COMMISSION STAFF WORKING DOCUMENT GUIDELINES ON THE APPLICATION OF DIRECTIVE 2008/48/EC IN RELATION TO COSTS AND THE ANNUAL PERCENTAGE RATE OF CHARGE

COMMISSION STAFF WORKING DOCUMENT GUIDELINES ON THE APPLICATION OF DIRECTIVE 2008/48/EC IN RELATION TO COSTS AND THE ANNUAL PERCENTAGE RATE OF CHARGE Contents 1 INTRODUCTION...2 2 THE APR...3 2.1 ROLE OF THE APR...3 2.1.1 APR VERSUS BORROWING RATE...3 2.1.2 THE DISCLOSURE OF THE APR...4 2.1.3 INSIGNIFICANT CHARGES...5 2.1.4 REPRESENTATIVE EXAMPLE...6 2.1.5 CREDIT INFORMATION PRIOR TO THE CONCLUSION OF THE CREDIT AGREEMENT...7 3 THE TOTAL COST OF THE CREDIT...11 3.1 COST ELEMENTS...11 3.1.1 CHARGES TO BE PAID IN CONNECTION WITH THE CREDIT AGREEMENT...15 3.1.2 KNOWLEDGE OF COST BY THE CREDITOR...16 4 CALCULATION OF THE APR: ANNEX I...17 4.1 REMARK (E)...17 4.2 REMARK (C): MEASUREMENT OF TIME INTERVALS...18 5 ASSUMPTIONS FOR THE CALCULATION OF THE APR...22 5.1 LIST OF ASSUMPTIONS CONSIDERED IN THIS SECTION...23 5.1.1 ASSUMPTIONS (A) AND (B)...25 5.1.2 ASSUMPTION (C)...26 5.1.3 ASSUMPTION (D)...27 5.1.4 ASSUMPTION (E)...27 5.1.5 ASSUMPTION (F)...30 5.1.6 ASSUMPTION (G)...32 5.1.7 ASSUMPTION (I)...33 5.1.8 ASSUMPTION (J)...34

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1 INTRODUCTION The Directive on Credit Agreements for Consumers (CCD) 1 aims to ensure that all consumers in the EU enjoy a high and equivalent level of protection of their interests, enabling them to make their decision about consumer credit in full knowledge of its costs and conditions as well as their rights and obligations. In order to meet this objective and to contribute to the creation of a genuine single consumer credit market, the CCD makes provision for a uniform definition of the following elements throughout the EU: - elements comprising the total cost of the credit to the consumer (TCC), (Article 3 (g)); - the method and assumptions for calculating the Annual Percentage Rate of Charge (APR), (Article 19 and Part II of Annex I), and - the extent and obligation regarding disclosure of other relevant information to be provided to the consumer (Chapter II). Since the adoption of the CCD, Member States (MS) have transposed it into national laws which reflect the considerable differences in national practices in this sector. This document represents the outcome of the work of the Commission in conjunction with Member States, who were sent a questionnaire in early 2011 requesting feedback on national practices when applying the APR to consumer credit. The main purpose of this document is to provide guidelines on the key concepts and provisions of the CCD which relate to the APR. The guidelines aim to develop a common understanding and a convergence of practices when implementing and applying the CCD. The CDD focuses on consumer credit agreements as delimited in Article 2. The guidelines should not prejudge any common understanding or convergence of practices as regards other forms of credit, such as mortgage credit. Furthermore, this document has no legal status and in the event of a dispute, the ultimate responsibility for the interpretation lies with the European Court of Justice. The specific elements of the CCD which will be addressed in this document include: - the role of the APR, (Section 2.1) as distinct from the borrowing rate (Section 2.1.1); - the rules of disclosure of the APR and the stages for disclosure (Section 2.1.2); - the role and design of the representative example (Section 2.1.4); - other information related to the cost of the credit and the characteristics of the credit product disclosed prior to the conclusion of the credit agreement (Section 2.1.5); 1 Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC, OJ L 133, 22 May 2008. 2

- the clarification of elements to be included in the total cost of the credit and the calculation of the APR (Section 3.1); - the measurement of time intervals (Section 4.2), and - clarification on the use of assumptions in Part II, Annex I of the CCD (Section 5). These guidelines are intended to contribute to the correct implementation of the CCD in Member States, reflecting the current practices and requirements of the consumer credit market in relation to APR. 2 THE APR 2.1 ROLE OF THE APR The aim of the APR in the CCD is to provide a numerical and comparable representation of the cost of the credit to the consumer. Recital 19 points out this role of the APR by stating that In order to enable consumers to make their decisions in full knowledge of the facts, they should receive adequate information, which the consumer may take away and consider, prior to the conclusion of the credit agreement, on the conditions and cost of the credit and on their obligations. To ensure the fullest possible transparency and comparability of offers, such information should, in particular, include the annual percentage rate of charge applicable to the credit, determined in the same way throughout the Community [ ]. To attain the aim of comparability and to contribute to the creation of a single consumer credit market in the EU, the elements comprising the total cost of the credit to the consumer (TCC) and the method and assumptions for calculating the APR should be uniformly defined throughout the EU. 2.1.1 APR VERSUS BORROWING RATE The CCD defines the APR in article 3(i) as the total cost of the credit to the consumer expressed as an annual percentage of the total amount of credit [ ]. The explanation of the APR is provided in Article 19.1, whereby the APR equates, on an annual basis, the present value of all commitments (drawdowns, repayments and charges), future or existing, agreed by the creditor and the consumer, adding that it shall be calculated in accordance with the mathematical formula set out in Part I of Annex I. It should be noted that although the payments to be made by the consumer might have a different nature (repayment of the amount of the credit, interest charges, administrative, charges, maintenance charges, charges for drawdowns or payments, costs of ancillary services, etc) and they might be computed by the creditor using different methods and variables, this 3

distinction is meaningless for the calculation of the APR. Hence, once the amounts and the dates of the payments and drawdowns are known or specified according to the assumptions for the calculation of the APR, they come together in the mathematical formula to allow the APR to be calculated as the only unknown value in the equation. This makes it evident, for example, that the APR cannot be confused with the borrowing rate charged by the creditor or with the internal calculation he makes in relation to interest charges, which might involve different methods of calculation. These differences could include for instance, the use of simple interest or compound interest, or different compound frequencies (daily, weekly, monthly, etc.). Also, the CCD does not regulate the method used for calculating interest charges, therefore MS and creditors have leeway in this matter. In contrast, the method and the rules for calculating the APR are elements defined in the CCD. This is highlighted in recital 19: To ensure the fullest possible transparency and comparability of offers, such information should, in particular, include the annual percentage rate of charge applicable to the credit, determined in the same way throughout the Community. [ ] As regards the borrowing rate, the frequency of instalments and the capitalisation of interest, creditors should use their conventional method of calculation for the consumer credit concerned. Therefore, the CCD respects the diversity of methods used in practice for calculating interest charges while imposing the uniqueness of the method for calculating the APR, provided that only using a single method for the calculation of the APR it is possible to attain comparability of the costs. 2.1.2 THE DISCLOSURE OF THE APR In the CCD, the disclosure of APR, alongside other information, is a central point in the strategy of consumer protection, and in this regard it should be emphasized that this requirement applies to all non exempt credit agreements and at three stages of the agreement: in advertising, at a pre-contractual and at a contractual level. The only exceptions to this rule are the following three 2 : Despite the exemption of overdraft facilities to be repaid within 1 month from the scope of the CCD, Article 6 (5) of the Directive imposes the obligation to provide certain information which includes the APR, illustrated by means of a representative example at a pre-contractual stage. Under the light regime applicable to overdraft facilities to be repaid on demand or within 3 months, MS may decide that the APR does not need to be provided at any stage of the process. 2 Note that the CCD refers to overrunning and overdraft facilities in current accounts and not in payment accounts as defined in Directive 2007/64/EC on payment services in the internal market. Directive 2007/64/EC defines payment account as an account which is used for the execution of payment transactions. This includes, for example, electronic money accounts, which are not current accounts. 4

Under the light regime applicable to credit agreements in the form of overrunning, neither the APR nor a representative example is required to be provided. Only Articles 1 to 3, 18, 20 and 22 to 32 of the CCD are applicable to overrunning, with Article 18 referring to the disclosure of information to the consumer. As established in point 1 of this Article, agreements to open a current account where there is a possibility that the consumer is allowed an overrun, must contain the information referred to in Article 6(1)(e), that is, information on the borrowing rate and on other charges, but not on the APR. And, according to point 2, if the overrunning becomes significant and lasts for more than 1 month, additional information should be provided, but it still excludes the APR. As for the requirement of the disclosure of the APR once the credit is running, it should be noted that the CCD does not require creditors to provide a new APR when the contract terms change in relation to the borrowing rate or the charges (see Articles 11 and 12 (2)). The CCD is silent on the treatment of changes in the terms of an existing contract. The extent to which these changes would imply a new disclosure of the APR depends on contract law in individual Member States. For the calculation of APR, if it is to be disclosed, only the future or existing commitments (but not past commitments) will be taken into account, in accordance with Article 19 (1). 2.1.3 INSIGNIFICANT CHARGES Article 2.(f) excludes from the scope of the CCD those credit agreements under the terms of which the credit has to be repaid within three months and only insignificant charges are payable. As for the level and definition of these insignificant charges, the following shall be considered: The charges to take into account are those included in the total cost of the credit to the consumer, as defined in Article 3 (g) and explained in another section of this document. This includes any cost for accessing any part of the credit facility (e.g. cash advances, balance transfers or foreign currency transactions) even if the cost is not included in the APR due to the application of the assumptions in Annex I.II (e.g. assumption (c)). The level of charges considered as insignificant can be specified by MS in their national implementation law, for instance, by defining a lump sum or indicating that a certain percentage of the total amount of credit represents a ceiling above which charges have to be considered as significant. MS may also simply retain the term "insignificant charges" in national law and thereby leave its interpretation to the judiciary. In the assessment of the level of charges considered as insignificant, relevant criteria might include the amount of the charge, both in absolute terms and relative to the amount of credit, the amount of the drawdown or the value and number of the transactions and the comparison of the costs to those of other similar or competing products on the market. 5

2.1.4 REPRESENTATIVE EXAMPLE When the APR is disclosed at the advertising or a pre-contractual stage, the CCD indicates that it should be accompanied by a representative example, whose purpose is to make the APR and the cost of the credit more understandable to the consumer. The relevant parts of the CCD are the following: Advertising stage (extract from recital 19): "As the annual percentage rate of charge can at this stage be indicated only through an example, such example should be representative. Therefore, it should correspond, for instance, to the average duration and total amount of credit granted for the type of credit agreement under consideration and, if applicable, to the goods purchased. When determining the representative example, the frequency of certain types of credit agreement in a specific market should also be taken into account. As regards the borrowing rate, the frequency of instalments and the capitalisation of interest, creditors should use their conventional method of calculation for the consumer credit concerned". Pre-contractual stage [extract from Article 5 (g)]: "[ ] the annual percentage rate of charge and the total amount payable by the consumer, illustrated by means of a representative example mentioning all the assumptions used in order to calculate that rate; where the consumer has informed the creditor of one or more components of his preferred credit, such as the duration of the credit agreement and the total amount of credit, the creditor shall take those components into account [ ]". The CCD defines the representative example in advertising in broad terms, and the only requisite is that the example should be representative of the type of credit under consideration. This allows a margin of freedom to national authorities if they wish to establish more specific rules (e.g. amount of credit, duration of credit) in order to promote comparability of the offers from different creditors. In any case, if it is a question of reflecting market conditions in general or trying to reflect the exact characteristics of the credit to be obtained by the consumer from the creditor, the choice should be in favour of the specific consumer loan and not the general market. Otherwise, there might be significant differences between the information advertised and the information provided to the consumer at the pre-contractual stage and at the conclusion of the agreement. This might be especially true when creditors operate in specific markets where consumers have particular characteristics or when creditors limit their operations (e.g., when they specialise in credits of low amounts or durations). Therefore, in general, the creditor should determine the content of the representative example on the basis of the agreements they reasonably expect to conclude. As mentioned in recital 19, the amount and duration of the credit could correspond, for example, to the average duration and amount of such agreements. However, other agreements that might reasonably be expected to be entered into as a result of the advertisement should also be taken into account. For example, where the advertiser expects to offer different products to 6

some consumers, at a higher borrowing rate or charges, or where he refers consumers to other creditors. In cases where the range of variation of an element of the credit is too wide and such variation has a significant effect on the APR (for example, when the amount of the credit varies significantly and there are charges which do not depend on such an amount), creditors should make use of the assumptions for the calculation of the APR in order to determine the specific value of such elements. An example of this would be agreements for credit cards and other revolving credit agreements. At advertising stage, it may be appropriate for the representative example and APR to be calculated on the basis of a 1500 euro credit limit, according to assumption (h), on the grounds that this is representative of such agreements. Obviously, if the creditor knows that this amount is unlikely, for example because the creditor does not lend above a certain lower threshold, this lower amount shall be considered instead. In this way, it is easier for consumers to compare the advertisements of different creditors as they are based on the same amount of credit and hence the same APR assumptions. It is open to MS to mandate this solution in their national legislation and determine the cases of application, or alternatively leave the decision to individual creditors. On the other hand, in the case of personal loans and other fixed-sum credit agreements, it may be preferable for each creditor to base the representative example on an amount of credit which is representative of that creditor s own product range and expected customer base, as these may vary considerably among creditors. At the pre-contractual stage, these difficulties are likely to be fewer, since at this stage the CCD requires adaptation of the representative example to the information (if any) provided by the consumer. Finally, at a contractual level, no representative example exists because the APR refers to the specific credit agreement concluded by the consumer, and the unknown elements of the credit will be determined by the relevant assumptions 3. 2.1.5 CREDIT INFORMATION PRIOR TO THE CONCLUSION OF THE CREDIT AGREEMENT In Chapter II, the CCD regulates the requirements of information to be provided to the consumer prior to the conclusion of the credit agreement. The aim is to provide the consumer with the information needed to compare different offers and to make an informed decision on whether to conclude a credit agreement. 3 See section Assumptions for the calculation of the APR for a more detailed explanation of the role of the assumptions. 7

The lists of elements of the credit to be included in advertisements which indicate an interest rate or any figures relating to the cost of the credit 4 (Article 4) and at the pre-contractual stage (Articles 5 and 6) should conform to the standardised information to be provided to the consumer. Regarding this standardised information, it should be noted that: The elements of cost to be displayed in advertising are limited to those included in the TCC 5, while in the pre-contractual stage the requirements of information are wider and additional costs should be also displayed (e.g. default charges, dormancy or inactivity fees). The inclusion of these elements is required irrespective of whether or not they are included in the calculation of the APR as a result of applying assumptions to the APR calculation. For example, assumption (c) implies using the highest borrowing rate or charges applicable to the most common drawdown mechanism for the calculation of the APR. However, the TCC is also composed of charges and rates applicable to the other drawdown mechanisms and hence, this information should be provided. Similar reasoning applies to rates and charges offered for a limited period or amount, which may be disregarded for the calculation of the APR by assumption (i). The total amount of the credit, defined by Article 3(l) must be specified either if this amount is known in advance or is estimated by the creditor (see section on representative example). This is because this amount plays an important role in the determination of the APR whenever there are costs independent of the amount of the credit. It should be noted that the amount of the credit does not include costs financed with the credit, since these costs are part of the cost of the credit 6. The currency in which the credit is provided must be also specified. This is particularly important in cases where a foreign currency is used. The duration of the credit does not need to be specified in open-end agreements. 4 MS are free to regulate information requirements regarding advertising which does not contain an interest rate or any figures on the cost of the credit in their national law (recital 18 and Article 4(1), second paragraph). 5 Article 4.2(a) details these elements as the borrowing rate, fixed or variable or both, together with particulars of any charges included in the total cost of the credit to the consumer. The elements of cost in the pre-contractual information are included in Article 5.1 and a reference is made to any other charges deriving from the credit agreement in point (i). For credit agreements referred to in Article 2(3), (5) or (6), the relevant article in relation to pre-contractual information is Article 6.1 and the reference appears in point (e). 6 An example is lump sum insurance costs, which sometimes are not required to be paid immediately, but over time, together with the credit. These financed costs are included in the total amount payable by the consumer as a part of the total cost of credit. The total amount payable is comprised of the amount of the credit and the costs of the credit. 8

Additional information about the credit can be provided, but always respecting the CCD, which implies that: In advertising, the standard information in Article 4(2), specified by means of a representative example, should be specified in a clear, concise and prominent way. To this end, the standard information should appear together in the same place (instead of being scattered around the advertisement), must be easily legible (or clearly audible when provided orally), and should stand out and be distinct from any other information related to the credit. 7 This 'other information' could include, for example, ranges of variation in the credit characteristics, such as borrowing rate bands which depend on consumer rating or the amount of the credit. There must be no risk of confusing the 'other information' with the standard information. For pre-contractual information, the form in Annex II (Annex III for credit agreements referred to in Article 2(3), (5) or (6) if this shorter form is provided) shall be used to display the standard information and, as stated in Article 5(1), final paragraph, any additional information which the creditor may provide to the consumer shall be given in a separate document. This guarantees the prominence, clarity and conciseness of the standard information as distinct from any other additional information. It should be noted that the standard information requirements are fully harmonised. Therefore, MS are not allowed to maintain or introduce national provisions other than those laid down in the CCD. Therefore, they are not allowed to change the standard information and their leeway in relation to the requirement of additional information is limited to the matters recognised in CCD. In this regard, it should be noted that: On the basis of Recital 26, MS may require the provision of information to consumers (including warnings) about the risks attached to default on payment or to overindebtedness in their duty to take appropriate measures to promote responsible practices during all phases of the credit relationship. Article 4 is without prejudice of Directive 2005/29/ EC concerning unfair business-toconsumer commercial practices in the internal market (Unfair Commercial Practices Directive). This means that the requirements of additional information in advertising at national level can be only justified on the basis of avoiding unfair or misleading commercial practices. That is, these additional requirements should ensure that commercial practices do not materially distort the economic behaviour with regard to the product of the average consumer, that they are not deceiving the consumer in relation to the characteristics of the credit product, and that they do not omit relevant information that the consumer needs. As indicated above, this additional information would not be a part of the standardised information and hence, it should be less prominent and there must be no risk of confusion with the standard information. Also 7 Other information which does not refer to features of the credit product or its costs, for example the identification or logo of the creditor, are not affected by these rules. 9

in relation to this Directive, special terms and conditions aimed to attract consumers to a particular product and which might be considered unfair or misleading to consumers should be avoided. As to pre-contractual information, Article 5(6) (coherent with recital 27) states that MS shall ensure that creditors (or, where applicable, credit intermediaries) will provide adequate explanations to the consumer, in order to place the consumer in a position enabling him to assess whether the proposed credit agreement is adapted to his needs and to his financial situation, where appropriate by explaining the pre-contractual information to be provided in accordance with paragraph 1, the essential characteristics of the products proposed and the specific effects they may have on the consumer, including the consequences of default in payment by the consumer. Member States may adapt the manner by which and the extent to which such assistance is given, as well as by whom it is given, to the particular circumstances of the situation in which the credit agreement is offered, the person to whom it is offered and the type of credit offered. On this basis, MS are allowed leeway to regulate these explanations, always within the scope of Article 5(6), that is, to place the consumer in a position enabling him to make his own assessment of the suitability of the product 8. In this sense, the duty of creditors or credit intermediaries to provide adequate explanations does not cover the provision of advice or recommendations. As these explanations are not part of the standard information, they will be provided separately. If they are provided in writing, they should be in a separate document which may be annexed to the Standard European Consumer Credit Information, just as in the case of any additional information the creditor may wish to give to the consumer. There should not be any risk of confusion between the standard information and any other additional information. For example, in the context of Article 5 (6), MS may require creditors to offer explanations to the consumer about the following, when relevant: Explanations about the pre-contractual information. For example, the effects of the exercise of any right to withdraw from the agreement and how and when this right may be exercised. Information on the particular features of the product which could distinguish it from other products and which has consequences for the consumer, depending, for instance, on the use of the product by the consumer. 8 Article 6, concerning pre-contractual information requirements for credit agreements under the light regime of Article 2, points 3, 5 or 6, is silent about the provision of explanations to the consumer. The justification for this in recital 23 is to avoid an excessive burden on creditors in relation to these agreements. However, if the circumstances of the market, the product or the consumers justify such explanations, the relevant explanations can be made a requirement. 10

Information on how the credit product operates and the effects of this on the cost of the credit. For example through illustrative examples, (not to be confused with the representative example). Information on features of the agreement which may operate in a manner which would have a significant adverse effect on the borrower. This could include the effects of high fees (e.g. fees calculated as a percentage of the highest amount of money drawn down during a given period) or it could apply in specific situations, such as the situation where the consumer does not repay the credit within a given period. Information on the consequences for the consumer arising from a failure to make payments under the agreement at the times required by the agreement. For example, additional charges made for late or missed payments, increases in interest rates, impairment of credit status or legal action and associated costs. Specific explanations might also be justified by the need to avoid unfair or misleading commercial practices in the national market, with regard to the characteristics of the market, the products offered, the consumers or the type of commercial communication in question. It should be noted that this additional information cannot, under any circumstances, contain alternative representative examples since the representative example is a core element of the standardised information. In fact, throughout the CCD all the references are to the representative example in the singular, and not representative examples in plural 9. This reflects the fact that, for a given credit, the representative example at each stage of the credit agreement is unique. 3 THE TOTAL COST OF THE CREDIT 3.1 COST ELEMENTS In order to preserve the comparability and the informative content of the APR, the CCD aims to determine uniformly throughout the EU the cost elements to be included in the total cost of the credit to the consumer (TCC). In this respect, recital 43 states that In order to promote the establishment and functioning of the internal market and to ensure a high degree of protection for consumers throughout the Community, it is necessary to ensure the comparability of information relating to annual percentage rates of charge throughout the Community. [ ] This Directive should therefore clearly and comprehensively define the total cost of a credit to the consumer. The cost elements to be included in the TCC and, as a consequence, in the APR, are regulated in Articles 3(g) and 19. 9 Article 6.1(f), regarding credit agreements under the light regime and at the pre-contractual stage, allows illustrations of APR by means of representative examples. This plural should be interpreted in the context of the different type of agreements and product variations within these types of agreements regulated by this paragraph. These agreements are covered under Article 2, points 3, 5 or 6. 11

According to Article 3(g), the TCC includes: Costs which the consumer is required to pay in connection with the credit agreement and which are known to the creditor, except for notarial costs this would include costs which must be paid in order to access the credit or to use it, and Costs of ancillary services (whether or not connected with the credit) which the consumer is required to pay if the conclusion of the service contract is compulsory in order to obtain the credit or to obtain it on the terms and conditions marketed. This is irrespective of whether the charge is payable to the creditor or a third party. Article 19 (1) points out the binding nature of the cost elements to be included in the TCC when referring to all commitments (drawdowns, repayments and charges), future or existing, agreed by the creditor and the consumer. As a result, the cost of the credit must include all those charges which the consumer is compelled to pay under the credit agreement itself or under an ancillary and compulsory service contract. It does not, however, include costs which are genuinely optional for the consumer, subject to certain conditions, discussed later. As for ancillary services, it should be taken into account that: Ancillary services are services which are auxiliary or supplementary to the credit agreement, sometimes offered in the form of cross-selling products. Examples of these services include the opening of any kind of accounts or insurance contracts. These contracts could include credit insurance, payment protection insurance, motor insurance or other types of insurance 10, sureties or guarantees. 11 They could also include an agreement to the constitution of capital from the payments made by the consumer not giving rise to an immediate corresponding amortisation of the amount of credit. The list is not exhaustive, because the CCD does not limit the types of ancillary services. 10 Under the CCD inclusion of insurance costs is irrespective of the purpose of the insurance. This is different from Directive 90/88/EEC in the sense that it excluded from the TCC charges for insurance or guarantees not designed to ensure payment to the creditor in the event of the death, invalidity, illness or unemployment. 11 The existence of sureties or guarantees allows to distinguish between secured credit and unsecured credit agreements. In general, a secured credit is a credit in which the borrower pledges some asset (e.g. such as accounts and deposits, financial securities or cars) as collateral for the credit. Hence, if the borrower defaults on the credit, the creditor would have the right to dispose of the pledged assets to repay the outstanding balance due. From a regulatory perspective, it is important to distinguish between non-recourse secured credits, where the creditor's recovery is limited to the collateral, and recourse credits, which entitle the creditor to seek financial recourse upon the default of the borrower. This is because non-recourse credits are outside the scope of the CCD according to article 2(2)(k), while recourse credits are regulated by the CCD. Accordingly, the costs of sureties in recourse credits which are mandatory to obtain the credit or to obtain it in the marketed conditions are included in the TCC and the APR. 12

Article 3 (g) introduces two situations which determine whether the cost of ancillary services should be included in the TCC. The existence of either of these two situations implies the inclusion of these costs: 1, if the ancillary service is mandatory to obtain the credit and 2, if the ancillary service is not mandatory but is necessary to obtain the credit on the terms and conditions marketed (for example to obtain the marketed borrowing rate, charges or duration of the credit). This applies even if the ancillary services are not financial in nature and do not relate directly to the credit. Given that these ancillary services might be maintained for periods longer than the credit, the inclusion of their cost once the credit has been repaid depends on the terms of the commitment described in the credit agreement. For example, if, as a consequence of the credit agreement, the consumer must maintain the ancillary service during a period longer than the duration of the credit, the costs during this longer period shall be taken into account. If, on the contrary, the commitment to maintain these services finishes when the credit is repaid, only the cost during the course of the credit agreement shall be included in the TCC, together with any costs for withdrawing from the ancillary service at the termination of the credit agreement if these costs exist. In the case where the duration of the ancillary service is shorter than the duration of the credit, the costs of this shorter period shall be taken into account. Costs connected with the credit agreement to be included in the TCC if required to be paid by the consumer and known to (or ascertainable by) the creditor, include, for example, the following: Interest charges, which are the charges for interest on a credit. These charges depend on the borrowing rate applied to the credit, the amount of funds borrowed, the method of charging the borrowing rate, and the period over which the funds are borrowed. Taxes and commissions arising from the credit agreement 12. Credit intermediation fees payable by the consumer (see Article 21(c)). Administrative fees (e.g. loan preparation or examination and authorisation of the credit). Costs for using a particular drawdown mechanism (e.g. fees for balance transfers or cash advances under a credit card or for foreign currency transactions), irrespective of whether these are included in the APR by virtue of assumption (c), as mentioned in the previous section. 12 The reference to the credit agreement is aimed to differentiate these charges from charges on the good or the service purchased with the credit. These latter charges, which are charges the consumer is obliged to pay whether the transaction is effected in cash or on credit are not included in the TCC, as stated later in this section. 13

Costs of maintaining an account which records both payment transactions and drawdowns (including credit or debit accounts), the costs of using a particular means of payment for payment transactions or drawdowns (e.g. cheques or cards) on that account, and any other costs relating to payment transactions (e.g. fees for recording transactions, for the transfer of funds or for arranging direct debit on the account). In reference to these costs, Article 19 (2), second paragraph establishes that only if the opening of the account is optional and its costs "have been clearly and separately shown in the credit agreement or in any other agreement concluded with the consumer", can these costs be excluded from the TCC 13. This means that if the option exists, but the consumer is not able to know the costs of the account, these costs should be included in the TCC 14. This requirement should preclude the hiding of costs by creditors and encourages them to provide clear and complete information about their products. As to the optional nature of the account, it should be noted that in cases where the account preexisted but the provision of the credit on the conditions offered necessitates keeping the account, the account is understood to be compulsory. Other costs and fees such as currency conversion fees and fees for transactions in foreign currencies, costs for providing account statements 15 or for postage, membership fees, fees calculated on the outstanding balance or on the amount of credit not drawn down, maintenance and insurance policies for the items underlying hire-purchase agreements, etc. Cost excluded from the TCC according to Articles 3(g) and 19(2), first paragraph, are: Notarial costs. It should be noted that this exclusion refers only to those costs of notarial nature; therefore, if the notary collects money for other services (e.g. registration of the credit agreement), they may be included, in accordance with the definition of the TCC. Fees for early repayment, for cancellation of the credit, and for changes in the contractual terms and conditions of the credit agreement at the consumer's request. 13 14 For the quantification, in advance, of the costs linked to transactions (drawdowns and payments) in order to obtain the APR, consideration should be taken to the number, date and volume of the transactions foreseen in the contract or, if this information cannot be ascertained from the contract, to the assumptions used for the calculation of the APR. Also note that the conditions in Article 19(2), second paragraph, are cumulative, i.e. costs relating to payment transactions can be excluded only if they are linked to an account recording both payment transactions and drawdowns. This does not extend to e.g. balance transfer fees on a credit card. 15 These are cases where the statement is required by law or under the contract. It does not extend to charges for duplicate statements when these are optional for the consumer. 14

Fees and charges for failures to comply with the terms of the agreement (late payment charges in the form of interest and penalties, charges for exceeding the credit limit, charges for returned payments, charges for collection of unpaid debts, calls to pay amounts due or to fulfill other obligations, etc). Charges other than the purchase price which, for purchases of goods or services, the consumer is obliged to pay whether the transaction is effected in cash or on credit, on the grounds that these charges are not paid in connection with the credit agreement (e.g., vehicle registration in the consumer s name in administrative records in the case of a loan to buy a car). To conclude, it should be noted that the TCC is limited to the costs of credit, and account cannot be taken of any offsetting income or benefits. These are not covered by Article 3(g) and so cannot be taken into account in the APR calculation. However, it is open to the creditor to disclose such income or benefits separately, subject to this not being misleading to the consumer. 3.1.1 CHARGES TO BE PAID IN CONNECTION WITH THE CREDIT AGREEMENT Article 3 (g) includes in the TCC those costs (other than notarial costs) that the consumer is required to pay in connection with the credit agreement. Application of this Article is straightforward when the agreement only provides for a credit facility. However, there are cases in which the agreement provides for additional services and facilities. In these cases the question is whether the costs of such services or facilities must be paid in order to obtain the credit or to do so on the terms and conditions marketed. Such services could include, for example, purchase insurance, travel insurance, legal advice, concierge services, access to airport lounges or loyalty programs. The costs of these additional services or facilities will be included in the TCC unless both of the following two conditions hold: FIRST SET OF CONDITIONS (i) the cost of the additional services or facilities is clearly and separately shown in the credit agreement or in any other agreement concluded with the consumer, and (ii) the consumer could access the credit on the same terms without paying for these additional services or facilities. This arises when the consumer is informed and can choose between products offered by the creditor including the same credit facility but without these services or facilities, or that the consumer can withdraw from these services or facilities at any time and stop paying their costs without this withdrawal having any cost or any effect on the terms of the credit. This approach is based on the treatment of the costs of an account recording payment transactions and drawdowns in Article 19(2), second paragraph, which establishes a double requirement of both the optional and the separate nature of costs in order that these costs be excluded from the cost of the credit. 15

Similar reasoning can be applied to the case of packages comprised of credit facilities and other products. For example, in a package including a bank account and a credit card, exclusion of the costs of the account from the cost of the credit card (and from its APR) is only possible if the costs of the account are separately shown and the consumer can access the credit card on the same terms without opening the account which forms part of the package. Further, it should be noted that in the case of packages of credit and non-credit products, the criteria of exclusion might require a step-by-step analysis whose result will be the obtaining of the TCC and the APR of each credit product 16. For example, in a package comprised of a credit card, an instalment loan and a bank account serving both the credit card and the loan: i) the costs of the account can be excluded from the costs of the loan if the double requirement of both the optional and the separate nature of costs of Article 19(2), or if the two elements of the FIRST SET OF CONDITIONS above, holds; ii) such costs can be excluded from the cost of the card if the same conditions are fulfilled; iii) if the cost of the account can be excluded from one credit product and not from the another, then it is possible to determine an APR for each credit product, one including the costs of the account and the another excluding them; and iv) if the costs of the account cannot be excluded from the cost of the credit card nor from the costs of the loan, each of the credit products will include the cost of the account as a cost of the credit, and the APR of each credit product will include the cost of the account. 3.1.2 KNOWLEDGE OF COST BY THE CREDITOR Throughout the Directive there are several references to creditor's adequate knowledge about the costs of the credit. For example, in Recital 20 it is stated that "Creditors actual knowledge of the costs should be assessed objectively, taking into account the requirements of professional diligence"; in recital 22 it is stated that " The costs payable in respect of those ancillary services should be included in the total cost of the credit; alternatively, if the amount of such costs cannot be determined in advance, consumers should receive adequate information about the existence of costs at a precontractual stage. The creditor must be presumed to have knowledge of the costs of the ancillary services which he offers to the consumer himself, or on behalf of a third party, unless the price thereof depends on the specific characteristics or situation of the consumer", and in Article 21 (c) regarding the obligation on intermediaries relating to the agreement, it is stated that "the fee, if any, payable by the consumer to the credit intermediary for his services is communicated to the creditor by the credit intermediary, for the purpose of calculation of the annual percentage rate of charge". 16 Each credit product should have its own APR. This is because several credit products cannot be treated as a unique credit and a unique APR would be difficult to interpret, especially taking into account that the products might have different features (duration, drawdown and repayments, etc) and different assumptions could be required to calculate the APR. 16

In some cases it might be known that a charge or ancillary service will be imposed (for which reason the costs have to be included in the TCC to reflect the higher costs of the credit) but the exact amount of the costs is not known. For this situation, it should be noted that it does not refer to those charges whose amount varies over time in a way unquantifiable at the time of calculation of the APR, because Article 19(4) establishes that these charges will remain fixed in relation to the initial level and will remain applicable until the end of the credit agreement. For this reason, these charges are determined in advanced and included in the calculation of the APR. The situation might refer to advertising or the pre-contractual stage, but not to the contractual stage. At the contractual stage the real costs of the agreement to be concluded with the consumer should be known and will be included in the calculation of the APR because either the creditor or the consumer will be able to avail of the necessary information. At the advertising or pre-contractual stage, however, the question is whether the creditor can ascertain the amount of the charge or can estimate it with sufficient certainty so as to be able to include it in the TCC and APR in the representative example. If estimated information is used at the advertising or pre-contractual stage, this must be made clear to the consumer. The consumer should be told that this information is not known with certainty but that an estimate has been used, based on reasonable assumptions 17, and that this is expected to be representative of the type of agreement in question 18. The nature of the assumptions used by the creditor should also be explained to the consumer. On the other hand, if it is not possible to ascertain the costs, or to estimate them with a reasonable degree of certainty, then they cannot be included in the TCC or APR. In this case, the creditor must inform the consumer of the existence of such costs at the advertising and pre-contractual information stage, and make clear to the consumer that because they are unknown they are not therefore included in the APR (Articles 4 (3), 5 (1)(k), Recital 22). 4 CALCULATION OF THE APR: ANNEX I 4.1 REMARK (E) It should be noted that there is an error in remark (e), second line: it should read 1 to n expressed in years instead of 1 to k expressed in years. 17 For example, in the case of an ancillary service, on the basis of the service the creditor sells on his behalf or on behalf of third party, even when the consumer is free to choose the contracting party. 18 For example, in insurance, on the basis the representative example (amount, duration, etc.) and the characteristics of the representative borrower (e.g. male aged 35). 17

4.2 REMARK (C): MEASUREMENT OF TIME INTERVALS Remark (c) establishes the method for the measurement of time periods for the calculation of the APR in the following terms: 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 30,41666 days (i.e. 365/12) regardless of whether or not it is a leap year. Application of this method is straightforward when intervals between dates can be expressed as a whole number of weeks, months or years because in this case a single kind of fraction is used 19. There is however, a need for clarification when the periods cannot be measured as a whole number of weeks, months and years (for example, when a repayment takes place in 1 month and 3 days). In order to attain the objective of comparability of the APR by providing a uniform application of remark (c) compatible with its wording, it shall be considered that: Only when an interval between dates used in the calculations cannot be expressed as a whole number of years, months or weeks, the interval shall be expressed as a whole number of one of these periods in combination with a number of days. For the choice among years, months or weeks, consideration shall be given to the frequency of drawdowns and payments. When using days: (i) every day shall be counted, including weekends and holidays; (ii) equal periods and then days shall be counted backwards to the date of the initial drawdown; and (iii) the length of a period of days shall be obtained excluding the first day and including the last day (simple subtraction of dates), and shall be expressed in years by dividing this period by the number of days (365 or 366 days) of the complete year counted backwards from the last day to the same day of the previous year. This approach is largely similar to the existing convention used in bonds markets in the Euro area, known as Actual/Actual AFB 20 or Actual/Actual (Euro) in international markets 21. 19 This is coherent with the assertion in the explanatory memorandum of the initial Commission proposal for a revised Directive of 2002 [COM(2002) 443 final], where the text of remark (c) appears. In pages 17-18 of this memorandum it is explained that The proposal is for complete standardisation in respect of rounding-off and what is understood by a year. Only the method for calculating fractions of a year has been retained. When compared with the methods for the measurement of time established in Directive 98/7/EC, given as the calendar basis (according to which 1 year=365 days or 366 days for leap year), and the standard year method (according to which 1 year=365 days or 365.25 days, or 52 weeks or 12 months of 365/12=30,411666 days), it is evident that there is an intention to abandon the calendar basis. 20 AFB stands for the Association Française de Banques. 18