Legal Newsletter: The Second Consumer Credit Directive – new rules on consumer financing
04/11/24
On 18th October 2023 a new Directive (EU) 2023/2225 on credit agreements for consumers (the “Second Consumer Credit Directive” or “Second CCD”) was adopted, repealing the current Directive 2008/48/EC on the same subject (the “First CCD”). The Second CCD aims to reflect the changes in the consumer lending market which occurred in the recent years, including digitalization of the consumer financing, to procure sufficient harmonization of the rules on consumer financing within the EU, and to strengthen consumer protection.
Key takeaways
Extended Scope of Application
The scope of the Second CCD is extended to consumer loans with principal amount of up to EUR 100,000 (or its equivalence in local currency), where the First CCD covered only consumer loans between EUR 200 and EUR 75,000.
Additional types of loans are now included into the scope of the Second CCD, such as:
hiring or leasing agreements that have an option to purchase goods or services (for example, motor finance agreements);
credit granted free of interest and without any other charges;
credit agreements under the terms of which credit has to be repaid within 3 months and only insignificant charges are payable (such as the “buy-now-pay-later” schemes);
credit agreements in the form of an overdraft facility where the credit has to be repaid within one month;
crowdfunding credit services provided to consumers.
Pre-contractual informatiom
Second CCD requires that the precontractual information provided through the Standard European Consumer Credit Information (SECCI) form is adapted to take into account the technical constraints of certain media (such as mobile telephone screens). The content of the SECCI form is also slightly expanded.
In the event that pre-contractual information is provided less than one day before the consumer is bound by the credit agreement, the creditor (or, where applicable, the credit intermediary) should remind the consumer of the possibility to withdraw from the credit agreement. The reminder should be made within seven days after the conclusion of the agreement.
Creditworthiness Assessment
The Second CCD expands the rules on the assessment of the consumer’s creditworthiness.The assessment should be based on information for consumer’s financial and economic status, and only on such information which is necessary and proportional to the nature, term and amount of the credit and its risk level (for example, the assessment may not be based on health data or data collected from social media).
A credit can only be made available to the consumer if the result of the assessment is positive. However, this rule is subject to certain exceptions (for example, in case of loans for healthcare expenses and student loans).
When the creditworthiness assessment is based on automated processing, consumers have the right to request and obtain a comprehensive explanation of this assessment by the creditor, and they should also be able to express their point of view and contest the assessment.
Advertisement for Consumer Credit Agreements
Advertisements must contain the warning: “Caution! Borrowing costs money!” or an equivalent wording.
Granting credit to consumers is always subject to their prior request and agreement. The use of any default options, such as pre-ticked boxes or similar implications for silent consent, are strictly prohibited.
The Second CCD introduces a prohibition of “tying practices” where a credit agreement is offered or sold only in a package with other distinct financial products or services and the credit agreement is not made available to the consumer separately. However, offering or selling a credit agreement in a package is permitted, if the credit agreement is also made available to the consumer separately (the so called “bundling practice”).
Certain advertising claims are prohibited. For example, an advertisement shall not include a statement that a credit would improve the consumer's financial situation or standard of living. Member States may also prohibit certain other advertising practices at their discretion, such as emphasizing the ease or speed with which a credit can be obtained, grace periods of more than three months, advertising discounts that are conditional upon taking up a credit, etc.
Cap on charges
Member States may cap the cost of credit for consumers at national level, by introducing a maximum threshold of the annual percentage rate of charge (APRC) or the total costs of the credit. This option aims to prevent abuse by charging consumers with excessively costly consumer loans. Also, Second CCD allows Member States to prohibit or restrict specific types of fees applied by creditors in the respective jurisdiction.
Other measures in the interest of consumers
Creditors shall have processes and policies in place for the early detection of consumers experiencing financial difficulties, and shall refer such consumers to independent professional debt advisory operators. Such debt advisory services shall be subject only to limited charges.
Creditors shall exercise reasonable forbearance before enforcement proceedings are initiated, taking into account the consumer’s individual circumstances. The forbearance measures may include full or partial refinancing of the credit, extension of the credit’s term, deferring payment of the repayment of installments, reducing the borrowing rate, partial forgiveness and debt consolidation, etc.
Second CCD introduces certain specific conduct of business requirements to creditors and credit intermediaries. They are required to act honestly, fairly, transparently and professionally and take account of the rights and interests of the consumers. Specific requirements on professional knowledge and expertise are provided, as well as requirements to the remuneration policies of creditors and credit intermediaries (for example, a requirement that a person’s remuneration is not contingent on the number of accepted applications for credit).
Deadline for Transposition
The EU Member States should transpose the Second CCD into their local legislation by 20th November 2025, where the new rules will enter into force as of 20th November 2026. By such date, all persons who provide consumer lending services should procure that their business is compliant with the new requirements. Currently Bulgaria has not made any steps for harmonization of the local legislation with the new rules.
The team at PwC Bulgaria is closely monitoring the process and is ready to assist you with any questions related to the topic.
