Jacqueline Minor Director Consumer Affairs. Maria Cristina Russo Head of Unit Financial Services and Redress

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1 European Banking Federation (EBF) European Savings Banks Group (ESBG) European Association of Cooperative Banks (EACB) European Mortgage Federation (EMF) European Federation of Building Societies (EFBS) European Federation of Finance House Associations (Eurofinas)/European Federation of Leasing Company Associations (Leaseurope) European Association of Public Banks (EAPB) Jacqueline Minor Director Consumer Affairs Maria Cristina Russo Head of Unit Financial Services and Redress European Commission Health and Consumers Directorate General ; c/o ; Brussels, 28 November 2012 Re: Guidelines on the application of Directive 2008/48/EC in relation to costs and the Annual Percentage Rate of Charge Dear Ms. Minor, Dear Ms. Russo, The European Banking Industry Committee (EBIC) takes note of the publication of the European Commission s guidelines on the application of Directive 2008/48/EC (CCD) in relation to costs and the Annual Percentage Rate of Charge (APRC). EBIC believes that the calculation of the APRC is a key aspect of the European regulatory framework for consumer credit agreements. We see the national interpretation of APRC provisions as critical to ensure the comparability of credit offers across Europe. We also recognise the importance to adapt the existing provisions to reflect market practices and products on offer. EBIC is concerned by the methodology used as well as certain aspects of the guidelines which we think go far beyond the CCD provisions as well as what can reasonably be achieved in terms of convergence of market practices. EBIC regularly contributed, at its own-initiative, to the European work on the calculation of the APRC but no formal consultation of the lending industry was ever conducted in this field. Though we acknowledge the comprehensive work conducted by the Commission and the efforts to provide a common understanding of the CCD provisions, we do not believe that the elaboration of such interpretative guidelines without the formal and active involvement of all parties is a good regulatory practice.

2 The calculation of the APRC is a technical issue that not only requires a common understanding but also a common acceptance of its underlying concepts. The Directive does provide some flexibility to adapt the common European framework to market characteristics or traditional local practices. We feel that some aspects of the guidelines can compromise this leeway. Against this backdrop, though we appreciate the clarification that the guidelines are strictly for information purposes it is unclear how this document will be used in the future i) by national regulators, ii) in case of private litigation and iii) in the context of the CCD review. EBIC would therefore oppose the inclusion of the guidelines (in one form or another) in the Consumer Credit Directive s forthcoming review without having been subject to a proper impact assessment and a formal public consultation of all stakeholders. You will find below several observations on the calculation of the APRC for consumer credit agreements. Several of these elements may have previously been addressed to the Commission. We remain at your disposal to further discuss the issues at stake. Sincerely yours, Joseph DELHAYE EBIC Chairman Edward SIMPSON Chairman, EBIC Consumer Credit Working Group 2

3 EBIC observations on the calculation of the annual percentage rate of charge (APRC) for consumer credit agreements 1. Relevance and uniqueness of the APRC (p. 4, p. 8-10, p. 19) Articles 4.2 (c), 5 (g) and 10(g) CCD provide that the APRC shall be provided to consumers at advertising, precontractual and contractual stages. In this context, we agree that each credit product shall have its own APR. However, in certain specific circumstance, several APRs may be provided for a single credit agreement. For example, this is the case for some types of revolving loans for which a distinct interest rate applies depending on the amount of credit withdrawn. In this context, the use of several APRs reflects the characteristics of the credit product while ensuring at the same time appropriate information to the consumer. It should therefore be clear that, depending on product features, several APRs may be used for a single credit agreement. We believe that any other approach would be extremely detrimental for both lending institutions and consumers. We ask the Commission to seriously reconsider this aspect. In parallel, it is also worth highlighting here the extreme difficulty of providing standardised APR calculation models without taking into account the diversity of market characteristics across Europe and within each single European country. It is challenging, if not impossible, to reconcile multiple existing usage patterns, market segments and distribution models with standardised APR calculation models. 2. Credit information prior the conclusion of the credit agreement (p. 11) The guidelines provide that the standard information, including information on the representative example, should stand out in the advertising. This development goes beyond the Directive s provisions and would be incompatible with national regulations requiring specific types of information, warnings or data to significantly stand out from other statutory information requirements. We therefore oppose this development. As a general observation, it is also worth stressing the significant difficulty to provide applicant borrowers with personalised information and explanation, while at the same time using standard indicators at all stages of the contractual relationship. 3. Total amount of credit (p. 11) The total amount of credit shall be mentioned at pre-contractual and advertising stages. According to article 3(l) of the CCD, the total amount of credit means the ceiling or the total sums made available under a credit agreement. The total sums made available under a credit agreement may be restricted to the actual loan but can also include, under specific circumstances, additional fees (such as administrative fees). This is a common practice, notably (but not exclusively) where the credit requires the payment of notary fees and the applicant borrower requires to include these ones into the total sum financed. The guidelines provide that the total amount of credit excludes those amounts for the payment of cost (e.g. administration costs) related to the credit. On the contrary these amounts are costs of the credit. 3

4 EBIC understands that, for the purpose of the calculation of the APRC, national practices may diverge as to the treatment of financed fees. This issue should therefore be left to the appreciation of national regulators to ensure that all local market characteristics are taken into account in this field. 4. Inclusion of all taxes in the APRC (p ) Article 3(g) CCD provides that the total cost of credit to the consumer encompasses all the costs, including interest, commission, taxes and any other kind of fees which the consumer is required to pay in connection with the credit agreement and which are known to the creditor[ ]. In several countries, a fixed stamp duty is levied on all contracts, irrespective of their amount or duration. For small ticket loans, the broad definition of the total cost of credit leads to a situation where the APRC is almost entirely driven by the tax component and is therefore misleading for consumers. The inclusion of the fixed stamp duty in the total cost of credit is also leading to competition distortions. Indeed, for the same credit conditions, the APRC is much higher in these countries than in other markets. A further impact on the global rate for usury threshold is also to be considered. Against this backdrop, EBIC takes the view that taxes that are determined as a fixed amount, and that are therefore non proportional to the amount financed and to the duration of the loan, shall be excluded from the APR. 5. Ancillary services (p ) The guidelines provide that ancillary services can be considered as not mandatory where: the consumer is informed and can choose at anytime during the credit agreement between products offered by the creditor including being able to keep the same credit facility but without any ancillary services or the consumer can withdraw from the ancillary services at any time and stop paying their costs without this withdrawal having any cost or any other effect on the terms of the credit. This interpretation goes far beyond the Directive s provisions which are limited to the situations where the cost of ancillary services should be included in the total cost of the credit. This new development rather introduces a new provision more than it clarifies the existing one. Besides, we do not believe it is reasonable to define a nonmandatory ancillary service on the unique condition that the consumer can withdraw from it at any cost or time. We oppose this development which in our view would entail major changes to the calculation of the total cost of credit. 6. Packages of products (p ) We believe that the guidelines do not provide sufficient explanation on the rationale of packaged products, and specifically on their economic benefits for borrowers. As mentioned in the guidelines, it is not necessarily possible to distinguish the costs of various package components. This will result either in duplicating the cost of the exact same service or using disproportionate estimates. 4

5 In parallel, it is worth stressing that the current methodology is more favorable for pay per use accounts than for packaged accounts. This presents a risk of influencing borrowers choice and is therefore not consistent with the Directive s objectives of comparison and choice. 7. Measurement of time intervals (p ) Annex I, part 1 (c) CCD provides that intervals between dates used in the calculations shall be expressed in years or in fractions of a year. A year is presumed to have 365 days (or 366 days for leap years), 52 weeks or 12 equal months. An equal month is presumed to have 30, days (i.e. 365/12) regardless of whether or not it is a leap year. The guidelines provide that only when an interval between dates used in the calculation cannot be expressed as a whole number of years, months or weeks, the interval can be expressed as a whole number of one of these periods in combination with a number of days. We strongly disagree with the restrictive interpretation of time intervals which would lead to the exclusion of day intervals from the scope of yearly fractions. We do note believe this interpretation to be consistent with Annex I, part 1 (c) of the CCD. This interpretation is currently incompatible with the methodologies used by many lending institutions across Europe. Any changes to the time intervals currently applied by lending institutions would impose a considerable and disproportionate administrative and financial burden. Therefore, we strongly support leaving it to the individual lending institutions to decide which method they prefer to use as they are dealing with this every day and have the corresponding IT system in place. In all cases, the method of calculating the APR on a day by day basis should remain a valid option as it is not detrimental to the overall comparability of offers. 8. Treatment of overdrafts and open-end agreements (p ) EBIC welcomes the clarification that open-end agreements such as credit cards, lines of credit or revolving loans fall under Assumption (e) for which the assumed duration of the agreement shall be of one year. In cases of overdraft facilities with no fixed duration, it shall be assumed that the duration of the agreement shall be of three months. This is consistent with Assumption (d). 9. Periodical Adjustments (p ) Annex I, Part II (j) of the CCD provides that for credit agreements for which a fixed borrowing rate is agreed in relation to the initial period, at the end of which a new borrowing rate is determined and subsequently periodically adjusted according to an agreed indicator, the calculation of the annual percentage rate shall be based on the assumption that, at the end of the fixed borrowing rate period, the borrowing rate is the same as at the time of calculating the annual percentage rate, based on the value of the agreed indicator at that time. This assumption may be used to calculate the APRC for agreements in which it is agreed that a variable rate will apply in the period following the initial fixed-rate period in the event that no new agreement on a fixed rate is reached after this initial period expires. 5

6 When interest rates are low and expectations are that rates will rise over the life of the agreement, the fixed rate offered by the creditor for the initial fixed interest period is often higher than the rate offered for variable rate loan agreements concluded at the same time. The use of the assumption set out in Annex I, Part II (j) can therefore result in an APRC which is significantly lower than the fixed rate agreed for the initial phase of the loan. With this in mind, it should be clarified that the APRC for loan agreements with a long fixed interest period should be calculated on the basis of the agreed initial fixed interest rate also for the phase following the fixed-rate period. Clarifications are therefore required in this field. 6