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European Consumer Law
   
Market Transparency I: Doorstep Selling and Consumer Credit



  1. The Aim: Market Transparency
  2. The Doorstep Selling Directive
  3. The Consumer Credit Directive
  4. The reformed Consumer Credit Directive


I. The Aim: Market Transparency

The so-called Doorstep Selling Directive and the Consumer Credit Directive were the first two EC directives addressing consumer contracts. They introduce two instruments, namely information (Consumer Credit) and a right of withdrawal (Doorstep Selling), which can be described as the prime instruments of European consumer protection in contract law, as the combination of these instruments is to be found in a whole number of other directives. It is important to note that both information obligations and the provision of a cooling-off period do not address the content of the contract concluded by the consumer. Instead, the underlying idea is to prevent market failure by enabling consumers to make an informed choice and to account for specific circumstances of the conclusion of the contract, which might have (unreasonably) induced the consumer to enter into the transaction.

The concept that intransparent markets may lead to market failure due to assymetric information was first described by George Akerlof in an article called The Market for 'Lemons' (84 Quarterly Journal of Economics [1970], pp. 488-500), which won him the Nobel Prize in Economic Sciences in the year 2001. Akerlof explained that in a market where consumers are unable to identify 'lemons' (low quality goods) from 'peaches' (high quality goods), the competition would solely take place via the price and eventually lead to a downward spiral in quality.

When assessing information obligations as an instrument of consumer protection, it is important to note that its efficacy depends on the consumers' capacity to actually process the information supplied and to act rationally upon it. Empirical research in the field of information psychology suggests that the quality of decisions does not improve once a certain, relatively low threshold of information has been crossed. Anyone interested should read George A. Miller's article 'The Magical Number Seven, Plus or Minus Two: Some Limits on our Capacity for Processing Information' ([1963] Psychological Review, pp. 81-97). An overview of the existing research is given by Eppler/Mengis in their article A Framework for Information Overload Research in Organizations.

Furthermore, better information will be of limited help to a consumer who has a limited choice in the first place, due to the superior bargaining power of its contractual counterpart. Finally, information obligations and cooling-off-periods may be such a popular instrument of European consumer law since it is oftentimes easier to achieve a political compromise on these matters, rather than regulating the content of a consumer contract. However, the assumption that information and the right to withdrawal is fairly cost-effective for businesses is not always correct, as we will see at a later point in time when we consider the Distance Selling Directive.


II. The Doorstep Selling Directive

Council Directive of 20 December 1985 to protect the consumer in respect of contracts negotiated away from business premises (85/577/EEC)

  • Art. 2 defines the 'consumer' and the 'trader'
  • Art. 1 defines the sphere of application: contracts for the supply of goods or services by a trader to a consumer which were concluded (a) during an excursion organized by the trader away from his business premises, (b) during a visit by a trader to the consumer's home or to that of another consumer, unless the consumer explicitly requested the visit or (c) during a visit by a trader to the consumer's place of work, unless the consumer explicitly requested the visit.
  • Art. 3 provides for a number of exceptions
  • Art. 5 provides that the consumer shall have the right to renounce the effects of his undertaking by sending notice within a period of not less than seven days
  • The period begins to run once the consumer is provided with a written notice of the right of cancellation (cf. Art. 4)
  • The consumer's rights under the directive may not be waived (Art. 6)
  • As follows from Art. 8, the directive aims at minimum harmonization


Important case law

  1. In Dietzinger, the ECJ was asked to clarify whether suretyships were to be considered contracts for the supply of goods and services for the purposes of the directive. In the Court's opinion, suretyships could principally fall under the application sphere of the directive as a consequence of their ancillary nature. However, since 'the directive is designed to protect only consumers, a guarantee comes within the scope of the directive only where, in accordance with the first indent of Article 2, the guarantor has entered into a commitment for a purpose which can be regarded as unconnected with his trade or profession' (para. 22).


  2. In Heininger, the Court held that a loan agreement secured by a German Grundschuld (a real security) is not excluded from the application sphere of the Distance Selling Directive by virtue of its Art. 3(2)(a). The Court further held that it is not in the discretion of the Member States to prescribe a period after which the consumer's right of withdrawal ceases to exist, in cases in which the trader has breached its obligation under Art. 4 of the Directive to inform the consumer of its cancellation right. The Court refused the argument that such a cut-off point is needed for the sake of legal certainty, by finding that 'If credit institutions choose such methods in order to market their services, they can easily safeguard both the interests of consumers and their own requirements as to legal certainty by complying with their duty to supply consumers with information.'


  3. In the cases Schulte and Crailsheimer Volksbank, the Court expounded that

    1. if the contract was concluded in a situation described by Art. 1 of the directive and the negotiations were conducted by a third party on behalf of the trader, it is irrelevant whether the trader was aware of the fact that the contract was concluded in a doorstep-selling situation;


    2. the doorstep selling directive does not preclude the consequence that a consumer who has withdrawn from a credit agreement formed in a doorstep setting must pay back the credit even though the money was used to fund a 'linked transaction' (i.e. the purchase of immovable property);


    3. the doorstep selling directive does not protect the consumer from having to pay back the loan immediately plus interest at the market rate;


    4. 'However, in a situation where, if the Bank had complied with its obligation to inform the consumer of his right of cancellation, the consumer would have been able to avoid exposure to the risks inherent in investments such as those at issue in the main proceedings, Article 4 of the Directive requires Member States to ensure that their legislation protects consumers who have been unable to avoid exposure to such risks, by adopting suitable measures to allow them to avoid bearing the consequences of the materialisation of those risks.'


  4. In Hamilton, the ECJ further held that

    1. incorrect information concerning the exercise of the right of withdrawal is equivalent to a complete failure to provide the information required by Art. 4;


    2. the performance in full by the parties of their obligations under a long-term loan contract causes the right of cancellation to lapse.


    III. The Consumer Credit Directive

    Council Directive of 22 December 1986 for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit (87/102/EEC)

    • Art. 1 contains important definitions; note in particular that the term 'credit agreement' does not only refer to loans, but also includes deferred payments and any similar financial accommodation.
    • important exceptions are listed in Art. 2.
    • Art. 3 stipulates an information obligation even before the negotiations have started (advertising).
    • Art. 6 provides for pre-contractual information.
    • Art. 4 covers what could be termed 'documentation' of the agreement: the consumer is to be issued a copy of the contract in writing, which includes the essential elements of the contract, a statement of the annual percentage rate of charge and a statement of the conditions under which the annual percentage rate of charge may be amended.
    • A community calculation method for the annual percentage of charge is now provided by the Directive 98/7/EC of the European Parliament and of the Council of 16 February 1998 amending Directive 87/102/EEC for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit.
    • In cases of linked transactions, Art. 11 allows the consumer to pursue remedies for late delivery or defective goods not only against the supplier of goods and services, but also against the grantor of credit.


    Important Case Law

    In Berliner Kindl Brauerei AG v Andreas Siepert, the Court held that suretyships are not covered by the Consumer Credit Directive: 'Given the objectives of Directive 87/102, on the other hand, which almost entirely concern the information to be given to the principal debtor regarding the implications of his commitment, and bearing in mind the fact that it is almost devoid of provisions that might afford an effective safeguard to the guarantor - whose primary concern is to have knowledge concerning the solvency of the principal debtor in order to assess the likelihood of being called upon to repay the credit granted - that directive must be regarded as not being designed to apply to contracts of guarantee.' (para. 25)


    IV. Reform of the Consumer Credit Directive

    An analysis of the national laws implementing the Consumer Credit Directive shows that the harmonisation effect is minimal and there are still major differences in the laws of the Member States regarding consumer credit. Thus, in 2008 the     Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC was passed. Member States are to implement the new provisions until 12 May 2010.

    Overview of the most important changes:
    • Art. 2(2): excluded from the scope of the Directive are (amongst others): credits below 200 and above 75.000 EUR; credits secured by mortgages and similar securities; credits intended for the acquisition of real estate.
    • Art. 4 calls for more specific standard information to be included in advertising.
    • Art. 5 and 6 prescribe extensive pre-contractual information on a durable medium. This information is to be provided on a Standard European Consumer Credit Information form as set out in Annex II of the Directive in order to empower consumers to truely compare between competitors.
    • Art. 10 requires extensive information to be included in credit agreements on a durable medium.
    • Art. 11 and 12 set forth information obligations during the course of the performance of the credit agreement.
    • Art. 14 introduces a right of withdrawal within 14 days of the conclusion of the contract or the reception of the contractual information as required by Art. 10.
    • The Directive calls for "responsible lending”: Obligation to assess the creditworthiness of the consumer (Art. 8) and improved circulation of solvency data across borders, Art. 9.
    • Obligations of credit intermediaries are addressed in Art. 21.
    • Art. 19 provides for a further harmonisation of the calculation of the annual percentage rate (APR).
    • The new Directive is geared at full / maximum harmonization.