Directive (EU) 2023/2225 of 18 October 2023 on credit agreements for consumers (the “Directive“) was published in the Official Journal of the European Union on 30 October 2023. The Directive repeals the previous Directive 2008/48/EC, criticized for its imprecise wording which prevented harmonized transposition into Member States’ law and failed to take into account the emergence of new consumer credit products and players.
The Directive therefore pursues a dual objective: enabling the expansion of an intra-European consumer credit market under optimum consumer protection conditions, and adapting the current legal framework to the new forms of credit that have emerged in recent years, by subjecting their suppliers to new obligations.
Background
In July 2021, the European Commission put forward its proposal for a revision of Directive 2008/48/EC. The Council of the European Union and the European Parliament then reached a provisional agreement on the revised Directive in December 2022, which was adopted by the Council of the European Union on 9 October 2023. This revision initiative was motivated by the need to amend the 2008 directive, which was already outdated in view of the growing developments in the consumer credit sector.
The 2008 directive had several drawbacks due to the way it was drafted. In particular, the 2008 directive had led some Member States to adopt national provisions that went beyond the initial regulatory framework, leading to a lack of harmonization in the European credit market. Moreover, the 2008 directive was faced with major digital, commercial and consumer-centric evolutions. One of the major developments has been the fast growth of deferred and fractional payment terms offered by new players – particularly FinTechs – both regulated and unregulated, and the growing interest of European consumers for credit granted immediately and backed by fractional or deferred payment terms.
A renewed scope
The Directive applies to credit agreements, of which it gives a new definition (in Article 3(3)) as agreements concluded between a creditor (defined as a natural or legal person who grants or promises to grant credit in the course of that person’s trade, business or profession) and a consumer. The Directive retains the definition of a consumer from the 2008 Directive, i.e. a natural person who acts for purposes outside of their trade, business or profession.
While the Directive’s new definition of credit agreements includes credits granted in the form of deferred payment, it does not cover all types of deferred payments, some of which are expressly excluded (see list below). Moreover, the notion is not defined.
Article 2 of the Directive (“Scope”), states that the provisions of the Directive apply, in particular, to:
- credit agreements involving a total amount of credit of EUR 100,000 or less (including credit agreements involving a total amount of credit of less than EUR 200 and where credit is granted free of interest and without any other charges, previously excluded),
- in part, credit agreements in the form of overrunning (see 3, 19) of the Directive),
- deferred payment facilities, provided, among other conditions, that a third party finances this deferred payment and not the supplier of goods or provider of services contracting with the consumer: mainly “Buy now, pay later” schemes, often granted to a consumer by a creditor via a supplier making available a new digital financial tool enabling this fractioned payment free of interest and without any other charges, therefore should be included in the scope of the Directive.
New obligations and useful clarifications
In line with the European legislator’s desire to increase consumer protection when taking out credit, the Directive extends its obligations to new credit players acting as creditors or credit intermediary (for example, the obligation to assess consumer creditworthiness). It also introduces new obligations for all creditors, to enable consumers to make informed choices and eliminate certain abusive practices.
Among the main provisions newly introduced by the Directive, or clarifying provisions already existing in the 2008 Directive, are those concerning:
- pre-contractual information (Chapter II): the Directive lays down revised requirements for creditors in terms of the information to be included in any advertising and marketing communications, to warn consumers of the commitment resulting from a credit agreement.
- Tying practice (Article 3(15)) and bundling practice sales (Article 3(16)), inferred agreement, advisory services and the unsolicited granting of credit (Chapter III):
- the Directive lays down the principle that member states are to prohibit tying practice, and to authorize the bundling practice,
- the Directive also aims to regulate advisory services provided by creditors, by requiring them to provide consumers with information prior to their execution.
- Annual percentage rate of charge and measures to limit rates and costs of credit (Chapter IX): the Directive requires Member States to take measures to effectively prevent abuse, including the introduction of caps to avoid excessively high annual percentage rates of charge, high borrowing rates or total costs of credit for the consumer.
- Conduct of business obligations applicable to the staff of creditors and credit intermediaries (Chapter X): the Directive lays down the obligation for the relevant staff of creditors to act honestly, fairly, transparently and professionally, and to take account of the rights and interests of consumers in the exercise of their activities (particularly in the manufacturing of credit products and the granting of credit), and imposes an obligation on staff to have professional knowledge and competence.
- Financial education and support to consumers in financial difficulties (Chapter XI):
- the European legislator requires creditors to apply, where appropriate, forbearance measures (total or partial refinancing of the credit agreement, modification of the existing terms of the credit agreement to adapt it to the consumer’s benefit – reduction of the borrowing rate, extension of the term of the credit agreement, etc.) before enforcement proceedings are initiated,
- creditors will be required to refer consumers who experience or might experience difficulties in meeting their financial commitment to independent debt advisory services.
- creditors registration and admission requirements (Chapter XII): the Directive requires Member States to subject creditors (other than duly authorized credit, payment and electronic money institutions) and credit intermediaries to an appropriate admission procedure, registration and supervision by an independent competent authority. This development has significant repercussions for certain professionals who, until now, were free to grant deferred or fractional payment facilities via technological solutions: from now on, these same professionals will have to be admitted and registered to continue their activities.
Specific exclusions
Despite the European legislator’s desire to adapt to new credit granting methods, the Directive continues to exclude several forms of credit from its scope: therefore, these specific forms of credit do not fall within its definition of a “credit agreement”.
These exclusions are listed in article 2.2 of the Directive. In particular, the following are excluded from its scope and obligations:
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- credit agreements secured by a mortgage (or any another equivalent security commonly used in a Member State on immovable property, or secured by a right related to immovable property),
- credit agreements involving a total amount of credit of more than EUR 100,000 (unless they are employed for the renovation of a residential property, in which case they are subject to the provisions of the Directive),
- leasing agreements where an obligation or an option to purchase the object of the agreement is not laid down either in the agreement itself or in any separate agreement,
- deferred payments whereby a supplier of goods or services grants the consumer a delay to pay, subject to three cumulative conditions: (i) the transaction does not involve the intervention of a third party offering credit, (ii) the purchase price of the goods or service concerned must be paid free of charge or interest, and (iii) payment must be entirely executed within 50 days of the delivery of the good or service.
Credit providers will therefore need to review their credit offers and implement additional consumer protection measures in line with the Directive, for credit qualified as a “credit agreement” within the meaning of the Directive.
First impacts to be anticipated
The Directive takes effect on 19 November 2023, on the twentieth day following its publication in the OJEU. European Member States will have to transpose its provisions into national law by November 2025 at the latest, with the new regime becoming applicable in November 2026. The 2008 Directive is repealed with effect from 20 November 2026, but its provisions will continue to apply to credit agreements in force on that date until they expire. However, certain articles of the Directive will apply to all open-end credit agreements existing on November 20, 2026 (articles 47 and 48 of the Directive).
New credit players in the European Union will have to specifically pay attention to the future transposition of the Directive into the law of the Member States, and anticipate compliance impacts that may be relevant for them, as new credit granting methods are integrated into the Directive’s definition of credit agreements.
In particular, the creditors and credit intermediaries concerned will have to consider the admission and registration requirements laid down by the Directive, as well as the consumer information measures to be included in the granting of credit, both at the advertising communications stage and during the life of the credit.
By creating a more transparent legal framework for credit agreements for consumers, the Directive aims at boosting consumer confidence in creditors and supporting the ever-increasing openness of the intra-European credit market, thanks to digital evolutions.