Online, payday lenders likely the focus of EU Commission's consumer-credit overhaul

8 July 2019 10:49am

28 June 2019, by Maxwell Hogan and Samantha Waigand

Online lenders and payday lenders may face tighter rules as the European Commission aims to level the playing field in a review of the 11-year-old consumer-credit directive due later this year.

The commission may seek to adjust EU rules to reflect widespread use of the Internet, and keep it flexible enough to adapt to unknown future developments.

The EU's current consumer-credit rules oblige lenders to clearly state interest charges and give borrowers a 14-day cooling-off period in which they can cancel the loan and have the option to pay it earlier. A separate law on "distance selling" of financial services, dating all the way back to 2002, was thrashed out when Google was in its infancy.

Any evaluation will have to look at the new types of providers of credit which have emerged on the market since then.

Regulators have long been concerned that borrowers need to be in a position to know the product they're buying is right for them.

Consumers should "have access to the right information, at the right time and in the right format to make informed decisions” when buying financial services online, said EU Commissioner for Justice Věra Jourová in an April statement, kicking off a public consultation on the bloc's laws.

But the rise of artificial intelligence changes that equation. Algorithms could crunch a users' online data to allow a custom loan tailor-made to fit a borrower's profile.

The worry is that, under the current rules, advertising and information offered to the client would be so personalized it makes it impossible to compare deals. Lenders could also potentially take unfair advantage of a customer's unconscious biases. Forward-looking laws will need to account for those changes.

Increased digitalization in the retail financial market has made taking out a loan as simple as a few clicks. But the commission is also worried that this apparent ease is accompanied by unscrupulous coercion.

Some marketing practices nudge financial-service consumers into making speedy purchasing decisions, which can cause consumers to make rushed, and potentially poor choices, a behavioral study on commercial retail practices found published by the commission in April showed.

Slowing down the process can improve the decisions online borrowers make, the study said — a finding which is likely to feed into the ongoing evaluation of the directive on consumer credit to be finalized at the end of 2019.

Extra rules will have costs, of course. Lenders will face more paperwork, as would those involved in the distribution and granting of credit. Borrowers may also find it harder to get loans. That will need to be weighed against potential benefits.

Commission officials, waiting for a change of guard of senior positions due in November, are tight-lipped about exactly whether or when any new proposal might be due. But they will also be aware of the consequences of failing to act.

Personal loans, credit cards and overdraft facilities can harm consumers, leaving the most vulnerable caught in a vicious circle of borrowing. Lawmakers on the European Parliament's economic affairs committee have long railed against mis-selling.

Loopholes in the system can have a macroeconomic impact: leading to high indebtedness and potentially leaving banks lumbered with a stock of sour loans.

And inadequate laws can also harm the EU’s single market. The Internet means a borrower in Hungary can easily get a loan from a provider in Austria, leaving any loopholes between countries open to abuse. The commission will likely be keen to address such discrepancies.

Fintech Regulation in 2018