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EUOBSERVER / BRUSSELS - A draft EU law designed to reduce differences between 27 different sets of national consumer credit rules is heading for a crucial test in the European Parliament, with MEPs giving the proposal a mixed reaction.
On Friday (11 January), EU capitals struck a deal with three of the parliament's major groups - the Socialists, the Liberals and the Greens.
But centre-right MEPs have refused to back the legislative changes as they believe the bill will increase red tape and costs, according to German conservative MEP Kurt Lechner, who is in charge of the dossier in the parliament.
"The regulations will become much more bureaucratic in some member states, and this is of no advantage for the consumer," Mr Lechner told EUobserver, underlining that it will be the consumer who will ultimately bear any additional costs.
The main controversy has centred around the lender's right to demand compensation when a consumer decides to pay off their loan earlier than previously agreed in the contract.
In principle, the financial institution should be allowed to determine the level of compensation, although two ceilings will be introduced, depending on the period of time left until the normal termination of the credit agreement.
If this period of time exceeds one year, the bank can charge no more than one percent of the amount being repaid. If the period is shorter than a year, compensation should not be higher than 0.5 percent of the repaid amount.
"The compensation cannot be used as a punitive charge, which would discourage the consumer to switch to a better choice," the commission's spokesperson told EUobserver.
But due to opposition among MEPs advocating for greater flexibility on the side of the lender, EU capitals agreed to a watered down version, introducing the possibility of lifting the caps.
"It should be possible for the banks to require greater compensation than 0.5 or 1 percent if a bank can demonstrate that it suffered greater injury," said Dirk Staudenmayer of the commission's directorate general for health and consumer affairs, regarding the compromise on Monday (14 January).
He stressed it would be "up to an individual member state" to introduce this into its national legislation. The compromise agreement also sets out in detail how to transparently calculate the loss suffered by a bank.
What else is in the consumer credit directive?
The consumer credit market in the EU is worth over €800 billion, but direct cross-border credit transactions represent less than one percent of the total volume due to differences in national legislation.
In order to boost the European market, the creditor will be obliged to provide its clients with standardised information, so they can compare offers more easily.
In addition, the annual percentage rate of charge, a single figure representing the costs of the credit, should be calculated in the same way.
The directive also sets out the right to withdraw from the arrangement, a new feature for almost half of the EU member states.
In practice, consumers will be able to switch to another creditor within 14 days without having to give any reason and without any charge.
According to Mr Staudenmayer, the changes envisaged by the EU draft bill are "the first step" towards the internal market in retail financial services.
EU lawmakers are to vote on the consumer credit law on Wednesday (16 January), with the deal between EU governments and the three groups making it likely that the controversial bill will be passed.
But still the European Commission has hesitated in expressing full confidence in the outcome, with its spokesperson noting "there has been massive bank lobbying."
She also pointed to the fact that the consumer credit directive was tabled by the EU's executive body in 2002 and has suffered several blows since then.