The long-awaited EU Consumer Credit Directive (CCD) has finally been agreed, although the impact on the UK second charge market is still not clear. Some industry commentators thought that the EU would use the directive to re-classify secured loans – also known as second charge – as mortgages, resulting in a change of regulation.
Currently the Office of Fair Trading (OFT) regulates all credit agreements, with the exception of first charge loans, which, of course, fall under the auspices of the Financial Services Authority (FSA). If the EU had decided to re-class secured loan products then it was highly likely that providers and brokers would also have to be legislated by the FSA under similar terms to standard mortgages, which are considered much stricter than the OFT’s current consumer lending rules.
However, although such drastic action did not occur when the CCD was finally approved in May, the new directive does apply stricter and more wide-ranging rules on the sale of secured loans. The directive seeks to give consumers more safeguards and options when taking out credit, as well as ushering in a more open market, enabling consumers to shop right across the continent for loans and credit.
Announcing the CCD, the EU said it aimed to break open the 800 billion consumer loans market, saying that currently it ‘remains largely fragmented into national markets, denying consumers choice and more competitive prices’.
The EU announcement said: “The new rules will make the market more transparent for consumers and business competitors. The main effect will be to provide standard, comparable information to customers across the EU taking out a credit loan.”
Key points
Under the new rules, consumers will be assured access to key facts and figures in advertisements. For credit offers, the information given to consumers – for example, interest rates, amount, number and frequency of payments, the obligation to take out insurance or the charges for defaulting – must be set out in a new comparable EU-wide European Credit Information Form.
In addition there will be a new single EU-wide method for calculating the annual percentage rate of charge (APR), which the body says will ensure that consumers can see the real cost of credit. The directive also sets common standards on a right of withdrawal so consumers can change their mind.
The key elements of the directive include:
- Advertising – If there is a figure in an advertisement on credit, it will be mandatory to provide the same standard list of essential information, all over the EU.
- Pre-contractual information – The directive obliges creditors to provide consumers with all the necessary information to compare offers in good time before they conclude the contract. Consumers will receive the APR, a single figure representing the cost of the credit and which consumers can use to compare and to establish the cheapest credit all over Europe, included in a standard form to be used by all creditors at EU level. This will make direct comparison between offers much easier, even across borders.
- Contractual information – Once consumers make a choice of which loan to take out, they need to receive comprehensive information when they conclude the contract, so that they have a reference document describing their rights and their obligations. This is provided for by the directive, which contains a list of information requirements. This guarantees the exact same level of information for consumers throughout the EU.
- Once they have concluded a credit contract, consumers will be able to withdraw from the credit without having to give any reason, and without any charge. This right – a new feature in almost half of the member states – will apply to all consumer credits in the EU. The EU says this will avoid the risk of taking a hasty decision under pressure without being able to step back and will also enhance competition among creditors, who will not want to risk consumers withdrawing, if they can find much better rates available.
- In addition, the CCD confirms the right to repay early at any time. It sets EU-wide standards on the compensation creditors are entitled to claim in case of an early repayment, in order to lower market entry barriers.
Importantly the EU says the CCD is part of a bigger drive to boost the cross-border market in retail financial services, pointing out that markets in different states are in different stages of development and estimating an average annual growth rate of over 8 per cent in consumer borrowing.
According to EU data the average rate charged on a consumer credit in the euro area in 2007 varies from around 6 per cent in the cheapest country, Finland, to over 12 per cent in Portugal, the country with the highest interest rate. Other examples illustrate this variety of situations: 9.4 per cent in Italy and Spain, 7.1 per cent in France or 6.8 per cent in Ireland. This suggests there are considerable potential benefits, for banks and consumers, in developing a cross-border market in consumer credit.
Whether the new EU rules will actually tempt UK consumers to look overseas for their credit remains to be seen, particularly as the UK actually has a fairly low interest rate compared with other markets. In fact, the new directive offers UK providers more opportunity to expand their already flourishing second charge offerings to consumers on the continent.
According to Datamonitor, secured loan lending is now worth around £6 billion in the UK. It has expanded over the last 10 years, with annual growth of more than 50 per cent in the past five years alone. Datamonitor estimates the second-charge market will grow steadily to £6.3 billion by 2010.
Research carried out by the Association of Mortgage Intermediaries (AMI)among its members last year found that 44 per cent of brokers already offered advice to their clients on secured loans. More importantly, almost two thirds of AMI’s members intend to offer this kind of advice at some point this year.
TAFB
The research was carried out in advance of the launch of the Association of Finance Brokers (AFB), which is a sister organisation to AMI. The AFB was set up by brokers and loan providers to help improve the image of the sector and develop better communications between companies operating in the marketplace. It will also act as a lobbying organisation at both national and European level, making the voice of the industry heard.
TCF and best advice
In fact for mortgage brokers, looking at secured loans when considering the finance options for their clients could make sense in certain circumstances, as well as being in-keeping with the FSA’s ‘Treating Customers Fairly’ (TCF) principles.
Take, for example, the customer who is midway through a fixed mortgage deal and needs to borrow more, but knows that remortgaging could cost him dearly in terms of charges and a higher interest rate. In this situation, a secured loan could be more cost-effective.
Similarly for a customer on a standard mortgage who has suffered from recent credit problems, a remortgage for them might mean a non-conforming product that is more expensive than staying with the existing mortgage and taking out a separate secured loan.
One of the new breed of self-cert secured loans could also be ideal for the self-employed person who wants to raise some money for their business without tinkering with their mortgage. While modern secured loans also offer developments such as simple one plus one redemption charges, interest only payment option and bolt-on accident, sickness and unemployment protection with back to day one cover.
Many of the new products being launched in the UK are being introduced by lenders specialising in non-conforming home loans and specialist mortgages. These lenders bring with them experience of lending under stringent FSA regulations, which means that the new generation of providers offer competitive rates with fair terms and conditions, designed to be easy for consumers to understand.
As the impact of the CCD is still being assessed, it also means that mortgage lenders are best placed to provide compliant products to meet tougher EU rules.
Secured lending is a growing marketplace, both here in the UK and across the EU, so this will ensure that the market continues to be innovative and competitive in the months and years to come, for consumers, lenders and brokers.
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