New EU rules for consumer credit markets

Consumer credit is more prevalent in European countries than is often assumed. While many households have a long-term mortgage loan, they also use short-term consumer credit, to different degrees and in different forms across countries. In its most basic iteration, it is used by consumers without their noticing on an almost daily basis in the form of payments, overdraft facilities, and increasingly, in international payments with credit cards or even new forms of payments such as buy-now-pay-later schemes.

In some countries, consumer credit is very widespread for the purchase or use of basic household items, such as a car or household appliances, as well as for more luxury purchases, such as holidays or excursions. The EU legislation applicable to such financial services covers issues such as how the applicable interest rate and costs are calculated, the know-your-customer rules and the standard information requirements. These rules are split between the EU and the national level, with a growing importance of the EU regulatory system, notwithstanding very diverse national markets and consumer protection rules.

The updated EU Consumer Credit Directive is a sign of the EU’s growing importance in financial regulation, also on the retail side. The proposal was published by the European Commission in 2021 and the EU legislators have now almost agreed on its final version. The directive considerably extends and clarifies the scope and terms of the directive. Other new EU legislative acts have also had an increasing impact on consumer credit, such as rules on non-performing loans, on data and privacy protection. Moreover, judicial interpretations play a major role in shaping the consumer credit landscape.

This ECRI Explainer will start with a review of consumer credit markets in the EU, their evolution across countries and the recent dynamics to the radically changing credit environment. It will then analyse the approach taken in the latest update to the Consumer Credit Directive and assess the implications for the credit markets. It further discusses the approach to the topical issue of over-indebtedness, and the interaction with other aspects of EU rulemaking. It ends with some considerations on the activity of the EU in this domain, an area where Member States’ rules are still dominant.

Karel Lannoo is CEO of CEPS and General Manager of ECRI and Fredrik Andersson is a Researcher in ECRI and the Financial Markets and Institutions Unit at CEPS.