Responsible lending and borrowing in the EU

Practical Law UK Legal Update 9-500-4927 (Approx. 3 pages)

Responsible lending and borrowing in the EU

by Susi Pak and Sandra Pfister, Simmons & Simmons

Published on 13 Sep 2013 • Germany

This article is part of the PLC Global Finance September e-mail update for Germany.

On 31 August 2009, the consultation period for the public consultation launched by the European Commission on 15 June 2009 on "Responsible lending and borrowing in the EU", ended. The consultation aimed at gathering views and ideas on the extent of irresponsible behaviour and at assessing which measures may be most appropriate. On 3 September 2009, a public hearing was held in Brussels to discuss with stakeholders the most appropriate policy responses to the challenges faced by consumer borrowers and the financial services industry, and to summarise the main conclusions from the consultation.

On 15 June 2009, the European Commission launched a public consultation on "Responsible lending and borrowing in the EU". This initiative should be viewed in the context of the Commission's 4 March 2009 Communication "Driving European Recovery", where it undertook to propose measures at EU level on responsible lending and borrowing, especially in the consumer mortgage credit sector.

The consultation covered, among other things, the advertising and marketing of credit products, the information to be provided to borrowers prior to entry into of any loan agreement, ways to assess product suitability and borrower creditworthiness, advice standards, responsible borrowing and issues relating to the framework for credit intermediaries (for example, disclosures, registration, licensing and supervision). The main conclusions of the consultation are summarised below.

Advertising and marketing

Advertising and marketing, especially in the financial services sector, should be fair, not misleading and should not put undue pressure on the prospective customer. While the Consumer Credit Directive explicitly addresses the information to be presented in advertising of consumer credit, with the exception of the provisions of the Unfair Commercial Practices Directive, no such requirements are in place for the advertising and marketing of mortgage credit.

Pre-contractual information

Borrowers must receive clear information to enable them to decide whether the credit product they are being offered is suitable for them. Such information could include the various potential (long-term) risks associated with credit, such as the impact of foreign exchange fluctuations, interest rate variations and changes in asset prices. The information must be clear, understandable and comprehensive and employ simple wording with limited use of technical jargon.

Suitability and creditworthiness

Some borrowers have been granted credit that was unsuitable for them or their needs. Therefore, in future, the issue of suitability needs to be considered.

While the Consumer Credit Directive as well as the Markets in Financial Instruments Directive (MiFID) set some rules on the assessment of suitability, no such obligations are in place with regard to mortgage lending.

Furthermore, there is a need for a proper creditworthiness assessment of the borrower. Lenders and credit intermediaries may have incentives not to undertake a thorough creditworthiness assessment to speed up the process and thereby gain new clients.

Advice standards

Advice should be objective, based on the profile of the borrower, and commensurate with the complexity of the products and the risks involved. Given that providers of advice on credit products, such as credit intermediaries and bank staff, are often remunerated based on sale commissions and fees, there is potential for conflicts to arise with these principles.

With regard to mortgage credit, there are currently no rules at EU level on the provision of advice. The 2007 White Paper on the Integration of EU Mortgage Credit Markets states that lenders should provide full information and adequate explanations to the consumer, so that the latter makes a well-informed choice, but should not be legally compelled to provide advice. However, MiFID already stipulates advice provisions, and internal advice guidelines for lenders could be drawn up to give sufficient detail for the suitability of different products for specific categories of consumers.

Responsible borrowing

Responsible borrowing means that individuals, when seeking to buy a credit product, will make efforts to inform themselves of the products on offer, be honest when providing information on their financial situation to the lender or credit intermediary, and take their personal and financial circumstances into account when making their decision.

This prudence should help the borrower to select the credit product that is most appropriate for its needs. Borrowers who do not behave responsibly will undermine the positive effects that could be achieved through policies on responsible lending.

Framework for credit Intermediaries

Currently, there are no provisions in EU legislation relating to the ongoing supervision of credit intermediaries.

In considering the framework in which credit intermediaries operate, the approaches could include:

Enabling supervisory authorities to assess whether intermediaries are involved in the provision of high-risk credit.
Helping to give borrowers confidence that the intermediary has suitable qualifications and expertise, and that there is an authority to which they could turn in the event of a dispute.
Creating a level playing field between intermediaries at the EU level and opening up the possibility to provide cross-border intermediation services under a "passport" system, as is currently the case for insurance intermediaries.
Providing a basis on which to determine the authorisation of access by intermediaries to borrowers' credit data.

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