Study on the functioning of the consumer credit market in Europe Unit SANCO.B4

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1 Study on the functioning of the consumer credit market in Europe Unit SANCO.B4

2 Objectives of the Directive Enhance the functioning of the European consumer credit market, and in particular promote cross-border lending Ensure high level of consumer protection

3 Objectives of the study What is the state of the internal market for consumer credit (competition, cross-border provision, range of consumer credit products)? Is the protection afforded by the CCD to consumers effective, especially with regards to: information (pre-contractual and contractual) the calculation of the annual percentage rate of charge (APR) the right of early repayment the right of withdrawal? How has the transposition of the CCD affected the consumer credit market, in particular in regards to levels of competition, prices, quantity of lending and consumer satisfaction?

4 Study carried out by Consortium IPSOS and London Economics Fieldwork carried out mostly in spring and summer of 2012 Link to the study: s/consumer_credit_market_study_en.pdf

5 Methodology A comprehensive review of existing material and secondary data sources A primary data collection A consumer survey of at least 500 consumers in each country A mystery shopping exercise (400 for credit cards, car loans, personal loans) in each country An analysis of credit advertisements of both online and brick-and-mortar consumer credit providers and intermediaries Surveys of various stakeholders such as consumer protection bodies, ombudsmen, consumer associations, national lending associations, lenders and regulators.

6 State of consumer credit market State: in end of 2011, the total value of outstanding consumer credit in the EU was 1,041 billion (8.2% of EU s GDP). Dynamics: the total value of consumer credit outstanding has shrunk by 5% since the onset of the financial crisis in 2007 when it reached its peak This resulted in a major impact on consumer behaviour: Reliance of consumers on credit (annual new credit/ expenditure) shrank from 4% in to -1,5% in thus from enhancing consumption to shrinking it

7 Differentiation of reliance on credit Difficult to assess, becuse statistics does not systematically cover non-banks Cyprus, the UK, Ireland, Greece, Denmark and Austria stand out with the highest levels of consumer credit indebtedness per capita (up to 4000 Eur) and new MS with the lowest (Lithuania 210 Eur in 2011) But: over the period , the level of consumer credit outstanding on a per-capita basis is converging Reliance of consumption in the terms of on net credit flow (increase minus decrease) changed from positive pre-crisis to negative after crisis (the strongest in Ireland and Spain).

8 Structure of the consumer credit market Specialist lender activity is highest in Italy, Sweden, Norway and the UK The most common forms of consumer credit in the EU are authorised overdrafts, credit cards and personal loans Concentration assessed on market share of credit institutions Herfindahl Hirschmann Index (HHI); the overall EU27 average rose slightly, yet still indicates a significant level of competition No standardised information on credit defaults

9 Cost of consumer credit In principle, higher than for mortgage credit (due to risk premium) The highest APR for credit cards, but the most differentiated for personal loans (payday loan impact) High cross-country differentiation of APR (according to ECB data from less than 6% to more than 20%, up to 35%) But: net consumer lending rates (the consumer lending rate minus central bank lending rate) are converging slowly among the EU27 Member States over the period According to the analysis of advertissements, largest differences between the APR and the interest rate were observed in Ireland followed by the UK, Poland and Slovakia. The differences go from 2,47 pp for car loans to 6,83 for personal loans

10 Information on consumers' rights Method: mystery shopping and survey The majority of shoppers did not receive full information on their rights (in particulr about the right of withdrawal 11%) The majority of surveyed consumers know their rights (73% know the lender has to inform about the right of early repayment) - contrary to the details of their contract. do not shop around: about 60% consulted 1 lender, usually their bank. think that the information provided is clear and comprehensive.

11 Information actually provided to the consumers -advertissments Third of adverts did not contain financial information, so no requirement of standard information Only 22% of the advertisements containing financial information fulfilled all the informational requirements. It was particularly poor for credit cards and deferred payments. Clearness and prominence varied by country. NL advertisements fared well with this respect. Data for calculation of APR insufficient (only 73% of adversts with borrowing cost provided representative example) and calculation in half of cases incorrect. But correct in AT, IE, LU, NL So how to compare adverts?

12 Information provided to consumers pre-contractual stage Difficulty to obtain offers due to credit checks The level of correctness of factual information 38% (the lowest for credit cards 28%). The best faring countries: DE and SI for car loans, PL and PT for credit cards, SI and PT for personal loans. Typical deficiencies: Right of withdrawal (11% informed) How APR was calculated (20% informed) Information about compulsory advisory services Even type and value of interest rate (15-16% NOT informed) SECCI given in less than a half of cases

13 Awareness of the consumers - survey Only 40% correctly indicated better offer 64% knew if APR was indicated in the contract 74% aware of whether an early repayment might be associated with a penalty charge But: Better knowledge that rights of early repayment and right of withdrawal should be included in pre-contractual information, 73% and 71% (but 65% and 46% of borrowers, respectively were aware of early repayment and withdrawal clauses within their actual loan contracts)

14 Empowerment of the consumers 1% tried to withdraw from the contract and 60% succeeded In spite of rather high satisfaction with customer service, 10% of consumers had problems with their loan. However, 62% of them did not complain.

15 Low perseverance Lenders solved 41% of complaints lodged with them by consumers who had problems, while problems lodged with third parties were resolved in 28% Of those respondents whose issue was partly resolved, eight of 20 have taken further action. Among those respondents whose issue was not resolved, only roughly a quarter took further action

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