The Institute of Credit Management is the largest professional credit management organisation in Europe. Its 9,000 members hold important, credit related appointments throughout industry and commerce with a significant proportion engaged in consumer credit. The Institute is therefore well-placed to comment on the consultation paper.

  The Institute is supportive of the UK position on the proposed Directive, and its detailed comments are set out below.

CHAPTER I: AIM, DEFINITIONS AND SCOPE

Q1:   Do you have any concerns arising from any of the other definitions in this Article?

  The Institute has no concerns beyond those raised in the consultation paper.

Q2:   What do you think is the appropriate level of harmonisation for the Directive? Why?

  The Institute supports the Government's view that the Directive calls for a targeted harmonisation approach as described in paragraph 44 of the consultation paper, allowing for the retention of certain important consumer protection features of our legislation, such as Section 75.

  Harmonisation should be at a level that encourages cross border trading, and permits comparisons to be made easily throughout the Member States. Flexibility is required, however, in order to meet local cultural variances without giving way to national protectionism.

  One of the Institute's senior members made the following point which, though minor, has implications and is therefore worthy of consideration:

"I can foresee that in order to make credit agreements from, say, a particular finance house readily available, understandable and enforceable throughout the EU, documentation may eventually need to be provided in all official languages. This would create an additional financial burden for small and medium sized finance companies."

Q3:   If you support a targeted harmonisation approach, which areas do you think should be subject to maximum harmonisation, which minimum?

  The Institute considers that full harmonisation could hinder modification of the law in the light of practical experience, for example, in advertising.

  In the Institute's view access to data, comparative pricing and interest calculation should be subject to maximum harmonisation. Cancellation periods could be varied locally to meet custom and practice needs, and areas that would add bureaucratic costs should be subject to minimum harmonisation. The Institute agrees with the Government's stance on consumer protection as set out in paragraph 44.

Paragraphs 47-55

  The Institute agrees with the Government that lending secured on property should be excluded from the scope of the Directive.

Hire-Purchase—Paragraphs 57 and 58

  One senior member made the following observation:

"There is a need to clarify not only the legal meaning of hire purchase as used in the Directive, but also how it is practised in other EU Member States. My understanding is that the practices differ considerably from hire purchase in the UK."

Q4:   Do you agree with the proposed UK Government position with regard to the various scope and specific requirement issues—if not, what would you amend and why?

  Subject to the comments made above, the Institute agrees with the proposed UK Government position.

CHAPTER II: INFORMATION AND PRACTICES PRELIMINARY TO THE FORMATION OF THE AGREEMENT

Q5:   Will the article, as drafted, assist the development of a cross-border market and consumer protection for credit by making credit advertisements more transparent?

  It is the opinion of the Institute that minimum requirements must be included, as currently suggested in the paper. In the Institute's experience, advertisers expend vast amounts of ingenuity in pursuing a supposed advantage by circumventing the rules. These therefore need to be clear and specific whenever information on credit products is to be given, but the Institute believes that there can be no objection to simple "name and occupation" types of advertisement.

  The Institute suggests that all advertising should state clearly the amount to be paid back by a consumer, subject to changes in interest rates, to make credit advertisements more transparent.

Q6:   Do you think that a principled approach based on mutual recognition would be appropriate for advertising? If so, what key information do you think should be included in all credit advertising?

  The Institute supports an approach based on the same principles as the Consumer Credit (Advertisements) Regulations 2004.

Q7:   Do you agree with the UK position on contractual information?

And Paragraphs 80-88

  The Institute agrees with the reasons why the UK Government rejects the principle of "responsible lending" as set out in the Directive. There is nothing intrinsically wrong, however, with the Directive's aims to ensure that lenders employ best practice in credit assessment. Proper assessment of risk will define a fair price, and failure to do so will not.

  Another concept that might be considered is that of injudicious lending, which applies in particular to lending to over-committed individuals and the striking out of a debt by the court if the decision to lend is considered injudicious. Any real or threatened publicity surrounding injudicious lending cases will, of course, encourage the lender to settle such claims out of the court, and to take a more lenient view on concurrent cases by the same loan officer. This tends to bury the extent of such cases beyond view, however. The Institute suggests that it would be better to encompass "responsible lending" and "injudicious lending" within the same area, as few borrowers are currently aware that if lending is felt to be injudicious then it is irrecoverable, and that level of awareness needs to be improved. In turn, lenders would raise their standards to avoid having a debt struck out.

Q8:   Do you agree with the position on pre-contractual information and in particular the reference to "in good time"?

And Paragraph 92

  In the Institute's view the term "in good time" is too vague, and what might be appropriate for a simple agreement for a small sum might not be appropriate for a more complex transaction. Such a subjective expression is likely to lead to inappropriate and unnecessary court proceedings. In many cases the customer will derive little benefit but will merely be delayed in finalising the agreement. The Institute suggests that a more positive term would be "before the agreement is made".

  Many transactions (especially hire purchase and lease/hire deals) are initiated by the consumer, and not from telephone, postal or doorstep canvassing. If a specific time period were laid down this would create delays to the detriment of the customer.

Q9:   Do you agree with our position on a duty to advise?

  The Institute agrees that this is an undesirable proposal which should be resisted, and suggests that more should be done to provide education, especially for young people who are often financially naive.

Q10:   Do the extra requirements of the Article cause lenders and borrowers any difficulties?

  The Institute does not envisage that the extra requirements of the Article would cause lenders and borrowers any difficulties.

Q11:   Do you agree with the UK approach to Credit Unions?

  The Institute agrees, on balance, with the UK approach to credit unions.

  One senior member made the following observation, however:

"Whether locally based or not, the law should apply to all credit providers without exception, and I can see no single reason for special treatment for credit unions as this would lead to unnecessary complexity."

Q12:   Do you have any comments on how the proposal contained in Article 7 can be amended so that the consumer clearly benefits and is not exposed to exploitation?

  The Institute recommends that Article 7 should preclude specialist debt consolidators from entering into any contract that would disadvantage the customer when compared with the original calculation of the cost of credit, and that variable interest rates for this type of transaction should be prohibited.

  Debt consolidation, and those involved in this area of the lending industry, need to be more closely regulated. For consolidation loans there should be a specific obligation on the lender to demonstrate, in writing, that the terms of the proposed loan are no less favourable to the borrower than the terms of the existing loan.

  The Institute agrees with the Government's concerns in relation to this section.

CHAPTER III: DATABASE ACCESS

Q13:   Do you agree with the UK position on databases?

  The Institute agrees.

  One senior member of the Institute made the following detailed comments, however, which have implications worth considering further:

"When assessing credit in the UK, the lender has access to a wide array of databases. A fundamental issue of accessing such data is that the consumer consents to the accessing of the various databases, and it is important that this is retained and not replaced by a legal right of lenders to access such information without consent.

Many of the shared account performance databases and fraud databases are based on the principle of reciprocity, ie, lenders can only see data if they have contributed data to the central database for the benefit of other members. It must therefore be understood that, even within the UK, all creditors do not have equality of access to data.

Furthermore, it is not just access to databases that is at issue. There should also be an EU wide set of rules of reciprocity, and an EU set of principles for constructing and use of credit scorecards. The Directive must prescribe the minimum type of information to be held on each database if this is to be used across lenders in different Member States in a reasonably fair and equal way."

Q14:   We would like to know of any concerns you may have arising out of this Article, including any concerns about the costs of implementation.

  In the Institute's view a company's lending criteria should not be made known to the consumer. Such a system would be open to abuse. If the lender is obliged to disclose to a consumer without charge, then ultimately the cost of borrowing will increase.

  The Institute believes that if, as drafted, details are to be disclosed then an equitable charge should be levied to reduce the number of enquiries. This would go some way towards acknowledging that the cost of providing a file could be onerous for the finance company. In addition, if references are to be obtained from other sources, for example banks, the Institute asks whether these too would have to be disclosed?

  There is a more radical solution, however. One senior member made the following comment:

"The provision of credit file information to consumers is now a right in many parts of the United States, and is accessed annually from a website to save costs and reduce the incidence of supply of files.

I believe a similar system would work better than placing the burden of this on lenders in the EU, as it is also impractical for lenders to supply a credit file in each case. Some lenders use several agencies, others use none, in particular for applicants who score so high or low that the credit file information would not change the lending decision."

CHAPTER IV: FORMATION AND SURETY AGREEMENTS

Q15:   Would lenders have systems difficulties in providing the personalised information currently required by the draft Directive?

  The Institute is in no doubt that smaller lenders would have considerable difficulty in providing such detailed information as currently required by the draft Directive. This would involve significant programming and training costs, and at the very least a defined but adequate development period to allow system development should be included. Software packages would need to be amended to provide the required information at a substantial cost.

Q16:   Please provide any specific comments you might have on these extra items of information that the Directive proposes should be included in credit agreements.

  The Institute is supportive of the UK position. However, one senior member made the following comment:

"The danger of including this kind of information is that it could be considered exhaustive rather than mere example. The UK courts are experienced in deciding what is or is not fair and lawful, and should not be excluded from doing so when required."

Q17:   Do you agree that the UK should argue for the inclusion of all of the above information requirements in the Directive?

  The majority of Institute members agree that the UK should argue for the inclusion of the information required under UK law in the Directive. One senior member made the following observation, however:

"There is a body of opinion amongst those who have had to devise agreements under the amended Agreements Regulations that these are unnecessarily detailed and prescriptive, and that they may end up by confusing rather than helping the consumer."

Q18:   Do you agree with the UK position on right of withdrawal?

  The Institute agrees with the UK position on right of withdrawal, in particular paragraph 136. This proposal would undoubtedly lead to inconvenience for consumers and retailers alike.

CHAPTER V: ANNUAL PERCENTAGE RATE OF CHARGE AND BORROWING RATE

Q19:   Do you agree with our policy to seek maximum harmonisation on the subject of APR on the basis of the policy suggestions outlined?

  The Institute agrees that maximum harmonisation is appropriate in this area. There is ample evidence of banks and others endeavouring to find their way around the rules and thereby confusing the customer. To give scope for such practices in relation to cross-border marketing is to invite trouble.

  In relation to paragraph 151, however, the Institute is suspicious of a provision that the term (duration) of the agreement should be based on the terms of the contract, particularly where this would be calculated from the minimum repayment. In the past this has led to UK banks ending up with agreement terms of several tens of years, or even of infinite duration, in an effort artificially to lower the advertised APR.

  The Institute agrees that "blended rates" (paragraph 152) are open to manipulation and misuse, and thoroughly supports the recommendation that credit cards should advertise APRs based on the "purchase rate".

  The Institute is hopeful that the assumptions for calculating the APR in running-account credit contained in the Consumer Credit (Advertisements) Regulations 2004 Schedule 1 Paragraph 1, and the amended Agreements Regulations, will bring a worthwhile improvement and reduce confusion.

  The Institute agrees that overdrafts should be required to show an APR rather than an EAR for the reasons given in paragraph 157.

Q20:   Given that we aim to retain the current provisions relating to the calculation of APRs for HP transactions, are there any difficulties associated with this proposal and if so what are they?

And paragraph 159

  The Institute is not aware of hire purchase agreements with the option to purchase exercisable on a number of dates. In the UK, the option is exercisable on completion of the payments or at the customer's option when he chooses to settle early. The proposal appears to the Institute to be unnecessarily complicated, involving complex calculations for little or no purpose.

  In addition, the Institute points out that documenting several APRs on a single hire purchase agreement, which is pre-printed or pre-formatted, would be very difficult, and additional programming and training would be required in relation to point-of-sale computers and mainframes. And which APR would be used when calculating settlement examples or, indeed, actual settlement figures? The APR where the residual value of the goods could not be determined, could look disproportionately high and would not be representative.

Q21:   Do you agree with our policy to resist the requirement that the new APR and amortisation table must be given when borrowing rates are varied?

  The Institute agrees with the policy to resist the proposal for a new APR and amortisation table to be given every time that borrowing rates are varied, on grounds both of expense and confusion.

CHAPTER VI: UNFAIR TERMS

Q22:   Do you support the inclusion of these terms in the Unfair Contract Terms legislation? If so, why?

  The Institute does not consider that the inclusion of these terms in the Unfair Contract Terms legislation is required.

CHAPTER VII: PERFORMANCE OF A CREDIT AGREEMENT

Q23:   Would you prefer to see maximum or minimum harmonisation in this area? Why?

  The Institute would prefer to see minimum harmonisation for the reasons given.

Q24:   Do you agree with our position on assignments of rights?

  The Institute agrees with the UK position on assignments of rights.

Q25:   Do you support our policy to maintain current UK law and retain the provisions contained in the 1987 Directive?

  The Institute supports the policy to maintain current UK law and retain the provisions contained in the 1987 Directive.

Q26:   Would you support our approach of maintaining joint and several liability as set out in the UK?

  The Institute believes that the UK approach of maintaining joint and several liability is fair and should be maintained.

Q27:   Do you agree with a minimum harmonisation approach in this area?

  The Institute agrees with a minimum harmonisation approach in this area.

CHAPTER VIII: SPECIFIC CREDIT AGREEMENTS

Q28:   Is there any need for this Article? If so, in what circumstances should it be retained?

  The Institute can see no justification for this Article, and still less for imposing a need to give three months' notice. The existing UK method is tried and tested within a very large market, and operates satisfactorily.

CHAPTER IX: PERFORMANCE OF A SURETY AGREEMENT

Q29:   In view of the differences between the Article and UK law do you agree we should seek minimum harmonisation?

  In the Institute's view paragraphs 194 and 198 set out proposed limitations on the usefulness of a guarantee which are both unduly restrictive and unknown in English law. The Institute therefore sees no alternative but to seek minimum harmonisation in view of the complexity of this area.

CHAPTER X: NON-PERFORMANCE OF A CREDIT AGREEMENT

Q30:   Are there any problems with applying this requirement to running account credit?

  In the Institute's view, the requirement described in paragraph 204 to inform the customer before blocking an account is a "rogues' charter" as it leaves customers free to increase their over-limit borrowing further. Creditors must be allowed to manage their risk, and this could not only encourage irresponsible borrowing but could, at a later date, be considered irresponsible lending.

Q31:   Do you agree that a minimum harmonisation approach to default and enforceability is appropriate?

  The Institute agrees that this chapter needs completely re-writing on a minimum harmonisation basis.

Q32:   Do you think that this Article provides adequate regulation for unauthorised overdrafts?

And Article 25, second paragraph

  The Institute agrees that this Article provides adequate regulation for unauthorised overdrafts, and should be linked to Article 24. However, the Institute cannot see the necessity for a new credit agreement when raising the credit limit for an over-limit borrower. In the Institute's view all that is required is notice of the increase. Furthermore, the word "significant" is too subjective. The Institute suggests that this should be expressed in a different way, perhaps as a percentage.

CHAPTER XI: REGISTRATION, STATUS AND CONTROL OF CREDITORS AND CREDIT INTERMEDIARIES

Q33:   Do you think that this Article is strong enough to protect consumers in an open internal market? Or do you think that such light requirements will upset the balance of competition and level of consumer protection?

  In the Institute's view this Article is strong enough to protect consumers in an open internal market, and the Institute does not consider that such light requirements would upset the balance of competition nor the level of consumer protection.

Q34:   Would it be more appropriate to introduce a passporting system similar to the banking Directives, where creditors or intermediaries would have to fulfil passporting provisions demonstrating that they are "fit" before they lend cross-border?

  The Institute has mixed views about this. In theory, if an organisation is approved in its own country, that should be sufficient to allow it to operate throughout the EC. In practice, however, matters might prove rather different.

Q35:   Is there any reason why credit intermediaries should not be required to divulge whether they are an independent broker, or work with one or more clients?

  The Institute can see no reason why credit intermediaries should not be required to divulge whether they are an independent broker, or work with one or more clients.

Q36:   Would you agree that the instances when a credit intermediary can charge a fee should be limited? If so, do you agree with the conditions above?

  The Institute agrees.

CHAPTER XII—FINAL PROVISIONS

  One senior member of the Institute made the following comment:

"Member States have two years from the date of coming into force to bring in legislation to comply with the Directive (Article 35). In Article 34, however, it appears that the Directive would apply immediately to all agreements entered into, on or after the date of coming into force."

  The Institute would be grateful for further clarification.

SECTION C: REGULATORY IMPACT ASSESSMENT

Q37:   Do you agree with the assumptions, figures and impact assessments made in this RIA—if not, please provide as much supporting evidence as possible.

  In the Institute's view it is difficult at this stage to provide a sensible RIA until details of the final Directive are known, and how it will differ from the current UK views on the European Union Consumer Directive. An added complication is the potential impact of the Consumer Credit Bill.

  The Institute understands that the changes will not reduce a lender's costs which means that, despite the potential for increased competition within the EC, the consumer will face higher costs or less available credit.