13 April 2022

Finance Watch: With inflation, unregulated financial products will harm the vulnerable even more. Unless…

There are a number of EU retail financial services files either currently under review or in the pipeline of being reviewed in 2022. It is key that these reviews ensure that consumers, and in particular the vulnerable, are adequately protected.

EU consumers are increasingly feeling the impact of the inflationary pressures stemming from rising energy and food prices on their everyday lives as they are witnessing a sharp decline in their disposable income and with it their living standards.

This development, also known as the cost of living crisis, already started before the Russian invasion of Ukraine but has now massively accelerated. Recent statistics from Eurostat show that annual inflation is expected to be 7.5% in March 2022, up from 5.9% in February. Among the largest EU member states, inflation in Germany was up 7.6 percent, in France 5.1 percent, in Italy 7.0 percent and in Spain 9.8 percent.

Record consumer borrowing, increased recourse to crypto assets

With households’ disposable income decreasing, consumers are likely to increasingly look in the financial services market for products allowing them to maintain their standard of living and pay off bills they are no longer able to afford. One of the products likely sought is consumer credit. Statistics show, for example, that consumers in the UK borrowed a net £1.5bn on credit cards in February, the highest monthly amount since records began in 1993. Total consumer credit in the UK now stands at £1.9bn net which is the highest level in five years.

A fall in household disposable income and purchasing power could also make innovative and sometimes unregulated retail investment products more enticing for consumers looking for quick and high returns to boost their income levels. In recent times, for example, consumers have turned to crypto assets. These products are largely unregulated and have been aggressively advertised on social media, including with the use of social media ‘influencers’, promising consumers fast and high returns.

EU retail financial services regulation: our key recommendations

This development makes the need for robust consumer protection measures in retail financial services regulation more important than ever. Regulation is vital to ensure that consumers are protected from taking out a financial service which does not help alleviate their financial difficulties and meet their needs but makes their financial situation even worse. There are a number of EU retail financial services files either currently under review or in the pipeline of being reviewed in 2022. It is key that these reviews ensure that consumers, and in particular the vulnerable, are adequately protected.

The Consumer Credit Directive (CCD)

The Consumer Credit Directive (CCD), the EU directive regulating the EU consumer credit market, is currently undergoing a review. With the increase of consumers seeking debt to finance their livelihoods, it is absolutely essential that the directive protects vulnerable consumers.

Lower income consumers are the ones the most impacted by the current cost of living crisis. As highlighted in a recent Finance Watch study on the EU consumer credit market, this consumer group is most likely to purchase new and unregulated credit products which are of small value. These products, however, are the riskiest as they are associated with high costs and fees, especially in relation to the low incomes of vulnerable consumers. To avoid these consumers falling into a situation where their economic burden gets even worse, instead of better, it is absolutely essential that these new credit products are brought into scope of the CCD.

Likewise, it is essential that the key provisions of the directive are fully applied to these new credit products. For example, the most effective tool to avoid mis-selling of loans are creditworthiness assessments. These assessments check if someone is able to afford a loan in the first place. These checks can only be effective, however, if creditors make a proper evaluation of the consumer’s household budget which includes income, essential expenditures as well as outstanding debts of the household. Not making a thorough assessment bears the risk that a consumer is sold a loan which he or she is unable to afford, leading to a worsening financial situation for the consumer or even over-indebtedness. Therefore, it is key that the full creditworthiness assessment rules of the CCD are applied to these new loans and that the rules are sufficiently robust.

The Distance Marketing of Consumer Financial Services Directive (DMFSD)

Another key retail financial services directive under review this year is the Distance Marketing of Consumer Financial Services Directive (DMFSD). The DMFSD provides two key functions. For one, it regulates all types of retail financial products and  acts as a safety net providing consumer protection for new products coming onto the market that are not (yet) covered by product-specific legislation. Secondly, it fills regulatory gaps that exist in current product-specific legislation....

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