For the past few years, the provision of credit (especially consumer credit) has been the subject of a great deal of attention, among other things due to the increasing number of people in the Netherlands with a heavy debt burden, as well as the stagnant property market. In this newsletter we will discuss recent legal developments in this area.
Specifically the following topics:
- the implementation of the Consumer Credit Directive in Dutch law with effect from 25 May 2011;
- in relation to the implementing legislation, the special rules on debt repayment arrangements;
- the amendment of the Code of Conduct on Mortgage Credit with effect from 1 August 2011;
- the draft European Directive; and
- the EU consultation on the imposition of interest rate restrictions (a maximum rate) for credit to consumers
Implementation of Consumer Credit Directive
On 25 May 2011, legislation implementing the new Consumer Credit Directive (Directive 2008/48/EC) in Dutch law (the "Act") entered into effect.
The Consumer Credit Directive (the "Directive") contains rules governing the relationship between offerors of credit and consumers, including rules on credit advertising, the provision of information, the assessment of creditworthiness and the contents of credit agreements. It also includes rules on credit intermediaries. The Directive is based on the premise of maximum harmonisation. However, EU Member States have been allowed a degree of freedom in relation to a number of topics.
The Directive has for the most part been implemented in two items of legislation:
- the provisions on supervision have been implemented in the Dutch Financial Supervision Act (Wet op het financieel toezicht, "Wft") and the related Market Conduct Supervision (Financial Institutions) Decree (Besluit gedragstoezicht financiële ondernemingen Wft);
- the private-law provisions have been laid down in a new title – Title 2A – of Book 7 of the Dutch Civil Code (Burgerlijk Wetboek, "BW").
As a result of the implementation of the Directive, a number of the provisions of the Consumer Credit Act (Wet op het consumentenkrediet, "Wck") have been repealed. In addition, the scope of the Wck has been extended to the effect that the provisions on the maximum cost of credit now apply to credit agreement with a maturity which is shorter than three months.
The table below provides a schematic overview of the most important provisions in the current legislation on consumer credit.
Consumer credit that must be
The same exceptions as set
Below we will discuss the provisions on supervision and, after that, the private-law provisions. Finally, we will address the Wck.
Provisions on supervision
Prohibitions and general exceptions
The Act leaves intact the three main prohibitions under the Wft on the provision of credit. These are as follows:
- the prohibition against offering credit to consumers without a licence from the Netherlands Authority for the Financial Markets ("AFM");
- the prohibition against acting as an intermediary in consumer credit transactions without a licence from the AFM; and
- the prohibition against advising on consumer credit without a licence from the AFM.
These prohibitions relate to the provision of both monetary credit and goods on credit. According to the explanatory memorandum to the bill underlying the Act, the prohibitions cover not only credit in the form of a loan, but also credit in the form of deferred payment or a similar payment facility.
Banks and insurers that have a licence in the Netherlands or a European Passport are still excepted from these prohibitions. However, they are required to comply with the continuing requirements for parties wishing to offer consumer credit, act as credit intermediaries or advise on consumer credit.
The Act has brought about a number of changes regarding the forms of credit that fall outside the scope of the Wft. The main change concerns the exception for credit that must be repaid within three months. The Act provides that the only circumstance in which the provisions of the Wft concerning consumer credit will not be applicable to consumer credit that must be repaid within three months is where the charges payable by the consumer are insignificant. This is clearly more restrictive than the previous rules, under which any credit that was repayable within three months fell outside the scope of the Wft.
Securities-based credit agreements
Although the Directive allows an exception to be made for securities-based credit agreements, this has not happened in the Netherlands. However, the continuing requirements that apply to offerors of such credit differ in certain areas, such as advertising and the mandatory pre-contractual information, from those that apply in relation to offerors of other types of credit.
Light-touch regime for overdraft facilities
Under the Act, a light-touch regime has been introduced for overdraft facilities (according to the abovementioned explanatory memorandum this includes, for example, overdraft facilities on a current account with a bank or an account at a mail order firm or online store). Overdraft facilities that must be repaid within one or three months are, among other things, subject to fewer rules on the provision of information.
As before, offerors of consumer credit are obliged to participate in the system operated by the Credit Registration Office (Bureau Krediet Registratie). In keeping with the Directive, the Act contains a provision stating that the Credit Registration Office should grant access on the same terms to all offerors with a registered office in another EU Member State. The Act also provides that if an offeror of consumer credit decides to reject a credit application on the grounds of a check carried out at the Credit Registration Office, it must immediately inform the consumer concerned without charge of the result of the check and of the information recorded in the system of the Credit Registration Office.
Prior to the entry into effect of the Act, an offeror of consumer credit was already obliged – in the interests of the consumer – to obtain information about the consumer's financial position and to determine whether he/she could safely enter into the credit agreement without thereby taking on an excessive financial burden. The Act provides that this test should be applied not only in relation to the conclusion of a credit agreement, but also in cases where the limit or the amount lent under an existing credit agreement is to be significantly raised.
Mandatory pre-contractual information
Under the Act, the obligation to have available a credit prospectus has been abolished. Instead, the consumer must be provided with prescribed information in a standard format (the Standard European Consumer Credit Information form) in good time prior to the conclusion of the credit agreement. Offerors of mortgage loans are excepted from the new obligation to provide the Standard European Consumer Credit Information Form.
The relevant private-law provisions have been included in Title 2A of Book 7 of the Dutch Civil Code and, like the provisions in the Wft, apply to credit agreements with consumers. The private-law provisions cannot be derogated from to the detriment of the consumer.
A number of agreements are excepted from the scope of the provisions in Title 2A of Book 7 BW. Please note that the exceptions in the Act for the private-law provisions are not entirely the same as the exceptions for the provisions on supervision (see above)!
The provisions in Title 2A are, among other things, not applicable to:
- mortgage loans, provided that the mortgage financing takes place on terms usual for such financing;
- overdraft facilities (as indicated above, these include – according to the explanatory memorandum – overdraft facilities on a current account or an account at a mail order firm or online store) that must be repaid within one month;
- credit agreements under which the credit must be repaid within a period of three months and only insignificant costs are charged.
Securities-based credit agreements
Although the Directive allows an exception to be made for securities-based credit agreements, this has not happened in the Netherlands. However, the continuing requirements that apply in relation to such agreements differ in certain areas, such as advertising and the mandatory pre-contractual information, from those that apply in relation to other credit agreements.
In addition, a light-touch regime applies to certain credit agreements. These are:
- overdraft facilities that must be repaid on demand or within a period of three months: fewer rules concerning pre-contractual information and the contents of the credit agreement apply to such facilities;
- credit agreements in the form of overrunning (i.e. a debit balance not explicitly agreed between the creditor and the consumer): only a few rules concerning the contents of the credit agreement apply to overruns.
Mandatory pre-contractual information
Like the Wft, the BW includes a provision to the effect that the Standard European Consumer Credit Information form must be provided to the consumer in good time before the conclusion of a credit agreement.
The credit agreement
Whereas the previous rule was that a credit agreement had to be entered into by means of a private instrument or a notarial instrument signed by or on behalf of all parties, the Act merely provides that a credit agreement must be entered into on paper or another durable medium. This represents a relaxation of the previous rules as now the agreement no longer needs to be signed by both parties. The Act also sets out detailed rules on what information the credit agreement should contain.
Continuing information obligations / Advertising
The Act also provides that the creditor has a number of continuing information obligations. For example, consumers must be informed of a change in the borrowing rate on paper or another durable medium before the change enters into force.
Furthermore, an offeror of credit must include standard information prescribed by the Directive in advertisements concerning credit agreements, if such advertisements indicate an interest rate or give any figures relating to the costs of the credit for the consumer. The information to be included relates to, among other things, the borrowing rate and the costs.
Other private-law provisions
The Act also contains provisions on:
- the termination of credit agreements, and the costs that can be charged in that regard;
- the possibility of early repayment, and the related costs;
- the assignment by the creditor of its rights under a credit agreement;
- the annual percentage rate of charge.
Consumer Credit Act
As a result of the implementation of the Directive, a number of the provisions of the Wck have been repealed. The remaining provisions of the Wck have the same scope as the provisions contained in Title 2A of Book 7 BW, except with respect to securities-based credit agreements and credits with a credit sum exceeding EUR 40,000: these credits are not covered by the Wck. In addition, the Act extends the scope of the Wck, in that the provisions regarding the maximum cost of credit now also apply to credit agreements with a term of less than three months. Previously, such agreements were not covered by the Wck.
The rules in the Wck that remain in force address the following subjects:
- the maximum total cost of the credit to the consumer (in the context of the implementation of the Directive, the Minister of Finance announced that he will investigate whether it is necessary to amend the maximum currently applicable in the Netherlands);
- the nullity of certain contractual provisions, for example those allowing the creditor to unilaterally increase the cost of the credit or otherwise impose more burdensome obligations on the consumer, those obliging the consumer to enter into another agreement (linked sales), and those providing for a right to demand repayment prematurely;
- security rights: the Wck imposes limitations on the creation and enforcement of security rights; and
- rescission (ontbinding): in principle, a credit agreement can only be rescinded by a court.
Transitional rules regarding implementation of the Consumer Credit Directive
The Act contains transitional rules that apply to both the provisions on supervision and the private-law provisions:
- The new provisions on supervision do not apply to credit agreements that were concluded prior to the entry into effect of the Act.
- Likewise, the private-law provisions do not apply to credit agreements that were concluded prior to the entry into effect of the Act, except to a certain extent credit agreements for an indefinite period. These are subject (as from the Act's effective date) to some of the private-law provisions, such as those relating to certain continuing information requirements, termination of a credit agreement and the assignment of rights.
Special rules for debt repayment schemes
While the Act was making its way through the Dutch Parliament, a discussion arose as to whether repayment arrangements entered into with consumers in relation to debts that are already due and payable and do not originate from a credit agreement should be treated as credit. For example: an energy supplier offers a consumer who is in arrears on his/her monthly energy bills an arrangement for paying the arrears in instalments.
As a result of this discussion, the abovementioned explanatory memorandum was supplemented to make clear that the offering of a debt repayment arrangement in normal commercial transactions does not require the party doing so to obtain a licence. The memorandum gave the above situation of an energy supplier as an example of a normal commercial transaction. However, according to the same explanatory memorandum, a debt repayment arrangement will be subject to supervision if excessive charges are imposed. In the interest of clarity, these rules will be laid down in an amendment to the Exemption Regulation Wft (Vrijstellingsregeling Wft). This amendment has not been published yet.
Amendment of Code of Conduct Mortgage Credit
The Code of Conduct on Mortgage Credit is a code of conduct which is endorsed by virtually all mortgage lenders in the Netherlands. The code, which relates to residential property only and not to commercial property, includes provisions on the following subjects:
- the information that must be supplied to consumers;
- the calculation of the mortgage costs;
- the assessment of the mortgagor's borrowing capacity;
- the calculation of the effective interest rate; and
- early repayment of the mortgage loan.
On 1 August 2011, the amended code of conduct will enter into effect. The main changes are as follows:
- The maximum mortgage credit will in principle be fixed at 104% of the property's market value, plus the transfer tax;
- The conditions under which it is possible to deviate from the requirements for assessing creditworthiness will be tightened;
- The redemption-free portion of the mortgage loan will be limited to 50% of the property's market value.
According to the AFM, the amended code of conduct provides a useful clarification of the open-ended norms for responsible lending.
Draft Mortgage Directive
On 31 March 2011 the European Commission published a draft directive on mortgage loans. The directive will, in brief, apply to:
- credit agreements secured by a mortgage or other security interest in residential property;
- credit agreements for the purchase of land or residential property;
- certain types of credit agreements for the renovation of residential property.
The draft directive in principle does not apply to commercial property.
Under the draft directive, many of the requirements imposed on "ordinary" credit agreements in the Consumer Credit Directive (see above) are also imposed on mortgage loans.
The subjects covered by the draft directive include:
- the advertising and marketing of mortgage credit;
- the pre-contractual information that must be provided to clients in a standardised format;
- the calculation of the annual percentage rate of charge;
- the standards for advising clients on mortgage credit;
- the right to early repayment.
The draft directive has been submitted to the European Parliament and the European Council. The relevant committee of the European Parliament is scheduled to accept the draft report for first (or sole) reading on 24 October 2011.
EU consultation on the imposition of interest rate restrictions
The European Commission has held a consultation on the issue of whether the interest rate that may be charged on credit to consumers should be capped at EU level. The consultation period closed on 22 March 2011. Since then a report has been published containing an overview of the feedback received. The prevailing view seems to be that the imposition of a maximum interest rate at EU level is not advisable. Some of the respondents do support the creation of a general framework based on which maximums at national level can be imposed.
In the context of the implementation of the Consumer Credit Directive, the Dutch Minister of Finance has announced his intention to investigate whether the cap currently applicable in the Netherlands should be changed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.