be repealed or changed.
At the time, they pointed out that the scope of the CCD meant that some credit agreements were covered while others like consumer hire agreements were not. This can cause confusion and some firms argue they are unnecessarily complex.
It's also important to remember that the UK Government can make changes to consumer credit rules without affecting the protections we've discussed in this guide.
For example, the FCA decided to overhaul overdraft charges in rules that came into force in April 2020.
These were designed to make things fairer for customers through measures such as ensuring the costs of unarranged overdrafts were the same as arranged overdrafts. However, the unintended consequences of this meant that many banks raised interest rates dramatically once the reforms came into force.
The FCA has also brought in rules on persistent debt, with both credit card and overdraft debt targeted by the regulator.
If a customer has been paying more in interest/fees than they have spent paying down the debt itself, lenders are required to engage with them to help improve their financial situation.
A new set of consumer protections the FCA are working on are covered by the Consumer Duty.
These proposals are expected to be finalised in mid-2022 and look at ways of prioritising good customer outcomes.
One main thread of this is making sure that consumer credit markets work well with the FCA saying that:
- Borrowers should be treated fairly and should be able to get affordable products that meet their needs
- The design, pricing and sale of products/services should ensure consumers receive products/services that offer fair value
- Firms will need to consider the impact of vulnerability characteristics when looking at consumer needs and decisions
Overall, the Consumer Duty could strengthen the guidance around how credit companies treat customers, but the main protections are still found in the Consumer Credit Act.
Summary: Important legislation
The Consumer Credit Directive rules have been part of our regulations for over a decade now and they brought much-needed clarity to some areas.
Requiring customers to be informed about interest rate increases and obtaining the right to overpay on their personal loans were particularly useful additions to consumer protections.
However, it's clear that there were some shortcomings in the CCD that were transferred into the Consumer Credit Act and remain there.
For instance, the fact that only 51% of customers will receive a representative APR remains frustrating and customers are still struggling to find out why they were rejected for credit in some cases.
Changes to the Consumer Credit Act can be made by the Government, although extra guidance can (and is) issued regularly by the Financial Conduct Authority.
The CCD helped to transfer some pivotal protections into UK law, though, and we still see the benefit of them every time we search for credit.