The SAFE Regulatory Radar in December

At the end of each month, the SAFE Regulatory Radar highlights a selection of important news and developments on financial regulation at the national and EU level.

CCD II: Revised directive for more consumer protection

Lenders will have to follow stricter pre-contractual information requirements and creditworthiness as-sessment criteria when granting consumer credits of up to 100,000 euros. On 2 December 2022, the Council of the European Union (EU) and the European Parliament reached a provisional agreement on the legislative proposal for a revised Consumer Credit Directive (CCD II). The CCD II expands the scope of the original Consumer Credit Directive to account for loans below 200 euros, potentially harmful products (e.g., high-cost short-term credits), and digital lending channels (e.g. crowdfunding platforms), thus complementing the crowdfunding regulation. The proposed directive is embedded in the Commission’s new consumer agenda to ensure that clients are well-informed and creditworthy before concluding credit agreements. Aiming to reduce the risk of mis-selling and over-indebtedness, the provisional political agreement obliges creditors

• to stop communicating that credits can increase financial resources, substitute for savings, or raise their living standards, 
• to prominently warn that borrowing is costly,  
• to allow withdrawals from credit agreements within two weeks after conclusion without any reason,
• to stop charging excessive interest rates, annual rates, charges on loans, or the total cost of credit,
• to disregard cancer diseases after a certain period if credits must be insured,
• to enable the repayment of credit before its maturity and at clear conditions, 
• to assist in case of difficulties with repayment at a charge no higher than necessary to compen-sate for costs resulting from a default, and
• to verify that credit obligations can be met by customers. 

If automated decision-making systems are involved in evaluating creditworthiness, consumers have the right to obtain human intervention from the creditor, to contest the evaluation, and to receive a meaningful explanation. The credit assessment shall be solely based on accurate and proportionate information about the financial and economic situation of the consumer, excluding personal data (e.g., from social media). 

The amount of financial data being shared may indeed be significant for the lending decision. Latest SAFE insights indicate that transmitting additional consumer information (e.g., bank account data) increases the chance of loan approval (particularly for borrowers with lower credit scores) and reduc-es interest rates (particularly for borrowers with higher credit scores). Asidefrom financial inclusion, accessing and assessing data may foster discrimination and therefore require new principles of fair lending, as outlined in another SAFE Working Paper.

Overall, the proposed CCD II will not only affect bank creditors but also non-bank creditors and credit intermediaries (excluding micro-enterprises and small- and medium-sized enterprises) which must now be admitted, registered, and supervised by national authorities. Before going through the formal adop-tion procedure, the Internal Market and Consumer Protection Committee, the European Parliament, and ultimately the Council must approve the outlined deal.

Additionally, creditors recently received official guidance from the European Banking Authority (EBA) on how to implement sound customer due diligence processes for online credit applications to pre-vent anti-money laundering and terrorist financing.

CRR and UCITSD: amendments to reduce dependencies from third-country central counterparties

European central counterparties (CCPs) may be able to provide more transparent, tailored and faster clearing services. On 7 December 2022, the European Commission proposed two packages of regulatory amendments: The first package aims at amending the European Market Infrastructure Regulation (EMIR), the Capital Requirements Regulation (CRR), and the Money Market Funds Regulation (MMFR), whereas the second package foresees to modify the Capital Requirements Directive (CRD), the Investment Firms Directive (IFD), and the Undertakings for Collective Investment in Transferable Securities Directive (UCITSD). Both packages have been submitted to the European Parliament and Council for adoption. 

They aim at reducing the critical dependence of European financial market participants on some ser-vices provided by certain third-country CCPs, leading to significant financial stability risks. The limited international attractiveness of European CCPs results from clearing-related problems on the supply side (e.g., excessive compliance costs, lack of capacity) and on the demand side (e.g., limited liquidity, network effects favoring concentration), accompanied by cross-border risks. The European Commission thus strives

• to improve the ability of European CCPs to quicker adopt to changes in market demand,
• to encourage clearing in European CCPs, and
• to address gaps in the way cross-border risk is assessed and managed in the EU.

Therefore, the proposals foresee measures  

• to simplify and shorten procedures for changing risk models, launching new products and revising the hedging criteria, 
• to require clearing members and clients to keep an active account at European CCPs, to improve the transparency of margin models, and to consider public and private guarantees as eligible collateral, and   
• to enhance the existing supervisory framework through a greater consideration of the impacts of intraday margin calls and a greater focus on avoiding procyclical collateral haircuts,

among other things. These amendments are developed to promote the Capital Markets Union (CMU). Its completion requires institutional modifications, as outlined in a SAFE Policy Letter, as well as safe, robust and attractive European clearing services. However, the European Commission sees well-functioning European clearing services to be endangered by an ongoing dominance of British CCPs for certain trades, even after Brexit. 

Regulatory consequences of Britain’s withdrawal from the EU are also the subject of the peer review report that the European Securities and Markets Authority (ESMA) published on 8 December 2022. In its analysis, ESMA focuses on the handling of a firm’s relocation to the EU by national competent authorities to achieve greater convergence at the supranational level on the application of the risk-based approach, the proportionality principle, and delegation arrangements. 

Carl-Georg Luft is a research assistant at the SAFE Policy Center.

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