Mariana Marques (Master's student in European Union Law at the School of Law of the University of Minho)
Introduction
In practice, financial institutions often grant credit without analysing the consumer’s creditworthiness. In most cases, credit is granted without analysing any variant that could compromise the borrowers’ financial capacity – and this is particularly prevalent in the granting of credit cards. Thus, any individual can obtain a credit card from most organisations without having to provide essential data, such as their salary slip, for example. Without prejudice to the consumer’s responsibility to take out credit that is appropriate to their income, would consumer credit institutions not have any duty in this regard?
On 11 January 2024,[1] the Court of Justice of the European Union (CJEU) handed down a ruling in which it clarified the duty to analyse the consumer’s creditworthiness –imposed on financial institutions before granting consumer credit. This pre-contractual duty, which is often (and unduly) brushed aside by the entities responsible for it, has been the subject of important developments in the new law governing consumer credit – Directive 2023/2225 of 18 October 2023.
This obligation imposed on financial institutions aims to fulfil the objective of increased consumer protection, as they are the weakest party in the contractual relationship.[2] The aim is therefore to combat indebtedness and over-indebtedness, which are increasingly common and very damaging to consumers, credit institutions and, ultimately, the state. To this end, the European Union (EU) has been legislating to protect consumers at the pre-contractual stage, in order to prevent irresponsible lending.
However, it is not enough to stipulate the duties of financial organisations for them to actually comply with them, since sufficiently dissuasive, appropriate and proportionate sanctions must be defined. To this end, the aim of this article is to analyse the rules applicable in the EU regarding consumer protection in the credit market – and, in particular, the duty to analyse creditworthiness – as well as to assess whether the actions of credit institutions in Portugal would be compatible with European standards regarding the responsible granting of consumer credit.
Specific legislation on consumer credit: process evolution
Even before the creation of the Economic and Monetary Union (EMU), the project for which came from the Delors Commission (1988-1989), Directive 87/102/EEC was introduced on 22 December 1986,[3] the aim of which was to harmonise the legislation of the various Member States on consumer credit rules. This was a bold purpose, since in order to protect consumers’ economic interests, it was crucial to harmonise general credit conditions and pass on all information relating to credit to the borrower.
However, it turned out that differences persisted in this area between the laws of the Member States.[4] This disparity could lead to discrimination against certain citizens to the detriment of others, as it posed obstacles to the internal market. As a result, access to cross-border credit was very difficult.
Furthermore, due to the increase in the amount of credit granted to consumers, the problem of indebtedness became alarming.[5] The European Commission therefore proposed an adaptation and, taking into account the position of the European Economic and Social Committee,[6] the European Parliament and the Council of the European Union approved Directive 2008/48/EC on 23 April 2008.
The primary objective of this directive was to harmonise the assignment of credit in the various Member States, allowing for an effective internal credit market. Thus, Member States were tasked to adapt their internal legislation with the aim of achieving harmonisation and, on the other hand, had a (negative) obligation to refrain from adopting new provisions beyond what was provided for in the mentioned directive.[7] This directive already foresaw the need to protect consumers from abuses by credit institutions.
It is also important to emphasise that it was crucial for credit institutions to check the creditworthiness of consumers, in order to prevent irresponsible lending that will lead to default. This directive was transposed into Portuguese law by Decree-Law no. 133/2009, of 2 June.[8]
Current scenario: (EU) Directive 2023/2225
The efforts made by the previously mentioned legislation, although valid and important, proved to be insufficient, given the possibility they left to the Member States to adopt divergent provisions, thus failing to materialise the internal credit market.
This legislative discrepancy jeopardised the internal market, since the conditions for access to credit were not the same for all EU citizens.[9] As a result, there was a need to change this situation and Directive 2023/2225 of 18 October 2023 came into being.[10]
The main objective of the new Consumer Credit Directive is to increase the transparency and security of the EU credit market, taking into account the current social landscape. This objective emphasises the relevant role of European citizenship in the current context of the Union, with the citizen as the main protagonist.[11] To this end, it prioritises correct, clear and precise information for consumers on behalf of credit institutions in regard to the contractual conditions established in credit agreements.
In this way, consumers will be able to make informed decisions about their budget management, preventing unawareness which, as a result, usually leads to non-fulfilment of contractual obligations. With the introduction of the new Consumer Credit Directive, the range of its application has been extended to cover, for example, smaller credit agreements, the amount of which is less than 200 euros. Consumers are also protected in relation to credit contracts without any charges.
It should be noted, however, that the rules contained in this directive must be properly transposed into the national legislation of the Member States by 25 November 2025, thereby allowing them plenty of time to adapt. However, until that date, the directive it is intended to replace – Directive 2008/48/EC –, will continue to apply as the basis for consumer credit contracts.
The aim of the new directive, as set out in Article 1, is to harmonise the laws of the Member States in relation to credit agreements. This directive improves the duty to provide information to the consumer, as well as implementing a ban on advertising that is intended to lure consumers into taking out a loan by appealing to them to improve their financial situation.
This prohibition is designed to prevent consumers from taking out credit without there being a real need to do so, thus protecting the weakest party in this contractual relationship.[12] In addition, all advertising for credit products must not be misleading and must include a warning of the risks and costs involved in concluding a credit agreement.[13]
In conclusion, the mandatory information that must be publicised represents, as far as possible, all the characteristics of the credit agreement that may be granted by the creditor.[14]
Solvency analysis
Analysing the creditworthiness of consumers is crucial in order to comply with the principle of responsible credit[15] and this is the responsibility of credit providers, as a rule.[16]
This principle implies that credit institutions analyse the capacity of consumers and emphasises the transmission of truthful and clear information between the parties, defending the weaker party in this contractual relationship.[17]
It is essential that credit institutions do not sign credit agreements without assessing whether the credit is safe, responsible and affordable for the consumer. On the other hand, it is the responsibility of the Member States to supervise credit providers in order to prevent such irresponsible lending from taking place.
This duty has two levels of protection, that is, the individual level, to the extent that it aims to protect the consumer by preventing irresponsible lending, which will lead to non-compliance with contractual responsibilities and, on the other hand, the general level, to the extent that it prevents serious damage to financial organisations.[18] If credit institutions fail to effectively analyse the solvency of each consumer, individually and on a case-by-case basis, Member States are obliged to adopt the sanctions they deem necessary to punish such inactivity.[19]
This need, which is fundamental for consumer protection, is further emphasised in the new directive. Thus, it is noted that the solvency analysis is carried out in the interests of the consumer, in order to avoid situations of over-indebtedness, which have become increasingly frequent.[20] In order to study the consumer’s creditworthiness, personal economic and financial factors must be taken into account, [21] in order to analyse whether the consumer is expected to be successful in fulfilling the credit agreement in question.[22]
Once this has been done, credit should only be granted to consumers who actually have the financial capacity to fulfil the contract. In order for the analysis of the consumer’s creditworthiness to cover all the relevant factors, the creditor should also check credit databases to find out whether the consumer has taken out credit with other organisations, under what terms and whether there have been any defaults. Based on common sense, it would not be beneficial to enter into a new credit agreement with a consumer who already has a large part of their monthly budget allocated to paying off similar obligations. However, the assessment of creditworthiness cannot be based solely on the consumer’s credit “record”.[23]
It should be noted that consumers are not free of duties, since they have the obligation to make diligent and well-founded decisions. In addition, they are committed to always providing truthful information, especially when it does not exist in databases that are suitable for this purpose.
In summary, the new directive reinforces the need to inform consumers correctly, as well as to analyse their creditworthiness, so that loans are taken out rationally and responsibly, with the aim of avoiding non-compliance.
Non-compliance by credit institutions
It amounts to credit institutions[24] carrying out analyses of consumers’ creditworthiness in order to protect them from the risks of over-indebtedness and insolvency. According to the CJEU, this obligation helps to ensure that all consumers in the Union are on the same level when it comes to defending their rights, as well as enabling the internal consumer credit market to be effective.[25]
If credit institutions fail to analyse the consumer’s creditworthiness, it is up to the Member States to verify this non-compliance and penalise it appropriately in order to safeguard the consumer, without prejudice to the consumer’s duty to make rational and well-founded decisions.[26]
The sanctions applied by the Member States must be dissuasive, to the extent that financial institutions feel compelled to fulfil their duty. If, in practice, the sanction established at national level is not applied or its application has irrelevant effects, then it will not have a preventive character.[27]
The CJEU recently emphasised[28] that if the financial institution has not fulfilled its duty to analyse the consumer’s creditworthiness, and even if the contract has been fulfilled in full and without any prejudice to the borrower, the penalty still deserves to be applied.
It should be noted that in the Portuguese legal system, the sanction for non-compliance of this type can be found in Article 30 of Decree-Law no. 133/2009, which only indicates an administrative penalty. Now, since the CJEU has considered[29] that the sanction of nullity of the credit agreement, accompanied by the consumer’s obligation only to return the principal to the creditor, is adequate and dissuasive, it seems to us, through a comparative analysis, that the sanction provided for in our legal system is not.
Conclusion
In view of the current social situation, it is necessary to avoid irresponsible credit, since it contributes greatly to the economic and financial crisis. Therefore, in addition to stipulating ex post solutions, such as personal insolvency, preventive solutions must be rethought and strengthened to avoid situations of consumer indebtedness and over-indebtedness.[30] Furthermore, this will not be enough if there is no effective supervision of the actions of credit institutions by the competent bodies.
However, in practice, violations of the obligation to analyse consumers’ creditworthiness are frequent and we therefore believe it is necessary to strengthen monitoring, otherwise there will be an exponential increase in situations where consumers default on credit agreements because they do not have the financial capacity to fulfil them.
On the other hand, even if this control does exist, it must be matched by a sanction to dissuade institutions from fulfilling their duty. However, we realise that in Portugal there is (for the time being) only an administrative sanction in place for non-compliance with the obligations imposed on financial institutions. We therefore question whether this sanction is a sufficient dissuasive measure, in accordance with the CJEU’s judgment.[31]
[1] Judgment Nárokuj s.r.o. v EC Financial Services, a.s., 11 January 2024, case C‑755/22, ECLI:EU:C:2024:10.
[2] See, regarding the state of vulnerability of the consumer, Sandra Passinhas, “O lugar da vulnerabilidade no Direito do Consumidor português”, in Estudos de Direito do Consumidor, ed. António Monteiro (Coimbra: Centro de Direito do Consumo; Faculdade de Direito da Universidade de Coimbra, 2019), 258.
[3] JO L 42 de 12.2.1987, 48.
[4] This information can be found in the Commission’s 1995 and 1996 reports on the application of Directive 87/102/EEC, available at https://www.europarl.europa.eu/doceo/document/A-4-1997-0010_PT.html and accessed on 23.12.2023.
[5] This idea stems from the Opinion of the Committee on the Environment, Public Health and Consumer Protection, annexed to the Report of the Committee on Legal Affairs and the Citizen on the European Commission report on the application of Directive 87/102/EEC (COM(95)0117 – C4 – 0185/95, 25.
[6] JO C 234, 30.9.2003.
[7] As stated in Recital 9 of Directive 2008/48/EC, L 133 67.
[8] Updated by Law no. 57/2020 of 28 August.
[9] Recital 6 of Directive 2023/2225.
[10] This Directive was driven by the New Consumer Agenda (13 November 2020, Brussels, COM(2020) 696 final), which emerged in the aftermath of the COVID-19 pandemic, which highlighted weaknesses in the protection of consumer interests. This document is available at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52020DC0696 and was accessed on 24-01-2024.
[11] Pedro Madeira Froufe/José Caramelo Gomes, Mercado interno e concorrência, Alessandra Silveira/ Mariana Canotilho/Pedro Madeira Froufe (edos.), Direito da União Europeia. Elementos de Direito e Políticas da União (Edições Almedina, 2006), 460-461.
[12] Unfair and misleading behaviour by companies is already regulated by Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005, available at https://eur-lex.europa.eu/legal-content/PT/TXT/?uri=celex%3A32005L0029 and accessed on 28-12-2023.
[13] Article 7 and Article 8(7)(a) of the CCC II.
[14] It should also be noted that although the previous Directive already stipulated the duty to provide pre-contractual information, this has been densified by the new law, changing the provision of the standardised information sheet (FIN).
[15] This principle was first enshrined in the Commission’s 2002 proposal for a Directive (available at https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2002:0443:FIN:PT:PDF and accessed on 23-01-2024) and determines that the creditor is obliged to analyse the consumer’s financial capacity in centralised databases in order to assess whether or not they are capable of taking out the credit responsibly.
[16] Notwithstanding the provisions on credit risk, which are laid down in Directive 2013/36/EU of the European Parliament and of the Council on access to the activity of credit institutions and the prudential supervision of credit institutions, OJ L 176, 27.6.2013, 338-436.
[17] See Cláudia Cristina Moreira Salazar, “Crédito responsável e dever de avaliação da solvabilidade do consumidor”, (Master’s diss., Universidade Católica Portuguesa, 2012), 17.
[18] José Engrácia Antunes, “Dos contratos de consume em especial”, Revista da Ordem dos Advogados, I-II (2018): 175, available at https://portal.oa.pt/media/130213/jose-engracia-antunes_roa_i_ii-2018-revista-da-ordem-dos-advogados.pdf.
[19] This idea is present in both directives, in recital 26 of Directive 2008/48/EC and recital 53 of Directive 2023/2225.
[20] As can be seen from Article 18 of the DCD II, which is part of Chapter V: assessment of solvency and access to the database.
[21] Respecting the principle of data minimisation enshrined in the General Data Protection Regulation (GDPR), Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016.
[22] The new directive, taking into account the social evolution that has taken place, also provides for the possibility of the analysis being carried out using artificial intelligence, in recital 56 and Article 18(8).
[23] As is stated in Article 18(11) of the new directive.
[24] Credit institutions correspond to the credit grantor and, for the purposes of this directive, correspond to natural or legal persons who, within the scope of their commercial or professional competences, grant or promise to grant a consumer credit, as stated in Article 3(2) of Directive 2023/2225.
[25] This idea can be found in the Radlinger and Radlingerová judgment, 21 April 2016, case C-377/14, EU:C:2016:283, recital 61.
[26] As stated in recital 53 of Directive 2023/2225.
[27] In this regard, see judgment Home Credit Slovakia, 9 November 2016, case C-42/15, EU:C:2016:842, recital 62.
[28] Judgment Nárokuj s.r.o. v EC Financial Services, a.s., 11 January 2024, Case C-755/22, ECLI:EU:C:2024:10.
[29] Judgment OPR-Finance, recital 30.
[30] See Jorge Morais Carvalho, Manual de Direito do Consumo, 7th edition (Almedina, 2020), 439.
[31] It is worth mentioning that there is no record of these administrative offences being applied to credit institutions.
Picture credits: by Cottonbro Studio on Pexels.com.
