Consumer Credit Directive comes into force
THE EU's Consumer Credit Directive comes into force from today.
It's a huge piece of legislation covering every aspect of the credit market: from how providers sell their products to the rights consumers have to leave contracts.
However, since the new rules have had to integrate with the UK's existing, fairly robust, consumer laws and regulations for advertising credit products the actual results are a mixed bag.
For example, one aspect of the credit card legislation actually makes APRs less representative.
Before the directive came into force, the 'typical variable' APR advertised with credit cards had to be available to at least two thirds of new applicants.
Now, however, the 'representative example' APR only has to be available to 51% of those that apply.
All in all, the CCD is a far cry from fairer credit card policies agreed by providers and introduced in January.
For more on exactly how the legislation will affect consumers see our full guide to the Consumer Credit Directive: available here.
Here, however, we'll continue to discuss the problems that actually implementing the legislation has bought up for politicians and financial providers.
Why have EU consumer help?
The EU Commission that spawned this directive primarily to establish some basic conditions which could allow payments systems in all EU countries to play nicely with each other.
The idea is that a basic framework will make it easier for retailers working in several European countries to operate and give consumers moving around the EU a guaranteed level of protection wherever they happen to be.
Today, Edward Davey was keen to publicly embrace the new legislation.
"The implementation of the Consumer Credit Directive will help strengthen a culture of responsible lending," the Minister for Consumer Affairs said.
"With new legal rights for consumers and greater responsibility for lenders, consumers will be better able to take charge of their money."
Yet, as we've seen above, the measures don't always work in the way they were intended to.
Turning information to action
In a Government consultation, consumer groups including Money Advice Trust, Citizens Advice and Credit Action agreed that the measures planned under the Consumer Credit Directive would provide insufficient consumer protection.
It isn't enough to provide information and leave it at that, the bodies said.
"Existing consumer protection measures have failed because they rely on consumers being able to understand complex information and take action as a result. As we have shown, this is not always possible," said Citizens Advice.
This not a new criticism of the directive.
In a December 2005 memorandum about the legislation circulated by three MEPs, including the directive's Rapporteur Kurt Lechner, and later admitted into evidence in a House of Lords debate on the directive, policymakers noted that too much information presented a risk for consumers.
"It is necessary to ensure that the information required from the credit providers is... genuinely useful to the consumer. Information overload can confuse consumers and impose a heavy burden on credit providers," the note said.
As a result, an effort was made to limit the amount of information lenders had to provide.
How far those limits will placate consumer groups remains to be seen, however.
New ways of advertising
It's also notable that discussions to decide how to implement the changes have focused on getting the job done as quickly as possible, rather than lingering on any possible benefits to consumers.
That in itself is unsurprising but the effect doesn't seem to have been considered at the policy level.
For example, the legislation states that all forms of borrowing must now include a representative example: if I borrowed X amount over period of time Y then I'd pay Z in interest.
Lenders and other companies advertising credit, such as price comparison sites, have generally agreed to express this using a stock phrase somewhere along the lines of: "This is equivalent to an X% APR representative variable based on a credit limit of £1,200."
The approach is well intentioned but, when it comes to credit cards at least, indecipherable.
A credit card isn't a personal loan: the amount of interest consumers pay isn't determined, in the most part, by how much they borrow it's based on what they're borrowing for (e.g. purchases, balance transfers or cash advances).
What's more, the actual amount consumers end up paying is dependent on a multitude of other factors. First and foremost it depends on whether they pay the bill in whole, in part or not at all at the end of the statutory interest free period.
After that point, the actual amount of interest due is still dependent on how payments are made subsequently by the user as well as strict card rules like the method banks use for payments to be allocated by interest rate (more on this here).
It seems highly likely that the 'representative' example was conceived as just that: a guide to how much consumers could expect to repay in hard currency.
The nature of credit cards obviously makes giving a guide difficult but the current way the legislation is enforced doesn't even try to offer one, not in any real sense.
The rules have ended up as just another obfuscation.