European regulators are targeting lenders as they look to protect consumers from excessive debt.
In various guises across the continent, borrowing is on the rise. For example, earlier this month the Bank of England reported that British consumers borrowed an additional 1.5 billion pounds ($1.8 billion) in consumer credit — driven by an additional 1.2 billion pounds in credit card borrowing — above the 0.7 billion pounds borrowed in October.
In fact, figures from last November marked a new record for the U.K., with more credit card debt accrued in a single month than ever before.
After months of inflation outpacing wage growth across the continent, lenders began to act with more hesitancy in the fall of 2022, weary of the looming threat of borrowers defaulting.
As a result, the European Central Bank has reported that in the third quarter of 2022, the terms and conditions applied by banks when granting consumer credit tightened, with 22% of lenders reporting that they had introduced more stringent loan criteria versus just 11% in the previous quarter.
Lending Practices Under the Spotlight
While banks’ more measured approach to lending is probably a smart decision given the current macroeconomic uncertainty, the danger is that it creates room for predatory lenders to step in and fill the gap.
To hedge against this and protect consumers from taking on unsustainable debt, the EU recently reached a provisional agreement on new rules intended to prevent over-indebtedness. These include measures to ensure consumers can’t be charged excessive interest rates, annual rates, or charges on loans or the total cost of credit.
The new rules will also ban advertisements that encourage consumers to seek credit by suggesting it would improve their financial situation or raise their living standards.
They will also enshrine the right to withdraw from a loan agreement without any reason within 14 days, and the right to early repayment and any associated reduction in total costs.
Regulators in the U.K. are also moving to enhance consumer protections.
The Financial Conduct Authority (FCA) is in the process of introducing the Consumer Duty, a cornerstone of its strategy to set higher consumer protection standards for financial institutions.
Ahead of new standards coming into effect in six months’ time, the financial regulator highlighted this month areas of focus it would like firms to prioritize following its review of the implementation so far.
In its assessment of how businesses are preparing for the Consumer Duty, the regulator warned that “some firms are further behind in their planning, so there is a risk that they may struggle to apply the Duty effectively once the rules come into force.”
Specifically, the regulator has asked firms to accelerate the speed with which they are communicating changes to their customers and has asked them to step up their efforts to work together on consumer protection issues.
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