Consumer Protection in Financial Services

As part of its EU consumer policy revision, the Commission undertook a review of the Consumer Credit Directive (2008/48/EC). The initiative followed its evaluation published in 2020, which highlighted several challenges hindering its functioning, in particular in terms of scope, information provision and creditworthiness assessment. The review, also included among the New Consumer Agenda actions, took into account the impact of COVID-19 on the credit market and on consumers, including vulnerable ones.

The new Directive (EU) 2023/2225 of the European Parliament and of the Council of 18 October 2023 on credit agreements for consumers and repealing Directive 2008/48/EC will apply from 20 November 2026. To find out more, visit the Consumer credit webpage.

When taking out consumer credit, special rules apply that help consumers make an informed decision and guarantee fair contractual conditions.

The right to make informed decisions

Consumers have the right to obtain advertisements containing standard information, and to request general information from the credit provider on the terms and conditions of credit contracts. Moreover, pre-contractual information has to contain standardised items in a certain format, which will be later replicated in the contract.

In particular, the consumer must always be provided with key information in a standardised format called the Standard European Consumer Credit Information (SECCI) form.

This form must state the total cost of the credit expressed as an annual percentage of the total amount of credit - the Annual Percentage Rate of charge (APR) - to help consumers to compare different offers. The Commission issued Guidelines in 2012 on the cost of credit and the APR.

A calculator based on the Consumer Credit Directive provisions is available to help users (including regulators, consumers, creditors) calculate the APR of a given value of credit.

The right to get the credit only if you can repay sustainably

In the Consumer Credit Directive, it is required that creditors do not engage in irresponsible lending and that they should bear the responsibility of checking individually the creditworthiness of consumers. Creditors must ensure, that credits are only granted to consumers who are expected to be able to meet their contractual obligations. This is to protect consumers from credit-related over-indebtedness. Where the credit worthiness assessment involves the use of automated processing of personal data, consumers have the right to request the personal intervention of a human.

The right to change your mind

After signing a credit agreement, consumers have the right to change their mind and withdraw from credit agreement without giving any reason within 14 days of the conclusion of the contract. If the consumer receives the contractual terms and conditions and mandatory information only after the contract has been concluded, the period begins at this point in time. However, the cancellation period expires in any event 12 months and 14 days after the conclusion of the credit agreement.

The right to pay back ahead of time

If consumers are able to pay back their credit earlier than foreseen in the contract, they have the right to pay back their credit ahead of time.

Creditors are obliged to implement a creditworthiness assessment system that ensures credits are only granted to consumers who are expected to be able to meet the contractual obligations. This is to protect consumers from over-indebtedness. Furthermore, consumers have the right to request personal human intervention during the assessment process, if it involves automated processing of personal data.

In its March 2017 Consumer Financial Services Action Plan: Better Products, More Choice, the Commission announced it would seek to introduce common creditworthiness assessment standards and principles for lending to consumers. A mapping of national approaches to creditworthiness assessment under Directive 2008/48/EC has been prepared with the input of national authorities.

Study of European Commission on the over-indebtedness of European households

The overall purpose of this study, published in 2023, was to obtain a clear and updated analysis of over-indebtedness among European households and consumers.

Some of the key findings are:

• in 2020 8.8 % of households across the EU were in arrears with their key financial commitments, which means in concrete numbers that over-indebtedness affects 17.2 million households and almost 40 million citizens
• while the proportion of citizens in financial difficulties decreased by around 30 % between 2014 and 2020, the COVID-19 pandemic led to a turning point in this trend and a new increase which is expected to continue further
• main factors for the increase in household over-indebtedness are increase in the cost of living, decrease in income, increase in demand for credit and increase in the cost of debt
• key measures to mitigate the impact of the continuing development are increasing financial knowledge to prevent over-indebtedness, development and expansion of debt advice systems to support over-indebted households and promotion of responsible lending practices

Please find below the final report.

2020-2021 Project of European Commission on debt-advice

This Project, carried out between 2020 and 2021 included 3 diverse tasks, namely:

• a Study on the Funding of Debt-Advice;
• two meetings addressed to the Exchange of Best Practices among debt-advice providers;
• two sets of Capacity Building events, in which expert debt-advice providers coming from countries where debt-advice is well developed explained their activities to future possible debt-advice providers coming from countries where debt-advice is still non-adequately developed.

This Report contains the results and the consequent outcome of this initiative. Among the most relevant conclusions, we can quote:

• a clarification of the resources needed for putting in place stable debt-advice services, but also an estimation of the (more reduced) resources needed to start a service where it is not available;
• a clear confirmation of the positive and “efficient” role of debt-advice, including for creditors;
• numerous examples of best practices, typical of specific places but well “exportable” in other countries;
• key messages for future debt-advisers, in particular in the areas of ethical principles, concrete support for overindebted consumers, legal and emotional support;
• fundamental information about the knowledge basis needed by potential future debt-advisers, in particular in the area of financial literacy.

The Commission has decided to promote a project aimed at facilitating the delivery of debt-advice for European citizens.

In the March 2017 Consumer Financial Services Action Plan, the European Commission committed to efficiently address consumer over-indebtedness linked to credit activities.

In 2008 and 2013, The Commission published two major studies on the over-indebtedness of European households, which both concluded that personalised debt advice is one of the most effective tools to address households' over-indebtedness.

A Stakeholder Forum on Debt Advice, attended by representatives of all the categories involved (financial and debt service industry, debt advisors, charities, consumer associations, experts from public administrations and academics) has taken place on 10 October 2018 to promote exchange of expertise on this topic.

Please find below the conclusions and the agenda.
 

Directive 2002/65/EC on distance marketing of financial services establishes common rules for the marketing of financial services by suppliers to consumers in the EU.

The Directive provides for a ‘safety net’ of basic rules for all types of consumer financial services contracts concluded at a distance, complemented by overriding sector-specific legislation. It ensures that the consumer receives comprehensive information from the provider and that he/she has the right to withdraw from the contract during a cooling-off period of 14 days. In addition, traders must provide a withdrawal function for contracts concluded by means of an online interface, which consumers can use to send a withdrawal statement directly online to the trader.

Traders are prohibited from using practices that materially distort or impair the ability of consumers to make autonomous and informed choices or decisions such as ‘nudging’ consumers via the design or structure of their online interface.

Directive 2002/65/EC will be repealed by Directive (EU) 2023/2673 as of 19 June 2026. To find out more about it, visit the distance marketing of financial services webpage. 

The study looks into the impacts on consumers of practices used by providers of retail financial services when marketing and selling their products online and suggests ways to improve how consumers are informed when they look to obtain financial products on the internet, such as consumer credit or bank accounts.

Some of the main findings:

• Consumers make better choices when information is provided to them upfront and saliently, at the right time and in a format that helps comparison. Information presented in one go, in a simple and structured comparison table particularly helps vulnerable consumers and users of smartphones.
• Some practices nudge consumers into making speedy purchasing decisions, which can cause consumers to make rushed, and potentially bad, decisions. The study shows that slowing down the process improve consumer decision.

The study has also collected evidence on the impact on consumers of a few additional practices, such as those pertaining to the design of the product, the use of personalisation and targeting techniques and the use of tools to help consumers in their decision-making process.

Findings from the study have been incorporated in the revised Directives on Consumer Credit and Distance Marketing of Financial Services.