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Protecting consumers taking credit in the digital era

On the 18th of June, CEPS, ECRI and DG JUST of the European Commission held a joint seminar on the revision of the Consumer Credit Directive (CCD), discussing how the current rules work and ideas for improvement. The seminar focused on four main topics discussed in four panel sessions:

  • What is the role of consumer credit in the economy?
  • Should the scope of application of consumer protection rules be extended?
  • Can rules on pre-contractual information be imposed?
  • Do we need additional rules with regards to responsible lending?

Martin Schmalzried, Policy and Advocacy Manager at COFACE-Families Europe, spoke in the first panel session discussing the role of consumer credit in the economy.

Consumer credit should essentially be used for large/expensive investments, in order to smooth out consumption patterns and income, not purchasing everyday goods such as food or paying utility bills. For low income families, credit is never a solution. If their income cannot cover their expenses and they take a credit, how will they cover both their expenses and service the credit the next month?

Ideally, consumer credit should be used by families which have a financial buffer (savings of a couple thousand euro at least) and take out a loan to spread across time paying for certain expensive purchases like buying a new washing machine or a new car, in order to keep their savings and ensure that they always have a buffer to cater for unforeseen expenditure. Unfortunately, in an economy where inequalities are growing, where wages of the low/middle income families are stagnating, where most of the growth benefits the top 1%, and where 1 in every 3 families lives pay check to pay check, consumer credit is used as a substitute for income, which is really dangerous.

Normally, as consumers take out more credit and spend it in the economy, this should trigger a virtuous economic cycle whereby their purchases are converted to salaries which allows them to repay the loan. But this cycle has been broken since the 1980s as productivity growth and wage growth decoupled, and our economics transformed from trickle down to trickle up economics. In this respect, the debt to GDP ratio is key. If it remains stable, coupled with economic growth, it means that whatever extra credit added to the economy has been used for productive means rather than just speculation on existing assets. In the present day, while the debt to GDP ratio continues to go up, it does not translate into economic growth, which clearly shows that credit does not help in jump starting a fragile economy.

The take-away is that it is not possible to solve systemic, societal, and macro-economic shortcomings via consumer credit. Broader policies addressing inequalities, social exclusion and poverty are imperative to create a stable base on top of which consumer credit can be used safely.

In short, consumer confidence and stable consumer demand are key drivers of the economy. If consumers were to compress their expenditure tomorrow and stop taking out credit, the entire economy would collapse within a few months. But even though consumers play such a key role in keeping the economy afloat, they don’t even get a “thank you” for keeping the economy going despite their vulnerable financial situation. As of yet, there is no personal insolvency scheme at European level, and all too often, these national schemes are extremely restrictive, even though the “myth” of the irresponsible borrower does not exist. Most of the cases of overindebtedness are linked to life accidents (divorce, health issue, loss of employment, death) which creates a financial shock that families cannot absorb (given their vulnerable financial situation, with low levels of savings) and not irresponsible behaviour.

Consumers therefore deserve better consumer protection within a revised EU Consumer Credit Directive, closing many loopholes and protecting consumers against predatory lending practices and new credit provision techniques, especially online and via their mobile phone. Credit is no substitute for income, nor is it supposed to be used to artificially prop up a failing economic and financial system. Perhaps more stringent regulation will finally force regulators to address the underlying core issues like inequalities and trickle up economics.

For more information about the event, please visit the official website: https://www.ceps.eu/ceps-events/protecting-consumers-taking-credit-in-the-digital-era/ and more information about the revision of the EU consumer credit directive http://www.coface-eu.org/consumers/eu-consultation-on-the-revision-of-the-consumer-credit-directive/

Or contact Martin Schmalzried: mschmalzried@coface-eu.org