Committee Reports > List of Committees > Joint > 1980 > Committee on the Secondary Legislation of the European Communities > Report No. 79 - Consumer Credit

REPORT

Introduction

1. The Joint Committee has examined the proposal made by the Commission for a Council Directive relating to the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit [COM (79) 69 final]. This proposal which is based on Article 100 of the EEC Treaty was sent to the Council on 28th February, 1979 but has not yet been considered by that institution.

2. The proposed Directive was examined in detail for the Joint Committee by its Sub-Committee on Economic, Commercial and Financial Affairs under the Chairmanship of Senator Noel Mulcahy. Apart from considering written memoranda received from the various interested bodies the Sub-Committee discussed the proposal with representatives of the Confederation of Irish Industry, Irish Bankers’ Federation. Irish Finance Houses Association Ltd., Incorporated Law Society. Irish League of Credit Unions, Irish Insurance Association. Central Bank and the Department of Industry, Commerce and Tourism. The Sub-Committee also carried out an examination of the draft Directive jointly with the Joint Committee’s Sub-Committee on Statutory Instruments and Legal Affairs under the Chairmanship of Senator David Molony. The Joint Committee is indebted to Senators Mulcahy and Molony and their Sub-Committees for their work.

Proposed Directive

3. The proposed Directive would oblige Member States, as a minimum requirement, to apply specified common rules to consumer credit agreements with certain stated exceptions notably those governing credit intended for acquiring rights in land or buildings or for renovating or improving a building. The following is a summary of its main provisions:—

(i)Information relating to the total cost of a credit agreement and the effective annual rate of interest charged is to be shown in advertisements and notices.

(ii)Member States may prohibit unsolicited visits to consumers to propose credit agreements.

(iii)All credit agreements, to be in writing, must contain certain specific information, must be signed by both parties and the consumer must receive a copy.

(iv)Overdraft agreements to be in writing: Changes of interest rates to be notified.

(v)Credit agreements to be void from the time goods are repossessed but Member States may lay down rules governing repossession.

(vi)Obligations under a credit agreement may be discharged before the time fixed in the agreement has expired.

(vii)In the case of tripartite agreements the creditor and supplier to be jointly liable for breaches of the credit agreement.

(viii)Member States would be obliged to set up a body to examine complaints by consumers or to require persons offering credit to have official authorisation or to be subject to inspection by an official body.

4. The Joint Committee understands that the proposed Directive on contracts concluded away from business premises (“Doorstep Sales”), which is dealt with in the Committee’s eighth report (Prl. 7124) of 26th April, 1978, will be adopted as a framework Directive. Accordingly that Directive would apply to credit agreement transactions concluded away from business premises. If this happens such transactions would be subject to the cooling off period referred to in paragraph 13 of the Committee’s eighth report.

General Views of the Joint Committee

5. In Ireland hire purchase and certain forms of credit sales agreements are subject to the Hire Purchase Acts, 1946 and 1960. However, the Joint Committee believes that it would be generally accepted that better protection of the public in this country is desirable particularly in relation to the many new forms of consumer credit that have become available in recent years. The Committee is satisfied that in this area the Irish consumer does not enjoy protection on a par with that available in many of the other EEC Member States. Generally speaking the adoption of the minimum standards which the Commission’s proposal envisages would improve the position of the Irish consumer and for that reason the Committee welcomes the proposed Directive although it believes that some of its provisions may need amendment or, at least, clarification.

6. The Joint Committee understands that proposals for national legislation on consumer credit are already under consideration in the Department of Industry, Commerce and Tourism. It agrees that it is reasonable to defer going ahead with such proposals until the fate of the proposed Directive is known provided that consideration of the Commission’s proposal is likely to be completed in the foreseeable future. It is desirable, therefore, from Ireland’s point of view that examination of the draft Directive at Council level should commence as soon as possible.

Definition of Consumer

7. “Consumer” is defined in the draft Directive as meaning “a natural person not acting predominantly in a commercial or professional capacity”. The Joint Committee notes that this definition is wider than the corresponding provision in section 3 of the Sale of Goods and Supply of Services Act, 1980. The Committee does not object to the definition on that score but it has received representations that the interpretation of the word “predominantly” could give rise to difficulties in practice. In the Committee’s opinion it should be provided that, in cases of doubt, the onus of proof that a creditor had acted predominantly in a commercial or professional capacity when obtaining credit should rest on the lender.

Credit Agreements

8. The proposed Directive is to apply when a consumer is granted “credit in the form of a deferred payment, a loan or a promise to grant a loan or other financial accommodation” and is obliged to repay “the credit, including any interest and charges, in more than one instalment”. An agreement for the supply of goods or the provision of services is itself to be deemed to be a credit agreement for the purpose of the Directive, if financed by means of a separate credit agreement with either the supplier or a creditor co-operating with the supplier.

9. The Joint Committee agrees that the Directive should apply to those types of transactions by which consumers normally acquire credit for the purchase of goods and services. It is concerned, however, that certain other transactions seem to be covered where the application of the Directive may not be appropriate.

10. When credit cards are used in the purchase of goods it would seem that the Directive could have the effect of making each separate transaction a credit agreement. It can scarcely be the intention to require all such transactions to be in writing and an amendment of the proposed Directive would seem, therefore, to be required.

11. It has also been drawn to the Committee’s attention that life assurance and non-life insurance contracts could attract the provisions of the proposed Directive if premiums are paid by instalments or if there is provision for non-forfeiture for a period in the event of non-payment of premium. The Committee cannot believe that it is the intention that such contracts should be covered but a specific provision excluding them would appear to be necessary.

Short Term Agreements

12. Although the proposed Directive is to apply to agreements where the repayment is to be in more than one instalment it is not to apply to any agreement where the period for repayment is not to exceed three months. In the Joint Committee’s opinion it is reasonable to exclude from the formalities required by the Directive agreements where the danger of disadvantage to the consumer is minimal. It is also desirable to ensure that the availability of short term credit is not imperilled or made more expensive. The Committee therefore recommends that the Commission be asked to examine whether it would be possible to exclude from the provisions of the Directive agreements where the number of instalment payments is not to exceed four irrespective of the period of repayment. Provision should also be made to ensure that the Directive is not circumvented by substituting a series of exempted agreements for a single agreement.

Credit Unions

13. The proposed Directive as it stands would apply to loan agreements with Credit Unions in this country. Credit Unions as they exist in Ireland are voluntary co-operative bodies whose object is to promote thrift among their members, to provide them with credit, to use and control their savings and to educate them in financial matters. They can make loans only to their members who must share a common bond prescribed by statute. They are not profit-motivated and their rate of interest on loans is limited by statute to one per cent per month. It seems to the Joint Committee wholly inappropriate that rules intended to protect consumers in dealing with commercial lending agencies should apply to Credit Unions and it recommends that they be specifically excluded from the provisions of the proposed Directive.

Effective Rate of Interest

14. The draft Directive provides that credit agreements, advertisements and notices should give particulars of the “effective rate of interest”. This is defined as “the total cost of the credit expressed as an annual percentage of the amount of the credit granted, including interest and all other charges”. It would be calculated in accordance with rules laid down by the Member States.

15. The Joint Committee considers that it is absolutely essential that the true cost of the credit be made known to the consumer before he enters into or is invited to undertake any obligation. It fully supports the aims of the draft Directive in this respect and its sole concern is with whether the relevant provisions can be effectively implemented. It has been represented to the Committee that there are technical problems to be overcome in calculating the effective rate of interest and that it is difficult to arrive at a formula which could be applied to all forms of credit. It was suggested, for example, that the cost of credit in some forms depends on the use the customer makes of the facility and that the draft Directive’s requirements regarding advertisements would in some cases be incapable of fulfilment. However, on the basis of its Sub-Committee’s discussions with representatives of the Central Bank, the Joint Committee believes that it is possible to calculate reasonably accurately the true cost of credit and it therefore urges that the Directive should be supported insofar as it seeks to have this information made available to the consumer. As far as notices to be displayed on the creditor’s business premises are concerned, the Committee believes that these should be prominently displayed and that advertisements and notices should be sufficiently explicit to make it clear to the potential customer exactly what facilities are being offered and what these will in fact cost him or the range into which the cost might fall.

16. The Joint Committee would prefer if the Directive itself laid down a uniform rule for the Community as a whole for the calculation of the effective rate of interest. It notes that this is also the preference of the Commission but that the latter considers that such harmonisation is not possible at present. However it has been suggested to the Committee that agreement on a uniform rule would not be impossible if there were a genuine desire by Member States for uniformity. It recommends therefore that efforts be made to reach such agreement when the draft Directive is being considered at Council level.

Joint and Several Liability

17. Where a consumer can prove “the existence of co-operation” between the creditor and the supplier the draft Directive proposes to make the latter pair jointly and severally liable to him for non-delivery or non-conformity of the goods or services supplied under the contract. The protection would, however, be limited to whatever rights the consumer has against the supplier under national law to recover payments made or refuse further payment.

18. Several objections against this provision were voiced to the Joint Committee by representatives of the lending agencies. Nevertheless, the Committee is in favour of the principle of the provision. To some extent this principle is embodied in the Sale of Goods and Supply of Services Act, 1980 which provides for joint and several liability where a buyer of goods enters into an agreement with a finance house for the repayment to the latter “of money paid by the finance house to the seller in respect of the price of the goods”. However, in the interest of not adding unduly to the cost of credit the Committee would favour limiting the creditor’s liability to transactions where the cost of the goods or services supplied did not exceed a prescribed amount (e.g. IR£10,000). Moreover, the Committee does agree with the view that the concept of “co-operation” as expressed in the draft Directive is far too vague. It recommends that the Directive be so drafted to allow pre-existing arrangements between creditor and supplier to be defined in national law along the lines of the relevant provisions of the British Consumer Credit Act, 1974.

Negotiable Instruments

19. The draft Directive proposes to prohibit the use of Bills of Exchange and Promissory Notes either as security or a means of payment in credit agreements though cheques would be allowed as a means of payment. The Joint Committee understands that the proposed prohibition on the use of Bills of Exchange would have little effect in practice in this country. However, as regards Promissory Notes, the Irish Finance Houses Association Ltd. points out that these form part of the ordinary personal loan agreements used by its members and that, if the proposed prohibition is adopted, it will seek to have alternative remedies in domestic law made available.

20. The Commission contends that “negotiable instruments place the consumer at great risk because the pecuniary claim based on them can be enforced without regard to his rights under the agreement”. The Joint Committee believes, on the one hand, that it is unwise to disturb existing practices unless there is compelling evidence of abuse. On the other hand, it considers it essential to ensure that the use of negotiable instruments does not prevent the Irish consumer from enforcing the new rights against the creditor which the Directive proposes to give him.

Repossession

21. The draft Directive proposes to make a credit agreement “void” from the time a creditor repossesses the goods supplied under the agreement. It leaves it to Member States to ensure that repossession of the goods does not lead to “unjustified advantages”. As the Joint Committee has noted in the past the word “void” in relation to contracts is used in some Commission proposals such as the present one in a sense other than that attributed to it in our legal system. In view of the technical meaning attached to the word “void” in common law systems the Committee recommends that the Commission be advised to avoid the use of the word except when referring to a purported agreement which is devoid of legal effect ab initio.

22. According to the explanatory memorandum the object of this provision is to prevent the consumer being deprived of the goods for failure to meet instalments but at the same time remaining under an obligation to pay the agreed price. However, the Joint Committee doubts if the provision, as drafted, would do justice to either party. The creditor could not recover arrears of instalments and the consumer would be liable to suffer the loss of goods without warning irrespective of their current value. The Committee assumes that the provision could only apply to agreements such as hire purchase agreements and it regards the existing provisions in the Hire Purchase Acts as providing superior remedies. It recommends, therefore, that the question of repossession be left to be regulated solely by national law.

Overdrafts

23. Only one provision in the draft Directive applies to credit in the form of advances on current account. It provides that the customer be informed in writing of the credit limit, the annual rate of interest and other charges and the procedure for terminating the agreement. During the currency of the agreement the customer would have to be informed in writing of changes in interest rates and charges as they occur or in a bank statement if such is supplied at intervals of a month or less.

24. The Joint Committee believes that the current practice of Irish banks in publishing their interest rates is quite adequate and considers that if more onerous conditions are imposed on them it could discourage them from extending overdraft facilities. In the Committee’s view the requirement that each individual customer concerned be informed in writing of changes in interest rates and charges should be dropped.

Written Agreements

25. Article 6 of the proposed Directive provides that credit agreements should be in writing and contain the essential contractual terms. Among the latter the draft Directive includes “the amount of the deposit (if any), and the due dates, the number and amount of the instalments”. The Confederation of Irish Industry has pointed out to the Joint Committee that at the time agreements are completed, it is not always known when the goods will be delivered and consequently when the consumer’s liability to repay shall commence. This can arise from stock shortages or from a wish of consumers to have goods held until, say, a new house is completed. The Confederation has suggested, therefore, that the word “frequency” should be used in lieu of the words “due dates” and the Committee supports this amendment.

26. Article 10 of the draft Directive seeks to give a consumer a right to discharge his obligations under a credit agreement before the time fixed by the agreement. The Joint Committee considers that it should be obligatory to insert a reference to this right in the written agreement.

Acknowledgements

27. In considering the Commission’s proposal the Joint Committee received considerable help from the various bodies it consulted and it wishes to express its sincere thanks to the Confederation of Irish Industry, Irish Bankers’ Federation, Irish Finance Houses Association Ltd., Central Bank, Irish League of Credit Unions, Incorporated Law Society of Ireland, Irish Insurance Association and Consumers’ Association of Ireland Ltd.

(Signed) ALEXIS FITZGERALD,

Chairman of the Joint Committee.

23rd July, 1980.