Report on the Operation of Directive 90/88
COMMISSION OF THE EUROPEAN COMMUNITIES Brussels, l2. U4. iyyo COM(96) 79 final 96/0055 (COD) Report on the Operation of Directive 90/88 Proposal for a EUROPEAN PARLIAMENT AND COUNCIL DIRECTIVE amending Directives 87/102 (as amended by Directive 90/88) for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit (presented by the Commission) I. II Introduction and Summary » The mathematical formula in Directive 90/88/EEC 1. 2. 3. 4. Simple interest rate calculation Yearly Compounded Interest The 1 year compounding period: The EC formula a) b) Present Value Summing up different calculations: the E symbol 1 5 6 7 8 10 11 11 III The calculation of the Annual Percentage Rate of Charge in the EC 13 and the other members of the EEA 1. 2. 3. General Observations a) b) Interest and the Annual Percentage Rate of Charge Verbal Definitions of the Annual Percentage Rate of Charge The Application of the EC formula The calculation of the Annual Percentage Rate of Charge in Germany and France a) b) c) The German method The French method Comparison of the EC formula and the German and French methods 4. Arguments in favour of the EC formula IV. Elements of Cost to be included in the calculation a) b) Elements of Cost Situation in the Member States V. Other issues 1. 2. 3. The Denomination of the Annual Percentage Rate of Charge Accuracy Time definitions VI. Conclusions and Recommendations Annexes: 13 13 14 15 17 17 19 21 23 25 25 25 32 32 35 36 38 I II III Articles 1 and 1a of Directive 87/102 (as amended by Directive 90/88)40 42 National legislation transposing Directive 90/88 47 The different formulae in use (German, French, Finnish) /fn I. Introduction and Summary On 22 February 1990, the Council adopted Directive 90/88 amending regulations and 1. Directive 87/102 administrative provisions of the Member States concerning consumer credit". This Directive entered into force on 31 December 1992. the approximation of laws, "for the 2. Pursuant to Article 1a5b of the amended Directive, the Commission must: "submit to the Council a report, accompanied by a proposal, which will make it possible in the light of experience, to apply a single Community mathematical rate of charge". the annual percentage for calculating formula Pursuant to Article 1a(5)(c), the Council shall "acting by a qualified majority on the basis of the proposal from the Commission, take a decision before 1 January 1996". Background1 for The first Consumer Credit Directive, Directive 87/102/EEC the 3. approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit2, introduced the principle that a the calculation of the "annual uniform method should be established percentage rate of charge". Although the principle was established, the method was left open. Following discussions with government experts, the Commission presented a proposal for a Directive3, later amended4, to regulate not only the mathematical aspect but also the elements to be included in the calculation. Directive 90/88 was adopted by the Council on 22 February 1990. The Directive introduced a Community method of calculating the "annual percentage rate of charge" for consumer credit and defined the credit cost items to be used in the calculation by indicating those costs which were not to be taken into account5. for All Member States were to ensure, at least, that only one mathematical 4. formula for the calculation of the "annual percentage rate of charge" was in use in their territory. For a transitional period until 1 January 1996, those Member States which used a different mathematical formula for the calculation of the "annual percentage rate of charge" (prior to 1 March 1990) were permitted to continue to do so. For further detail on the background to Directives 87/102 and 90/88, see Chapter 2 of the Report on the application of Directive 87/102: COM(95)117 of 11. 05. 95 OJ L 42 of 12. 2. 87, p. 48 OJ C 155 14. 6. 88 p. 10 4 OJ C 155 23. 06. 89 p. 4 Recital 3, Directive 90/88 5. Directive 90/83 was incorporated into the Agreement on the European Economic Area (EEA) and this Report therefore covers Iceland, Liechtenstein and Norway as well as the 15 members of the European Union. 6. Pursuant to the obligation in Article 1a(5)(b) on the Commission to present to the Council "a Report, accompanied by a proposal" which will make it possible to definitely apply a single Community mathematical formula for calculating the "annual percentage rate of charge", the Commision hired a consultant expert in financial mathematics to carry out a study of the application of Directive 90/88 in the Member States of the European Community and other members of the EEA6. Meetings and contacts with government experts also took place between April 1995 and January 1996. On the basis of the results of the above study, other studies of the transposition of the Directive into domestic law7, and particularly the results of contacts with governmental experts, the Commission presents the present Report which is accompanied by a proposal for a Directive8 which will "make it possible, in the light of experience, to apply a single Community mathematical the annual percentage rate of charge". for calculating formula 7. While the Directive requires an evaluation and a report which ". will make it possible, in the light of experience, to apply a single Community mathematical formula. ", this requires an examination of other issues than the mathematical formula alone, in order to define a uniform application of the formula. Conclusions of the Report9 8. Transposition of the Directive has been completed in the majority of Member States of the European Community and other members of the EEA. The formula contained in Annex II of the Directive is presently in use in all Member States of the European Community and other members of the EEA, with the exception of Germany, France10 and Finland. Study of the method of calculation of APR in EEA States, Contract A0 2600/94/000101. Available at DG XXIV. See footnote 3 of COM(95)117, Report on the operation of Directive 87/102/EEC on the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit While the term 'Decision' is used in Article 1a5c, this is not a 'Decision' as defined by Article 189 of the Treaty but rather, since its objective would be to require Member States to change their in the Explanatory Memorandum which accompanies the proposal for a Directive. This is further explained laws, a Directive. 9 10 Chapter VI infra See Annex II of this document 9. Concerning the verbal definition of the "annual percentage rate of charge" (APR), some linguistic amendments are required to the English and Greek language versions of Article 1a(1)(a). Although following the transposition of the Directive by the Member States, 10. the elements included in the term are not totally identical, such identity would in fact be desirable for reasons of transparency. However, bearing in mind that much effort has been expended in communicating to consumers the meaning of the terms presently used in each Member State, it does not seem appropriate to propose a change in the wording used in the different languages. Nevertheless, it is desirable that a common feature be included in order to enable consumers, terms as being particularly equivalent to those in use in their own Member States. Following discussions with government experts, and in accordance with the principles of proportionality and subsidiarity, it is proposed that the use of a symbol in addition to the existing term will be required. This symbol will be identical in each Member State. This will not constitute a change in the language of the term and will only involve a small additional cost for transposition. in crossborder situations, to recognise these 11. As far as the mathematical formula is concerned, it has been confirmed that the formula in Directive 90/88 is the only correct formula and it is therefore recommended that it should be retained and made definitely general throughout the Member States of the European Community and the other members of the EEA. As regards the the elements of cost which should be 12. calculation of the annual percentage rate of charge, the transposition of the Directive has led to a situation where there is a harmonised minimum level of protection for all consumers throughout the European Community and the other their members of the EEA. As Member States report few problems with operation, and as any differences that do result are minimal in nature, it is not proposed to amend the list of exemptions in Article 1a(2) at this time. included in 13. Accordingly, a draft Directive is proposed at the same time as this Report, dealing with the following amendments to Directive 90/88: the requirement to use, in addition to the term "annual percentage rate of charge", a common logo (symbol) which will be identical in each Member State the deletion of Article 1a(5) in order to remove the transitional measure and this Report and associated to the legislative proposal the deletion of Article 1a(3) as this measure has not been availed of by any Member State11 references 11 No objections were received from Member States to this proposal at the meeting in April 1995 (paragraph 6 supra) or since. the insertion in Annex II of the Directive of a requirement to use accuracy to two decimal places - and any associated amendment to Annex III the insertion in Annex II of the Directive of a requirement to use a 365 or 366 day year - and any associated amendment to Annex III linguistic changes to the English and Greek language versions of the Directive at Article 1a(1)(a) 14. As regards other substantive elements of Directive 90/88/EEC, any proposals for amendments in this regard would be considered together with possible proposals following the outcome of the consultation on the Report on the operation of Directive 87/10212. 12 Footnote 1 supra II The mathematical formula in Directive 90/88/EEC 15. Directive 90/88 introduced a common method for the calculation of the "annual percentage rate of charge" into the requirement of price disclosure in consumer credit already contained in Directive 87/102/EEC. The intention was that the annual percentage rate of charge should add a commonly defined and acknowledged element of price disclosure to consumer credit, making its price comparable throughout the EC as well as between different forms of consumer credit. The Directive defined the mathematical procedure for calculating the 16. annual percentage rate of charge as well as the elements of cost to be included in the calculation13. In addition, several assumptions were made for certain forms of consumer credit e. g. open-ended credit that does not provide all the information necessary to calculate the annual percentage rate of charge at the time of conclusion of the contract. The verbal definition of the "annual percentage rate of charge" is as 17. follows: "the total cost of the credit to the consumer, expressed as an annual in percentage, of accordance with Article 1a"u the amount of the credit granted and calculated and "which shall be that equivalent, on an annual basis, to the present value of all commitments (loans, repayments and charges), future or existing, agreed by in accordance with the mathematical formula set out in Annex //"15 the borrower, shall be calculated the creditor and 18. This verbal definition is expressed in a mathematical definition found at Annex II of the Directive. The Annex clarifies, in mathematical terms, those obligations which shall be made equal in their present values through the annual percentage rate of charge. 19. All the mathematical formulae currently in use in the European Community and the other members of the EEA for the calculation of the annual percentage rate of charge are basically derived from the same principles of interest calculation16. National deviations which lead to different forms of and results from the formulae applied do not derive from mathematical origins 13 14 15 16 Chapter IV infra Article 1. 2(e) of Directive 87/102 (as amended by Directive 90/88) Article 1a(1)(a) of Directive 87/102 (as modified by Directive 90/88) Annex III of this Report but rather from differences in the assumptions applied to the calculations in certain Member States. Were these assumptions identical, so too would be the results. 20. At this point an explanation is necessary, in simple mathematical terms, of the operation of the mathematical rules, both in order to understand the rules themselves and, more importantly, the other forms of calculation (the German, French and Finnish17 methods) which lead to different results as a result of differences in basic assumptions. 1. Simple interest rate calculation 21. The price of a credit is defined by the combination of three factors: the capital borrowed the charges or costs applied the time in which a capital can be used by the borrower (AK) (CK) (tK) 22. The interest rate (i) is therefore expressed by the equation: Charges (CK) i = Capital (AK) * Time (tK) 23. Using the convention that interest rates are expressed in relation to 100 currency units (%) and for a time period of one year (p. a. ), the equation reads as follows: i %p. a. = Charges (CK) * 100 * 1 year Capital (AK)* Time (tKjnyears) 24. If time is calculated in months, then "1 year" in the upper part of the formula must be replaced by "12 months". Therefore 130. 66 ECU for a loan of 1,000 ECU for one year amounts to an interest rate of 1 3 0 , 6 6 * 1 0 0 / 1 , 0 0 0 *1 = 13. 066 % p. a. 17 Finland has availed of Article 1a5a to retain a formula different to that in the Directive. Once a single formula is confirmed for use throughout the EC, it is prepared - according to declarations from Government representatives - to adopt this formula - the derogation is not for reasons of principle but to avoid having to enact two possibly different laws in a short space of time. Finnish legislation does require the disclosure of APR. 2. Yearly Compounded Interest 25. In the simple formula (cost divided by capital and time) no compounding is foreseen. While banks always receive their interest by the end of the credit contract period, a bank which receives interest payments before the end of this period can reinvest this money and thus earn additional interest. In this way, the real charges in the example given would be not only the 200 ECU after 18 months but also the additional 13. 333% on 130. 66 ECU (reduced by the amount that early payment would cost the borrower). Thus the simple interest rate does not match the real cost but produces a 26. higher amount of charges than the consumer has consented to. In other words, the annual percentage rate of charge of different consumer credit contracts are not comparable if the period during which interest is compounded is not also equal. 27. Taking the first example from Annex III of the Directive, where the lifetime of such a loan is not exactly 1 year but rather 18 months, with charges of 200 ECU, the traditional simple formula would produce the following result: 200* 100* 12 1. 000* 18 = 13. 333 % p. a. The example given in the Annex, however, states that the result should be 28. 13. 066 % p. a. The reason for this difference lies in the fact that credit contracts for different time periods are incomparable without a uniform decision about what to do with the interest earned after a certain time period. To use financial interest should be mathematics "compounded". the question is at which terms, time The definition of an interest rate with reference to 1 year therefore means 29. not only that all interest rates are expressed as "p. a. " (which means that the lifetime interest rate of a credit is divided by the number of months and multiplied by 12) but that the compounding period for the credit should be uniformly 1 year. The formula given in Directive 90/88 and in use in the majority of Member States (henceforth referred to as the EC formula) fulfils this condition. The French method of calculation does not recognize this condition at all, thus giving rise to The arbitrary compounding periods which in practice amount to 1 month. German "Rule of 360" accepts a compounding period of 1 year, in principle, but deviates from it in every case where interest has to be calculated for less than a year, especially if the lifetime of the credit does not amount to exactly 1 or more The reason is that calculating interest rates with a compounding full years. period of 1 year is not possible with the simple formula given above. 30. Criticisms have been voiced about the complexity of the EC formula and In this context, it should be noted that the the need for technical expertise. simple formula can only be used for a period during which the capital borrowed In the case of credit with monthly repayments, the accurate remains constant. require an calculation of approximation of many different calculations which, although simple in themselves, would need to be reiterated so many times that technical assistance would also be required. the annual percentage rate of charge would As will be shown below, the EC formula which is at present successfully 31. used in the large majority of Member States, is merely the more developed form of earlier formulae (in order to take more variables into account) and is more convenient and accurate to use than the other methods presently in use. 3. The 1 year compounding period: 32. As the compounding of interest is an integral part of the calculation of interest, one must already "know" the interest rate in order to use the simple formula (to calculate that interest rate) since the first year's interest must be added to the capital which will bear interest in the subsequent period (e. g. in our example, in the remaining six months in a credit of 18 months duration). The interest rate can no longer be directly calculated but is calculated as a growth rate (i) of the original capital. 33. An interest rate of 13. 066% thus increases by (1 + i ) of the original capital (1 +0. 13066) = 1. 13066 1,000 ECU amounts to 1,000 * (1 + 0. 13066) = 1,130. 66 ECU after one year. 34. This is also referred to as the "future value" of a capital as it describes the growth rate after a certain time period has passed. The amount can also be considered in terms of "growth" rather than "interest", as the growth can easily be Interest is the difference between the original capital and its future calculated. value after this growth. In the case of a credit which is repaid in total after two years, the same 35. result is achieved with the EC formula or the French or German formulae. The German and the French methods apply the simple formula in two steps: Year 1 Year 2 Capital, Capital2 = = Capital + (Capital * i) Capital + (Capital * i) + [Capital + (Capital * i)] * i Using the above example, another 0. 13066 * 1,130. 66 ECU = 147. 73 ECU for the interest of the second year should be added to the 1,130. 66 ECU, producing a result of 1,278. 39 ECU. The EC formula, on the other hand, merely simplifies the equations in a 36. still familiar way using simple algebra: Capital, Capital2 = (1 + i) * Capital = (1 + i) * (1 + i) * Capital = (1 + i)2 * Capital This simple form is directly calculable with calculators or computers using the In our example, (1 + 0. 13066)2 * 1. 000 exponential form of the same formula. ECU = 1,278. 39 ECU. In the same way, after three years, the formula would be (1 + i)3 * capital and after t years, capital, = capital * (1 + i)'. Thus the same result is achieved by the different formulae, though in a 37. simpler way using the EC formula. However, this simplicity is not the main advantage - the formula can also be applied to fractions of a year because "t" expressed in years should properly be expressed as "t/1" which means that t supposes a compounding period of 1 year. If we express "t" in terms of months then "t" would be written as "tmonth/12". 38. A capital of 1. 000 ECU for 6 months lent out at a rate of 12% p. a. would grow to capital6 = 1-000 * (1 + 0,12)6/12 = 1,000 * 1,121/2 = 1,058. 30052 ECU In the same way, instead of 6/12, this could be expressed as 182/365 days capital182 = 1,000 * (1 + fj,12)182/365 = 1,000 * 1,12182/365 = 1,058. 13624 18 39. An interest rate of 12% p. a. earns 58 ECU interest in a six month period if interest is compounded annually. While 58 ECU is less than half the interest the bank would have earned after 1 year, because this interest is being paid out earlier than foreseen in the compounding period, the bank can invest these 58 ECU for 12% for the remaining six months, with a future value of 2 ECU, thus matching if compounding occured at the end of the compounding period (1 year). This result cannot be achieved with the older methods of calculation still in use in France and Germany. that would have been reached the 60 ECU for six months 40. Using the German method, an interest rate of 12% p. a. on a capital of If fractions of a year are 1. 000 ECU would yield exactly 60 ECU for six months. involved, the simple form either fails to produce a result or does so by deviating from the underlying compounding period of 1 year e. g. by reducing it to 6 months, in this case. Instead of p. a. , it would be more accurate to describe it as 6% per half year. 18 The resu't is slightly different because a 365 day year does not divide evenly 9 41. In fact, the French method states that a rate of 6% for a half year may be multiplied by 2 to reach the annual percentage rate of charge. The compounding period in France is therefore regarded as unimportant and can be arbitrarily convened through the repayment periods (which in the case of consumer credit are normally monthly). The French method therefore usually uses a monthly compounding period. In Germany, on the other hand, the annual compounding period 42. is prescribed as a rule. However, in order to avoid exponential calculation, it deviates from this rule for the last year of the life of a credit if this year does not amount to exactly 12 months. Consumer credit contracts with a lifespan of less than a year are therefore equally misrepresented in the German and the French calculations of the annual percentage rate of charge. The results differ from each other significantly if the life-span is more than a year19. 43. Given the express intention in Directive 90/88/EEC that a single formula for the calculation of the annual percentage rate of charge should be used in order to facilitate the comparison between credit offers from different countries, the conditions of calculation must be uniform. One of the most basic conditions is that each annual percentage rate of charge should be calculated on the basis of the same compounding period of 1 year. 44. Only the mathematical formula in Directive 90/88, in use in the majority of Member States, this condition and produces comparable annual percentage rates of charge. follows 4. The EC formula 45. The simplest form20 of this mathematical formula is V =AK *(1+i)' where AK AK i t is the initial loan augmented with all charges and interest at the end of the credit's lifespan is the initial loan is the interest rate expressed p. a. (but not in percent) is the lifespan of this loan 46. It might have been closer to traditional legal understanding if the Directive had put emphasis on the total cost (C) of a credit instead of its 'present value', 19 Table at paragraph 86 infra 20 This form does not, in practice, fully take into account all elements of a transaction 10 although the mathematical meaning would have been the same, using total cost C would then have been: The formula Extended Capital + Total Cost Extended Capital multiplied by growth rate in the time period the AK + C AK *(1+i)t 47. The annual percentage rate of charge is the factor which represents the growth of an initial capital, taking into account all charges for a given time period with annual interest compounding expressed as a percent per annum. The calculation is based on real time, with daily precision where loans, repayments and charges are debited or credited to the debtor. For the sake of accuracy, therefore, the results should be expressed to an accuracy of 2 decimal places and the year shall be expressed as having 365 days21. a) Present Value The present value of all repayments and charges in consumer credit is 48. normally the initial loan. This means that if all charges expressed by the growth- rate are subtracted, the principal (the original capital) will remain. For most normal calculations, as expressed in the examples of Annex III of Directive 90/88, the above formula would be sufficient. But where there are deviations in practice e. g. with a loan being paid out later than the date of the contract (or more precisely the date on which interest is calculated), the amount of the loan would already include interest. The amount of the loan would therefore have to be used in the calculation with its present value. The EC formula therefore takes into account the present value of a loan in the following form: AK ( l + i )c A K ( l + i ) *- If the loan is paid out at the beginning of the calculation, t is 0 b) Summing up different calculations: the E symbol 49. Most consumer credit contracts do not take the simple form of a once off repayment at the end of their lifespans but are paid back in instalments. 50. As the above mentioned formula (and the simple formulae in use in France and Germany) presupposes a constant interest bearing capital for "t", 21 Table at Paragraph 125 infra 11 each credit must be divided into as many credit transactions as changes occur in the interest bearing capital. Therefore the annual percentage rate of charge is only correct if it is used 51. equally in all individual calculations and if the sum of all present values ( £ ) is equal to the sum of the present values of the loans or if the growth of the loan expressed as one single growth rate is equal to all the charges and costs incurred, whether in the present or in the future. This is the formula used in the Directive, employing the z symbol to 52. is also the indicate that a sum is to be made out of multiple calculations. It formula used in all Member States of the European Community and other members of the EEA with the exception of Germany, France and Finland. 12 Ill 1. a) The calculation of the annual percentage rate of charge in the EC and other members of the EEA General Observations Interest and the annual percentage rate of charge 53. Creditors calculate the price of credit in numerous ways and under many different names22. Although there are some general guidelines concerning the way in which charges for consumer credit are calculated, the definitions are far from uniform. Usually, creditors distinguish between "once-off costs" (one time only costs) such as fees and charges, and "interest" (variable or time costs that comprise all those charges which increase over the duration of the credit). Some banks put more emphasis on the (nominal) interest rate, others on fees. The method of distinguishing between fees and interest, and the methods of interest calculation differ not only between countries but also from one creditor to another. Sometimes this is due to the internal cost benefit calculation of a bank, institutions or the fact that the creditor must share the profits with other (brokerage fees, insurance premiums), or to facilitate the individual calculation of the cost of the credit by third parties (intermediaries or brokers). 54. National law usually assumes that creditors are free to choose any appropriate and non-arbitrary method to define the cost of a particular credit. The only requirements are transparency and completeness in the list of charges. In some countries, there is an exception to the arbitrariness of the definition of the nominal interest rate, in connection with the requirements of Article 8 of Directive 87/102 (early repayment). This article requires national rules for the calculation of an equitable reduction in the cost of the credit. Some countries fix percentages of the total cost to be refunded23 while others state that the rebate should concern only "time costs" which are expressed by the nominal interest The situation varies from State to State25, as does the definition of rate24. 22 23 24 25 A 1984 survey revealed that the term "interest" was used in 13 different ways in Germany internal It should be noted that this arbitrary use of terms only concerns alone. calculations, not the legally prescribed disclosure of the APR. In France, this is three times the contracted amount for the next payment, and then reverts. Décret 90-979 of 31. 10. 90 (Article L311-29) The notion of "interest" in the rules on price disclosure must be distinguished from "interest" as used in restrictive rules on the refund of time-connected charges (e. g. anatocism or "interest on interest"), where courts do not interfere directly with the definition of nominal interest in the contract but rather recalculate the part of the cost for rebate by using their own definition of interest. In Germany the Supreme Court has held that a "disagio" was to be considered not as a once-off fee but as hidden interest and therefore to be partially refunded in the event of early repayment. Bundesgerichtshof, 16. 11. 93, XI ZR 30/93 13 "equitable". The rule usually used for such calculations is the "Rule of 78"26 which in small credit transactions. is inaccurate, but acceptable is generally agreed it 55. The Directive did not interfere with the methods of calculation of early repayment already in use or with the definitions of interest used internally in contracts. As far as interest was concerned, the Directive aimed to harmonise the notion of interest as it is used in the "interest rate" for price disclosure, i. e. to state a uniform requirement to disclose the result of this cost calculation in a Community-wide comparable credit price - the annual percentage rate of charge. 56. In this respect all Member States are in agreement - no State leaves it to the discretion of the contractors to define the method of calculation of the annual percentage rate of charge or the elements to be included although, as we have seen, France and Germany have left some arbitrary elements insofar as creditors may influence the annual percentage rate of charge by choosing special life spans for their credit contracts. 57. The form of the regulation varies. Most countries do not simply transcribe the verbal form of the calculation into their law but leave its mathematical definition to administrative bodies. b) Verbal Definitions of the annual percentage rate of charge 58. Directive 90/88 defines the annual percentage rate of charge directly by the method of its calculation, while Directive 87/10227 presupposed a definition. National legislation distinguishes between the definition of the annual percentage rate of charge and the method of its calculation, using the traditional relationship between time, cost and capital expressed on an annual basis in percent as the most important element of definition followed by the method of its calculation28. 26 27 28 Accurately defined in Section 2. 510 of the US Consumer Credit Code Regulation Z In §226. 8(b)(7), the "Rule of 78" takes its name from the sum of the digits 1 through 12. the first month, the creditor earns 12/78ths of the agreed interest. After 2 months, the creditor has earned 23/78ths i. e. the first 12/78th plus 11/78ths. The formula wherein the time periods are expressed as months defines those parts of the total interest earned which must be refunded as follows: frest of lifetime in months + 1)*rest of lifetime] * total interest (lifetime in months + 1 )*lifetime in months For commentary, see German Bundesgerichtshof Neue Juristische Wochenschrift 1979 p. 542. Article 1. 2e of Directive 87/102, amended by Directive 90/88 Annex II of this Report contains a list of and brief analysis of national transposing legislation 14 ° Denmark29 requires the statement of the "annual costs in percent" 0 Germany30 defines the "initial effective interest rate" as "the total amount of charges expressed as an annual percent rate of the net capital or cash price" ° Spain31 defines the "annual equivalent rate" as the total cost of credit expressed as an annual percentage of the capital lent" 0 France defines the rate as the "global effective rate" ° Ireland32 defines the rate as the total cost of credit expressed in an annual percentage of the amount of credit given. " ° The Italian33 and Portuguese34 laws use a similar definition 0 The Netherlands35 defines an "effective credit remuneration percentage on a year-basis as the reward for the credit according to the agreement, expressed as a percentage for a year of the open balance" 0 Sweden36 defines the "effective interest" as "the credit cost to the consumer, expressed as an annual rate in percent of the amount of the credit granted, where the instalment payments made during the life span of the loan have been appropriately taken into account. " Similar definitions can be found in the other Member States. The UK37 is 59. the only State to refer to the compounding period: "The annual percentage rate of charge is a rate per annum compounding annually expressed as a percentage such that a) the sum of present values as at the relevant date of all repayments of credit and the total charge for credit; and b) the sum of present values as at the relevant date of all credit under the agreement would, when calculated at that rate be equal. " Austria combines both definitions in one article38 and defines the annual percentage rate of charge as the "decursive percentage rate for a full year which establishes numerical equality between the sum of the credit paid out and the sum of all payments. " and provides the explanation that "It expresses the total cost of credit in relation to the credit granted. " 29 Art. 9. 1. 4, 1990/398 Lov om kreditaftaler of 13. 6. 90 Art. 4 alinéa 2 of the Verbraucherkreditgesetz of 17. 12. 90 31 Art. 18 b of the Ley de crédito al consumo of 23. 03. 95 32 Consumer Credit Act 1995, s. 9 33 Art. 19 Legge Communitaria 142 of 19. 2. 92 34 Art 2, al (a) Decreto-Lei of 21. 09. 91 35 Art 1. 2 k Wet op het consumentenkrediet of 04. 07. 90 36 Art 2 Konsumentkreditlag 830 of 1992 37 Statutory Instrument on Consumer Credit Regulation 1980/51 Art. 9 al. 1 38 Title VIII, Art. 33 al. 4 of Bankwesengesetz 1993/532 15 2. The Application of the EC formula 60. With the exception of Germany, France and Finland, all the Member States of the European Community and the other members of the EEA have incorporated the EC formula into their national legislation. The majority of them (except the United Kingdom), did so in reaction to the Directive. 61. In some cases, the wording of Article 1a was used and the mathematical equation, in Annex II was copied, though sometimes the symbols were replaced by others (because it was felt that different symbols for repayments and loans would make literally to read). incorporated the mathematical formula of the Directive. This is the case for Denmark, Greece, Italy, Luxembourg, Portugal, Sweden and Iceland. Some countries have the formula easier 62. The remaining Member States either used other symbols, elaborated different examples or gave more verbal explanations in the construction of the formula but kept to the basic equation, using the "internal rate of return" or exponential growth: In Belgium39, the "balanced cash value equation" given in the Directive is restated using different symbols. An iteration procedure that can be used to solve the balanced cash value equation is described and this procedure is applied step by step to several examples In Spain40, the formula is developed in two steps and examples different to those in the Directive are given in the Annex In Ireland41, the conditions and applications of the formula are explained in words and, particularly, growth and cash value as well as the iteration procedure are explained. The Netherlands has developed "Rules on Effective Credit Yield"42 which elaborate on the mathematical procedures in some detail. The "effective credit remuneration percentage on a year-basis" is developed on the open The calculation of an open-ended credit is also balance of a credit. explained Similarly, Austria43 uses the EC formula with different symbols and also developed the "fictitious annual interest rate" for open end credit The UK has a vast body of rules regulating the general requirements of the Consumer Credit Act. The mathematical formula in the Directive 90/88 In addition, accuracy is also covered 39 40 41 42 43 Arrêté Royal 2311 of 04. 08. 92 (amended on 29. 04. 93 by 1381/1993) Article 18a Ley de crédito al consumo, 23. 03. 95 Consumer Credit Act 1995 Regeling effectief kredietvergoedingspercentage of 06. 11. 91 Title VIII Art. 33 al. 4 of the Bankwesengesetz 16 is restated44 and three examples are developed, demonstrating different degrees of sophistication in the mathematical procedure. In Norway45, "effective interest" is calculated with the same formula as in the Directive 3. The calculation of the annual percentage rate of charge in Germany and France As mentioned above, the difference between the mathematical formulae in 63. use the in Germany and France, and unwillingness of those countries to use exponential calculation. Mathematically, this in a situation whereby neither country can apply a 1 year compounding period for all circumstances. the EC formula lies basically results in a) The German Method 64. The German method calculates interest for 12 months and compounds it at the end of this time before restarting interest calculations for the next 12 months. If the last year does not have 12 months, interest is compounded earlier. Legally, this result is achieved through a complicated reference scheme. Article 4 of the Consumer Credit Act refers to Article 4 of the Price Disclosure Regulation which, for the purpose of interest calculation, refers to Art. 608 of the Civil Code. 65. However, Art. 608 makes no reference to "interest calculation" but deals only with the question of the time at which debtors must pay interest in the event that nothing has been agreed (in which case it establishes a rule that interest must be paid annually or, if a credit is repaid in less than 1 year, at the time of repayment). Art. 4 of the Price Disclosure Regulation applies this rule to interest calculation by citing this article as well as by using the description "cascade method" (Staffelmethode). 66. As we have seen above, the question of the time at which interest is paid and the time at which it is compounded are not linked to each other if the exponential form of the calculation is used. 44 Statutory Instrument 15 of 1980 The Consumer Credit (Total Charge for Credit) Regulations 1980 of 29. 01. 80, Art. 6 to 11 45 Forskrift til kredittkjopsloven of 15. 07. 86, N° 1616 17 67. In practice, the real source of the German method is a paper by the Bund- Lander-Kommission "Preisauszeichnung"46. Here the method is explained and a formula is given that uses exponential forms, though these are by definition more formula because simple calculations becomes complicated extremely complicated if expressed in correct mathematical terms. This method is known as the "360 day method" due to its additional assumption that a year has 360 days. the EC than The German formula poses a problem not only for comparisons with 68. products in other Member States but also within Germany. In particular, credit for periods of less than a year deviates significantly if the annual percentage rate of charge is stated in the German form. 69. If a consumer has the choice between: 4 consecutive credit contracts, each of 3 months duration, with an annual percentage rate of charge of 12% p. a. each, or one credit contract of 1 year duration with an annual percentage rate of charge of 12. 5 % calculated according to the German "360 day method", producing 1,000 ECU net capital without additional costs, the consumer would have to pay 125 ECU in interest in the second case at the end of the year and 30 ECU every quarter in the first case. But if they had paid the interest in the first case at the end of the year (as in the second case), this would cost them an extra interest charge of: [(12% on 30 ECU for 9 month) + (12% on 30 ECU for 6 month) + (12% on 30 ECU for 3 month)] = 0. 12 * 30 * (9 + 6 + 3)/12 = 5. 40 ECU. 70. Aithough the German price disclosure regulation was correctly applied, the consumer would have made the wrong choice if they had chosen the "cheaper" credit. 12% p. a. in fact involves a surcharge of 5. 40 ECU or an "effective interest rate" of 12. 54%. 71. Thus in Germany, a consumer contracting for 42 months and another contracting for 48 months cannot properly compare their annual percentage rate of charge because the 48 months involves compounding periods of 1 year while the other uses 1 year for the first three years and 6 months for the rest of the life of the credit. The German method is not "correct" in a mathematical sense the rule of a 1 year compounding period is obviously not observed in because 46 An administrative body which lays down the surveillance principles for disclosure in price regulations. The reference for the formula is: Bund-Lander AuG. chull. es "Preisangaben" Bemeinsamen Amtsblatt des Landes Baden-Wurttemberg, seite 27, 05/02/93 all cases, and calculations that are based on different general assumptions and conditions are not equal47. The German system requires two different formulae for interest calculation: 72. the "Rule of 78" for rebates and the rule of 360 for price disclosure. In cases where it is necessary to calculate the present value, it also uses the EC method. The EC method would enable the calculation of rebates with the same formula48. 73. The main differences between the German and the EC methods are related to the time period. The most significant differences occur in short term credit covered by the annual percentage rate of charge disclosure requirements of the Directive. As the Directive partially excludes current account credit as well as credit which must be repaid in less than 3 months or with no more than four instalments and a life span of 12 months, the most striking cases are legally outside the scope of the Directive. However, the Directive does require the indication of an "annual rate of interest49" for such credit as well. 74. Although this rate is not covered by the requirements of the mathematical formula in Directive 90/88, many countries approach both annual interest rates in the same manner. The problem concerning short term credit of less than one year is therefore increasing. For instance, credit card credit in particular is the first form of crossborder consumer credit. But credit card credit, although expressly subject to the annual percentage rate of charge requirements, tends to be short term credit and may thus escape these prescriptions. The differences between the German and EC methods as regards 75. consumer credit for a period of more than one year are less significant. b) The French Method 76. The French method of calculation of the annual percentage rate of charge does not recognize the importance of a generally fixed compounding period. The 47 48 49 There have been some developments in recent years. The German Bundesgerichtshof has stated, in its decision of March 12, 1991 (XI ZR 190/90), that in case of early repayment of a mortgage loan a bank can only ask the. present value" of future interest as recompensation of lost profit. This present value is calculated according to the same rule as implied in the EC-formula and generally accepted by German banks. In addition, some banks now use the EC-formula for the rebate in consumer credit because the old "Rule of 78" is inapplicable in cases where instalments are not equal. At present, the use of the "Rule of 78" is necessary because the Rule of 360 cannot be applied to calculate a rebate rationally - no bank applies this rule. Article 6 of Directive 87/102 19 relevant Order50 permits the use of different periods and period rates e. g. of 1 month, 3 months, half a year etc, with interest compounded within each period. The only precision is that if irregular payments are made, only one period should be used for interest compounding. The period rate for one month is then transformed into an annual interest rate simply by multiplying it by 12. thus appear artificially more 77. This conversion is misleading because an annual rate is disclosed which is in fact not based on annual compounding periods but on invisible, mostly monthly, compounding periods. As shown below51, this leads, especially in consumer credit with monthly instalments, to very significant differences. French the consumer credit contracts consumer than in all the other Member States of the European Community and the other members of the EEA. While the German deviation is mathematically inconsistent and creates artificial difficulties in calculation but has modest effects on ordinary instalment credit (though these may be greater if once-off fees are important), the French method deviates so significantly that the French interest rates are misleading not only to other Europeans but also to French consumers who do not get a correct idea of the differences between credit prices e. g. between credits with monthly or quarterly instalments. favourable to 78. The reasoning behind the French method seems to be that in their view, the function of the annual percentage rate of charge should indicate the burden on the consumer, (although it seems to be accepted that the current EC formula is normally used among businessmen)52. is erroneous, a misunderstanding of the function of the annual percentage rate of charge. The annual percentage rate of charge does not indicate "the burden on the consumer" - consumers can evaluate the burden on their budget only if it is expressed in currency units because all their monthly income and expenditure is expressed in such currency units. In order to answer the consumer's question as to whether they should take a particular credit, the obligations set out in the Directive regarding the disclosure of instalments and the total cost, as well as the total amount of the debt, are crucial. Only commercial clients may use the annual percentage rate of charge as an indicator for the burden because they this is reasoning However, 50 Art. 1 of Décret relatif au calcul du taux effectif global, N° 1985/944 of 04. 09. 85 51 52 para 85 below. See also §381-1 of Gavalda and Stoufflet: Droit Bancaire (2nd ed) and §28 of Biardeaud: Guide Pratique pour le contrôle des crédits immobiliers. An example of this is the comment made by the Economic and Social Committee on the EC formula when initially proposed: OJ n° 337 of 31. 12. 88 p. 1-4 §3. 3. 1: "This formula allows for the continuous reinvestment of income as is normal among businessmen, in this case the crediting of yield from the reinvestment of repayments made by the borrower. In practice, this is how the lender, but not the consumer, assesses the value of the loan. For the consumer, the reinvestment of income in terms obtainable by the lender is deceptive. it is important to know the burden of the borrower. " 20 can compare it to their own profit rate or the interest rate which they earn with other capital. The annual percentage rate of charge thus answers the consumer's It is a means of comparison. In in Directive 90/88, which presupposes annual is the only way of 79. question as to which credit they should take. this the respect, compounding also comparing equally calculated products. formula in the case of monthly payments, 80. It should also be noted that financial developments mean that, for the consumer, the date of payment is also worth money because some credit card accounts even allow overpayment and pay interest on a positive balance. 81. The older argument, that the annual percentage rate of charge in France is identical with the usury rate and that this rate can not be changed because it would make credit usurious which had not been usurious before, no longer applies due to a change in the French method of regulating usury. c) Comparison of the EC formula and the German and French methods In the following table, a fixed instalment loan of 1,000 ECU with 120 ECU 82. interest for one year is calculated. In this table, the top rows show clearly that in all three cases the basic items needed to calculate an annual percentage rate of charge (cost, time and principal) are the same. 83. In the German method, interest is calculated every month but only compounded to the principal at the end of the year. Three different calculations are necessary: Each month 1. Capitaln = Capital,. , - Instalment; 2. Interest = Capital,* i/12 At the end of the Year 3. Capital12 = Capital12 + z [lnterestn ] In the French method, interest is calculated as in the German method, 84. but compounded monthly. Only one calculation is necessary each month: Each month Capitaln = Capital,. , - Instalment + Capital,. , * i/12) The EC formula only requires one calculation each month because it 85. calculates the capital growth: Each month Capital, = Capital^ *(1+i)1/12 21 The interest can be derived from the capital column by simply subtracting the different balances after instalments have been deducted: Each month Interest, = Capital,. , Capital, - Instalment 86. It can be seen that, in all three cases, different interest rates lead to the same amount of interest under the same conditions. While the German method comes quite close to the EC method, the French method deviates significantly. Loan (ECU) Instalment (ECU) Credit Cost (ECU) Life Span (months) APR GERMANY 1000. 00 93. 33 120. 00 12 24. 66% Month 1 2 3 4 5 6 7 8 9 10 11 12 Sum Capital 1000. 00 906. 67 813. 33 720. 00 626. 67 533. 33 440. 00 346. 67 253. 33 160. 00 66. 67 26. 67 0. 00 1120. 00 Interest 20. 55 18. 63 16. 71 14. 79 12. 88 10. 96 9. 04 7. 12 5. 21 3. 29 1. 37 0. 55 120. 00 - FRANCE 1000. 00 93. 33 120. 00 12 21. 46% Capital 1. 000,00 924. 55 847. 75 769. 57 690. 00 609. 00 526. 56 442. 64 357. 22 270. 28 181. 78 91. 69 0. 00 1120. 00 *Ë C-DIRECTIV 1000. 00 93. 33 120. 00 12 23. 70% Interest 17. 88 16. 53 15. 16 13. 76 12. 34 10. 89 9. 42 7. 91 6. 39 4. 83 3. 25 1. 64 120. 00 Capital 1000. 00 924. 55 847. 75 769. 57 690. 00 609. 00 526. 56 442. 64 357. 22 270. 28 181. 78 91. 69 0. 00 1120. 00 Interest 17. 88 16. 53 15. 16 13. 76 12. 34 10. 89 9. 42 7. 91 6. 39 4. 83 3. 25 1. 64 120. 00 87. In the following table, we have used different life spans for a credit of 1,000 ECU, assuming that the creditor would take 10 ECU interest for every month of the lifespan of the credit. (This would be a rate of 1% using the traditional method of nominal interest calculation, which is not an interest rate but a parameter for easier interest calculation). LifeSpan (months) Cost (ECU) 6 12 18 24 48 60 120 180 240 480 EC method French method 22. 29 23. 70 24. 00 23. 84 22. 86 20. 29 21. 46 21. 65 21. 58 20. 75 German 360 day method 21. 49 24. 66 24. 27 24. 34 23. 09 22 88. It shows that the German deviation is quite significant for periods of less than a year. For longer periods, the difference between the German method and the EC method is quite small. However, the difference between the EC method and the French method is between 2 and 3%. The crossborder implications of this are already being felt in certain areas53. 89. In any event, there is no direct relationship between the interest rates which would enable a consumer to simply add 2 or 3% to the French (or subtract 0. 2% from the German method) because the size of the difference depends on the life span as well as the up-front fees and the interest rate. 4. Arguments in favour of the EC formula 90. If the annual percentage rate of charge is seen as a main factor in choosing between different products, the EC formula is mathematically the only way to guarantee that the price represents equal conditions. All the regulations concerning the costs to be considered in the annual percentage rate of charge calculation are meaningless if the mathematical procedure of their inclusion is not homogeneously defined. 91. The annual percentage rate of charge is the only form of a credit price that can help consumers to shop across the borders in the Single European Market. It will simplify the legal framework for consumer credit and make national transposition measures more consistent, as well as providing a proper framework for possible future legislative action at Community level as well. As the some countries also apply differences between mortgage loans and consumer credit are vanishing (second mortgages are used for consumption purposes while the last 20% of an uncovered loan for a home is often given in the form of consumer instalment credit), it would be important, in case of harmonisation in this area, that there would be a unified system of annual percentage rate of charge calculation from the outset. As credit card credit will be the first form of consumer credit to be offered across borders, and the use of credit cards linked to special instalment open-ended credit offers increasingly exponentially, a uniform price disclosure system might also be needed in this context. to mortgage loans, and legislation this is 92. The potential cost of adapting banks' computer programs and price structures to handle the EC formula in those countries that do not presently use the formula is not a striking argument. The banking sector in the other Member States have already made this investment in order to adapt to their national legislation as it was transposed. In addition, banks in France and Germany frequently adjust their programmes to take account of case law and 53 German banks already offer consumer credit in Alsace, while Credit Lyonnais, having purchased a German bank (BfG), are beginning operations in Germany. Complaints have already been received from French consumers who have been misled by a mortgage loan linked to a capital life insurance, the true APR of which, as well as the dangers, had not been made clear by the German bank 23 administrative rulings on the subject e. g. for the calculation of rebates in the event of early repayment of consumer credit and mortgage loans; for the calculation of damages in the event of early repayment. In addition, some of the calculations are already done using the mathematically correct form. 93. Programming will also be easier using the simpler EC method. Only the EC formula offers consumers the possibility of directly calculating the increase of a capital over a period of years. Its simplicity (1000 ECU for 98 years at an interest rate of 9. 6% will yield to (1 + 0. 096)98 * 1000 = 7,969,559. 30 ECU) is striking and merely requires the use of a home computer or even a pocket calculator. 24 IV. Elements of cost to be included in the calculation a) Elements of Cost The Directive requires that all credit costs must be included in the annual. The "total cost of credit to the 94. percentage rate of charge calculation. consumer" means: all the costs, including interest and other charges, which the consumer has to pay for the credit. The mathematical formula requires that the difference between the 95. present and future value of the capital borrowed should include all the elements of cost to be included in the calculation i. e. not only the nominal interest but all other charges which can be attributed to the credit as such and not to other separate services of special value to the consumer. 96. With the exception of insurance fees, the Directive uses the indirect method, allowing the omission of five types of costs which are supposed to be "credit costs". Art 1a(2) allows the following charges to be excluded from the calculation of the "total cost of credit to the consumer: i) ii) iii) iv) than the purchase price) payable charges payable by the borrower for default charges (other whether the transaction is by cash or credit charges for accounts, transfers. (except where the consumer does not have reasonable choice or such charges are abnormally high) membership subscriptions regardless b) Situation in the Member States 97. As the number of items which could be considered as elements of cost to be included in the calculation is, theoretically speaking, unlimited, most countries simply repeat the exemptions in Article 1a(2), definitely excluding those items from the annual percentage rate of charge calculation, regardless Thus the regulations in of how closely they are related to the credit. Denmark, Greece, Ireland, Italy, Luxembourg, Portugal and Norway follow closely the wording of Article 1a(2) of the Directive, with practical application generally left to case law. 25 Art 1a2 B DK D EL ES F IR IT L NL 0 PT SF SV UK IS LI N i ii iii iv V Comments / / / / / • / / / / / / / / / / / / — / — — S / / / / / / / / / / / / / / * / / / / / / / / / / / * / / * — / — / / / / * * / / * / / / * * / * * * * / / Open list of charges to be included. For insurance, the criteria is whether a reasonable choice is given Insurance which does not secure repayment is exempt, whether mandatory or not All charges are included in the rate, including mandatory insurance charges (but non-mandatory ones are not listed as exempted) All charges are included in the rate. Jurisprudence has resulted in some changes. If the range of services provided is wider than credit, membership fees are not included. If credit is the main activity, the fee is included If account fees. , or insurance fees are obligatory, they must be included. There are no membership fees. All charges except those for non-mandatory insurance are included The Act exempts no costs (including insurance). All mandatory costs are included. All costs, including non-mandatory insurance, are included / * = = = Corresponds to Directive 90/88 i. e. these charges are specifically excluded from the calculation of the Global Annual Effective Rate Goes further than the Directive - there is no specific exemption for these items - but they may in practice be excluded See individual comments and relevant paragraphs below 98. the Directive54. In Denmark, the costs to be included are more comprehensive than in In Belgium there is a positive list of those elements of cost to 54 Article 13 of the 1990 Credit Agreement Act defines the total price of credit as the sum of all charges with the exception of certain charges (corresponding to those in the Directive, but more restricted). Charges are divided into three types: those to be included in the 26 be included in the calculation which must be included55 as well as a list similar to the exemptions in the Directive (although provided the consumer has a reasonable choice, neither the costs of a credit card which are not connected Italy and Luxembourg also have with credit nor insurance costs are included). an open list of charges to be included in the calculation, though the list of exemptions is closed. Member States, in practice, arrive at lists similar to that of Belgium through their reference to the term "credit cost" which includes items like brokerage fees, up-front fees, disagios. which must be included in the annual percentage rate of charge calculation. The situation in other Member States differs slightly - Spain, France, 99. Finland, Sweden and the UK are tacit on the subject of the list in Article 1a(2). This does not necessarily mean that they deviate from the practical method of annual percentage rate of charge calculation, because they assume that the general definition of the elements of cost to be included in the calculation already leads, in principle, to the exclusion of certain of the items concerned (fees for late payments, fees for bank accounts, membership fees and special cash price fees). These States do, however, make an important distinction in that they generally exclude only those elements of cost to be included in the calculation which are not mandatory - while the majority of States exclude the items listed in Article 1a2, these States apply a test of how the fees have entered into the contract. They therefore apply the distinction in Article 1a2(v) concerning insurance fees to all other charges. 100. The Spanish legislation requires all charges to be included in the calculation, including mandatory insurance charges. Non-mandatory insurance is not mentioned as specifically exempt from inclusion. The elements of cost to be included in or excluded from the calculation are not listed, except as regards insurance premiums and default fees56. 101. In France, Article L. 313. 1 of the Consumer Code states that the calculation must reflect all interest and other charges, commissions and remunerations of any kind, direct or indirect. e. g. including payments to intermediaries. The Comité Consultatif of the Comité Usagers of the Conseil annual percentage rate of charge but not necessarily mentioned individually (e. g. charges by the creditor or third parties); those to be listed but not included in the annual percentage rate of charge (membership fees. ) and those to be neither listed nor included (cheque fees, transaction fees unless the method is compulsory. ) 55 Article 2. 1 of the Arrête Royal 1381 of 4. 8. 1992 contains an open list of charges which should be included in the "taux annuel effectif global". These include charges for: inquiries, advertising, the creation of a file, inquiries at a credit register, administration of the file, accounting and collection, intermediaries, credit insurance, guarantees and other personal securities, and anything else the creditor requires for the credit. 56 Article 6. 2c of the 1995 Consumer Credit Act states that debt insurance, if required by the It also exempts from the calculation charges lender, must be indicated in the total cost. in the event of default 27 N a t i o n a l - du Crédit, in a Report, produced a detailed t h o u gh the list d o es not appear to be binding in nature: list of such charges5 7, Charge included establishment and administrative costs costs for securities and warranties guaranteeing a bill of exchange notary costs stamp duty compulsory death insurance premiums overdraft charges fee for keeping money available fee for confirmation account statement fees59 fees for endorsements Charge not included book-keeping fees fees for not using a credit granted58 service charges postage non-compulsory death insurance premiums Case law and administrative precedent have included certain elements in the calculation e. g. account fees and insurance premiums. Companies in France are prohibited from selling both credit and insurance, and mandatory insurance is not required for consumer credit but rather for mortgages. 102. Credit costs in Finland are defined as "the total amount of interest, costs and other payments that the consumer shall pay on the basis of the consumer credit relationship. No list of items to be included or excluded is provided. Since 1993, insurance premiums are excluded and must be listed separately. 103. Credit costs in Sweden are defined as the total sum of all cost elements (interest, additional costs and other charges). In theory, there are no exemptions - all elements of cost to be included in the calculation must be included in the In practice, the exemptions in the Directive are annual percentage rate of charge. used. If credit Insurance charges, however, are not mentioned in the regulations. is combined with insurance, or if a separate insurance is mandatory, these costs Charges to third parties, which arise in connection with must be included. mortgages (which are within the scope of the Act) are not mentioned. 104. The UK also defines the total charge as the interest and other charges at The exemptions60 are much more any time payable under the transaction. 57 58 59 60 Report on the Reform of Usury Legislation, December 1992. The list is described as 'being given "under the reservation of the sovereign appreciation by the courts" Listed under different names as a cost to be included (commission d'immobilisation, commission d'engagement sur autorisation, commission de confirmation) and under two names as a cost to be excluded (commission de nonutilisation, commission d'attente). Though there also appears to be an obligation to provide these free of charge Defined in Article 5 of the Statutory Instrument The Consumer Credit (Total Charge for Credit) Regulations 1985 28 than in the Directive - there is differentiation between different forms and detailed All premiums for life insurance are exempted61. purposes of credit. Initial fees (e. g. for administration costs) are common in UK consumer credit, and may be Rest debt insurance (against either added to the balance or paid up front. accident, sickness or unemployment) the instalments during that period of illness or unemployment and may be of limited duration. Life insurance cover is often required for larger loans. is common but usually only covers 105. As regards the remaining Member States, an initial administration fee is usually required for consumer credit in Germany, but some banks claim to use no other ancillary charges (periodic fees, statement fees. ). Germany uses the same exemptions as in the Directive. Rest debt insurance is offered, but is usually not mandatory for consumer credit. Where it does apply, it is usually paid as a lumpsum in advance, and the costs must be listed separately. Insurance which does not secure repayment is excluded from the calculation, whether mandatory or not. 106. The Austrian regulation defines the cost elements to be excluded from the calculation; These exceptions differ from those in the Directive in that Austria does not mention charges other than the purchase price which must be paid regardless whether the transaction is by cash or credit, or membership fees. These does not necessarily mean that these are to be considered as interest, as they could be considered as part of the purchase price. Nor do charges required by the State have to be included. Customers must also pay for their annual bank statements. 107. In the Netherlands, only direct credit charges (including mandatory rest debt insurance), fees in case of default and compensation in the event of premature repayment are permitted to be included in the calculation62. No other charges are permitted If for consumer credit, either as initial charges or periodic services connected with the credit (e. g. death, unemployment, invalidity and other insurance) are offered, the charges must be included in the annual percentage rate of charge, may not be counted as separate payments, and must not surpass in the order on Credit Remuneration63. Rest debt the maximum rates insurance is not allowed. insurance with consumer credit is common, but compulsory listed fees. 108. In Iceland, the total cost of credit includes all interest and other charges to be paid by the consumer, with the exemptions listed in the Directive. Charges for the transfer of funds and for keeping an account (except collection charges) are 61 Statutory Instrument: The Consumer Credit (Total Charge for Credit) (Amendment) Regulations 1985 62 Article 34 of the Consumer Credit Act prohibits all "rewards for the lender" other than these charges. 63 Besluit Kredietvergoeding, Stb. 1991/549 of 16. 10. 91 29 exempted only when the consumer has reasonable freedom of choice in the way funds are transferred or collected and the charges are not abnormally high. The inclusion of insurance costs is not restricted to compulsory insurance. 109. Unlike the exemptions listed in Article 1a(2)(i)-(iv), Article 1a(2)(v) of the Directive indicates the only positive item to be included in the calculation of annual percentage rate of charge. It exempts charges for insurance or guarantees from inclusion in the calculation, except death, invalidity, illness or unemployment insurance which are to be included in the calculation, as are other charges which have to be imposed by the creditor "as a condition for credit being granted". All countries have, in one way or another, referred to this in their legislation. Interpretations differ, however. Some countries assume that such insurance premiums are always mandatory and therefore regularly included, while others e. g. Germany repeat the text of the Directive literally but in practice assume that credit life insurance is never mandatory. This is because of their legal definition of the concept of "condition" whereby insurance is interpreted as being "imposed by the creditor as a condition for the credit being granted" only if the credit contract is legally linked to the insurance contract whereas in practice creditors offer two separate contracts which are only linked by the fact that the bank will only grant the credit if the insurance is also taken. In this respect, Belgian legislation takes the other view, asking whether a rational choice between a credit contract, with or In practice, this usually without such an insurance coverage, has been offered. lead to the inclusion of such premiums64. The UK appears to be the only country which expressly excludes life insurance premiums from the annual percentage rate of charge calculation even though such insurance is obligatory for credit contracts. 110. These differing interpretations of Art 1a(2)(v) can lead to differences in annual percentage rate of charge calculations for identical products in different Unlike the charges excluded by Article 1a(2)(i) to (iv), insurance countries. premiums are an important element of the burden of charges on a consumer (up to a quarter of the credit costs in some cases). It may be necessary to exclude distinctions which are easy to circumvent through simple formulations and the use of different formulae by creditors - while this would not eliminate situations where creditors refuse to grant credit without also selling insurance coverage, it would open the door to more competition for insurance premiums. This is necessary because the same life insurance purchased separately from a consumer credit Separate life insurance would also have the contract is usually lower in price. advantage that it could be used for subsequent credit contracts and other purposes without fees for age progression. Creditors should be persuaded to insurance coverage instead of disclose to consumers the possibility of separate overcharging for linked credit life insurance contracts. 64 Empirical surveys in Germany have finance revealed companies offering credit for low income consumers insure up to 98% of the credit contracts while savings banks showed a rate of less than 5%. Credit life insurance is therefore mostly an additional security income consumers and offers the bank additional "interest" because insurance companies pay up to 3. 5% as a brokerage fee to the bank instalment banks and required by the creditor from that low 30 111. At the meeting with governmental experts in April 1995 to discuss this subject65, the experts reported on the situation in their Member States with regard to the elements of cost to be included in the calculation included in their national legislation. Some experts explained the reasons why their Member States had gone further than the Directive, or that the intent of their legislation was the same even if the wording used differed, and some clarifications of certain aspects were given. Following the study by Professor Seckelmann, it was felt that Member States include almost the same elements in their calculations and that any differences that do exist are minimal in nature. The Commission does not therefore propose, at this stage, to amend the list of elements of cost to be included in or excluded from the calculation of annual percentage rate of charge. this meeting and the results of 65 Paragraph 6 supra 31 V. Other issues 112. While the Directive requires an evaluation and a report which ". will make it possible, in the light of experience, to apply a single Community mathematical formula. "66, this requires an examination of other issues than the mathematical formula alone, in order to define a uniform application of the formula67. 1. The Denomination of the annual percentage rate of charge 113. The Directive does not regulate the multitude of interest rates or parameters with which, according to the principle of freedom of contract, lenders define how they calculate the credit costs internally. The only legally defined parameter for credit cost is the annual percentage rate of charge, presupposing either a special form of disclosure68 or a homogeneous denomination. 114. The table below indicates that there are almost as many denominations as there are Member States. 66 67 Article 1a(5)(b) of Directive 87/102 While Article 14 of the Directive specifically mentions the "distribution of the amount of credit over several agreements", other circumventions occur. On several occasions, the German Bundesgerichtshof has ruled that the combination of capital life insurance and consumer credit can be transformed into one single credit with one single APR in order to find out whether it is usurious. Another circumvention is the combination of savings and credit where the consumer is required to save an amount equal to the sum of the credit in a special account (e. g. a whole life insurance account or even an instalment savings account). The credit is not reduced and only at the end are the savings used to repay the credit in one single instalment. Interest is due on the total amount of credit from the beginning to the end of the life span. The savings have earned much less interest than is to be paid on the credit, but the consumer has had to use the money for low-interest savings instead of repaying the high-interest credit. Such combinations can also be easily transformed into one credit relationship, with the EC formula applied to the total of In such cases, the true APR is normally all payments either on the credit or the savings. at least 1% higher than the disclosed APR. The problem posed by such combinations should be studied. 68 US legislation prescribes a special form sheet wherein the APR has to be disclosed in a defined area 32 Short form Denomination B DK D EL Taux d'intérêt effective/ Effektieve Rentevoet E. Rentefod E. Zinssatz and, less often, E. Zinsfuss 7T. €7rt TOK L O, P. Epitokio ES Tipo de interés E. IR IT Taux d'intérêt E. E. Interest Rate Tasso D'intéressé E. Taux D'intérêt E. NL E. Rentevoet O E. Zinssatz Taxa de Juro E. SF SV UK Todellinen vuosikorko / effectiv rànta Eff. ranta E. Interest Rate ISL none LI N E. Rente taux annuel effectif global/ jaarlijkse kostenpercentage arlige omkostninger i procent effektiver Jahreszins or anfânglicher effektiver Jahreszins r i KO TT pay[lot errjoLo CTTLTOKLO (EnE), etisio pragmatiko epitokio, (EPE) tasa anual équivalente + porcentaje anual de cargas financieras taux effectif global annual percentage rate of charge, (APR) tasso annuo effettivo globale, (TAEG) taux annuel effectif global effektief kredietvergoedingsperce ntage (op jaarbasis) (dekursiver) effektiver and fiktiver Jahres- zinssatz taxa anual de encargos efectiva global, (TAEG) todellinen vuosikorko / effectiv rànta effektiv rânta annual percentage rate, (APR) ârleg hlutfallstala kostnaôar Effektive Jahreszins effektiv rente English Translation global effective annual rate/ annual cost percentage annual costs in percent effective annual interest or initial effective annual interest annual effective interest rate annual equivalent rate + annual percentage of financial burden (tipo de interés E. ) global effective rate also annual percentage rate global effective annual rate global effective annual rate effective credit remuneration per centage (on the basis „year") (decursive) effective and fictitious annual interest rate global effective annual rate of burden effective annual interest effective interest also annual percentage rate of charges, (APRC) annual percentage rate of costs effective annual interest effective interest 33 115. The common elements are "Rate" The majority of Member States of the European Community and the other members of the EEA use the term "rate"69 "Annual" Except for France, Sweden and Norway70, other Member States use the term "annual". This is particularly important as France, for instance, still uses monthly or quarterly rates. "Effective" With the exception of Denmark, Spain, Ireland, the United Kingdom and This this Iceland, distinguishes between other interest rates used by lenders. the majority of the Member States use term. 116. As regards other terms found in some Member States, not all Member States include the concept of "interest" or "charge" in their term. Of those that do, Member States are fairly equally divided between those which refer to the result of the calculation (the interest rate)71 and those who prefer to refer to what it represents (the rate of charge)72. The inclusion of either term does not add significantly to the transparency of the term. 117. While some Member States do use the term "Percentage"73, it is so common as to be understood and the inclusion of the word does not add It should be noted, in any event, that the use of the significantly to transparency. term "percentage rate" is no substitute to providing accurate information to consumers. 118. Those elements which are most important for the transparency of the term are therefore those found in the Belgian, Greek, Italian, Luxembourg, Austrian and Portuguese terms i. e. "Rate", "Annual" and "Effective"74. 69 70 71 72 73 74 With the exception of Denmark, Germany, Netherlands, Finland, Sweden and Norway. However, it should be noted that Germany uses both the term "interest" and "interest rate" and the exclusion of the word "rate" seems to be language-specific. The Directive itself uses both terms and therefore those States which transcribed the Directive exactly should be considered as using the term "rate". In Norway, the term is, by its legal definition, an annual interest Denmark, Greece, Austria, Finland, Sweden, Norway Belgium, Spain, Ireland, Portugal, United Kingdom, Iceland Belgium, Denmark, Spain, Ireland, Netherlands, United Kingdom, Iceland The original 1979 Commission proposal used the terms "Effective Annual Rate of Interest", "Taux Annuel Effectif Global" and "Effektiver Jahreszins". While different terms, proposed by the European Parliament, were accepted in the 1983 Amended Proposal: "Annual Percentage Rate of Charge", "Taux annuel des frais" and "Jâhrlicher Belastungssatz", these later reverted to the original terms. By the time discussions reached the Council Working Group, the original French and German terms were again used, as also in the final version of the Directive. The term in the English language 34 "global". 119. An additional feature, found in the French language version of the Directive, and presently used by Belgium, France, Italy, Luxembourg, and Portugal is the word transparency and comprehension of the term for the average consumer as it indicates that the totality of the costs to be paid are contained in the annual percentage rate of charge This word adds considerably the to literal meaning, has led to problems 120. The fact that the wording used to translate the original term (taux annuel effectif global) differs from one Member State to another and is often different in its in practice because some of the denominations used in one country to denominate a certain "rate" are sometimes It would therefore used in other countries to denominate other, different "rates". be useful if some homogeneity and transparency could be achieved in order to assist in consumer comprehension. However, bearing in mind that much effort has been expended in communicating to consumers the meaning of the terms presently used in each Member State, it does not seem appropriate to propose a change in the wording used in the different languages. Nevertheless, it is desirable that a common feature be included in order to enable consumers, particularly in crossborder situations, to recognise these terms as being equivalent to those Following discussions with governmental experts it was felt that, rather than proposing that the different terms used in the different national legislation for "annual percentage rate of charge" be harmonised, and the principles of proportionality and subsidiarity, a common feature should be included in order to enable consumers to recognise these terms as being equivalent to the one in use in their own in Member State. accordance with the principles of proportionality and subsidiarity, it is proposed that the use of a symbol in addition to the existing term will be required. This symbol will be identical in each Member State. This will not constitute a change in the language of the term and will only involve a small additional cost for transposition. Following discussions with government experts, and in their own Member States. in accordance with in use 2. Accuracy 121. The Directive does not define the degree of accuracy required in the calculation of annual percentage rate of charge. The examples given in Annex III presuppose that Member States may prescribe an accuracy of one or two decimal places. It thus seems clear that the Directive demands at least accuracy to one decimal place. 122. Most countries in fact demand accuracy to one decimal place. This, however, can make consumer credit contracts for ECU 20,000 over 60 months look equivalent although they may actually differ in cost by about ECU 50 (5 * 0,0999 * 20,000/2 = 49. 99). As the scope of consumer credit legislation in many Member States covers much higher amounts and longer terms, the difference may In those Member States which include mortgage credit in the be up to ECU 500. version alternated between "effective annual rate of interest" and "annual percentage rate of charge" up until the final draft of the Directive. 35 scope of the Directive, the difference may amount to several thousand ECU. Such a discrepancy is not tolerable. 123. More accuracy should therefore be required for higher amounts of credit. At least two decimal places should be prescribed (though with the possibility of allowing one decimal place if one decimal represents costs of less than ECU 50). 3. Time definitions 124. Different definitions of time are in use in the Member States. The Directive that all calculations should be made with daily correctness implicitly states ((Remark b) of Annex II). It also states that intervals "shall be expressed in years or in fractions of a year"75. This assumes that a day, week or month can be expressed in a constant fraction of a year. APR rules Comments Practice of n o m i n al Interest 3 6 5 / 5 2 / 12 365 / 360 B DK — 365. 25 D 3 6 0/ 12 360 EL 3 6 5 / 5 2/ 12 *~ ES 3 6 5/ 12 365 F 365/ 12 •<~~ IR IT L NL O P SF SV UK ISL LI N 3 6 5 / 5 2/ 12 366 / 365 3 6 5/ 12 365/360/12 «- «- 366/365 <- 360 360/12 360/ 12 3 6 5 / 5 2/ 12 360 360/ 12 «- — <- «- «- — 12 months of different lengths Valuation is calculated for one day and converted to 365. 25 days (4 year average) 12 months of 30 days. 365 day year for certain transactions 12 months of equal lengths. 360 day years for loans, 365 for savings Valuation converted to 365 days Valuation is calculated for a period and converted to 365 days. 12 months of equal days. 12 months of equal lengths for one month and is calculated Each year equals the calendar year Actual months (28, 30, 31 days) 12 months of 30 days. 360 days for savings and consumer loans, 365 for commercial loans Each year equals the calendar year 12 months of 30 days 12 months of equal length 12 months of 30 days same as for nominal interest calculation 75 Remark c of Annex II 36 125. As can be seen from the above table, which indicates practice in different Member States, most countries for Germany, Austria, Sweden, (except Liechtenstein and Norway) have already introduced the correct calendar into their calculations. For default interest, German banks also use the 365 day year. For annual percentage rate of charge calculation, Denmark, Luxembourg and Spain prescribe 365 day years while Germany, Austria and Liechtenstein prescribe 360 day years. All other countries assume that the same year will be used as is used in nominal interest calculation. in the results achieved 126. The differences these variations are significant. For instance, a nominal interest rate of 18% p. a. for an open-ended credit used for one day gives an annual percentage rate of charge of 19. 422% p. a. if calculated at 360 days a year, and gives 19. 716% p. a. if calculated at 365 days a year76. through 127. There is no reason why calendar days should not be prescribed as the basis of a calculation while a year could generally be assumed to have 365 or 366 days (or 365. 25 days to take account of leap years, though the difference caused by the loss of one day every 4 years would not be significant enough to be noticed even with accuracy to two decimal places). Nor is there any need to compensate for a credit taken out in a shorter month. 128. Annex II should therefore be amended to state that a year is presumed to have 365 or 366 days. 76 The easiest way to do such calculations using computers is by using the calendar day because each computer has an inbuilt calendar. Calendar dates can be easily subtracted and the number of days defined. However, computers have extreme problems of definition when using the 360 day formula - a test of the relevant function in a popular spreadsheet program showed that their offer of a 360-day function is not correct because the sum of the days of 10 years differs by more than 10 days if calculated in one or in several intervals. A correct 360-day calculation is therefore impossible 37 VI. Conclusions and Recommendations 129. There is a list in Annex 2 of the national legislation which transposed the Directive in the Member States of the European Community and the other members of the EEA. 130. As regards the verbal definition of the annual percentage rate of charge, some amendments are required to the English and Greek language versions of the Directive. The proposed wording for the English version of Article 1a(1)(a) is as follows: The annual percentage rate of charge, which shall be that rate, on an annual basis, which equalises the present value of all commitments '(loans, repayments and charges), future or existing, agreed by the creditor and the borrower, shall be calculated in accordance with the mathematical formula set out in Annex II. and the proposed wording for the Greek version of Article 1a(1)(a) is as follows: irporyiioiTLKO TTOOOUTO eiufiôtpvvorjç -notpovoeç oi£îeç TOV avvôXov TTOV ettoûveL TWV Tp£xov&ûv viïoxpeûoeuv 0ivaXr]4>6e i airô TO ôave (àaveîwv, eÇocpXficeuv IOTT) non TO (ÔŒVe KOLTOLVOIXUITT), L nô TVTTO TTOV -notpoLTiB eTOii OTO KOLL eirifiotpvvoeuv) iÇô^ievo) ÇeTùtL oviiQuvot u. e TO uadrj^oiT oe T) TIOV erijoLO T IÇ (Sacq "To OVVOXLKO ETfjoLOi LieWovTLKÛV éxovv viroXoyt TTOipÔipTTJIKX I I ". 131. It is proposed to require the use of a symbol in addition to the term currently in use in each Member State for the "annual percentage rate of charge". This symbol will be identical in each Member State. 132. As far as the mathematical formula is concerned77, it is proposed, based on the arguments contained in this Report, that the formula in Directive 90/88 should be retained and made general throughout the European Community and the other members of the EEA. Article 1a(5) should therefore be removed from the Directive as it will no longer be necessary. 133. For the calculation, there should be a requirement of accuracy to two decimal places and a requirement to use a 365 or 366 day year. This will require amendment of the Annexes to the Directive. A correction would also have been necessary to the fourth example given in Annex III of the Directive to correct a 77 For the mathematical aspects, see Professor Seckelmann's Study of the method of calculation of APR in EEA states - Footnote 6 supra 38 miscalculation78 but this has been overtaken by the recalculation of the examples on the basis of accuracy to 2 decimal places and the use of a 365 or 366 day year. 134. Regarding the elements of cost to be included in the calculation, the transposition of the Directive by the Member States has led to a position where there is a harmonised minimum level of protection for all consumers throughout the European Community and the other members of the EEA in this respect. As Member States presently include almost the same elements in their calculation, and as any differences that do exist are minimal in nature, it is not proposed that the list of exemptions in Article 1a(2) should be amended at this time. In accordance with Article 1a(5)(b) of Directive 87/102, as amended by This will implement the 135. Directive 90/88, a draft Directive is being proposed. changes recommended above79. 136. As regards any other substantive elements of Directive 90/88/EEC, any proposals together with proposals for the amendment of the original Consumer Credit Directive 87/10280. in this regard would be considered for amendments 78 79 80 A mistake was made in this calculation. The result should be 13. 1855% according to spreadsheet calculation. This mistake in no way affects the correctness of the general formula, and the other examples are calculated correctly. It will also propose the deletion of Article 1a(3) of the Directive as this measure has not been availed of by any Member State. A Report on the operation of Directive 87/102 was published in May 1995 and the Commission is currently considering reactions to this Report. Any subsequent legislative proposal in this respect could include amendments to Directive 90/88. 39 (a) (b) (c) (d) (e) Annex I - Articles 1 and 1a of Directive 87/102 (as amended by Directive 90/88) Article 1 1. This Directive agreements. applies to credit 2. For the purposes of this Directive: accordance with the mathematical formula set out in Annex II. (b) Four examples of the method of calculation are given in Annex III, by way of illustration. 'consumer' means a natural person who, in transactions covered by this Directive, for purposes which can be is acting trade or as outside regarded profession ; his 2. For the purpose of calculating the annua! percentage rate of charge, the "total cost of the credit to the consumer" as defined in Article 1(2)(d) shall be determined, with the exception of the following charges: 'creditor' means a natural or legal person who grants credit in the course of his trade, business or profession, or a group of such persons ; 'credit agreement' means an agreement whereby a creditor grants or promises to grant to a consumer a credit in the form of a deferred payment, a loan or other similar financial accommodation. for Agreements the provision on a continuing basis of a service or a utility, where the consumer has the right to pay their for provision, by means of instalments, are not deemed to be credit agreements for the purpose of this Directive. the duration of them, for to 'total cost of credit the consumer' means all the costs, including interest and other charges, which the consumer has to pay for the credit. the credit total cost of 'annual percentage rate of charge' means the the consumer, expressed as an annual percentage of the amount of the credit granted and calculated in accordance with Article 1a. to Article 1a (a) be shall p r e s e nt rate of The annual percentage charge, which that equivalent, on an annual basis, to the commitments and charges), agreed by the creditor and borrower, shall be calculated all repayments (loans, future or existing, the in v a l ue of (i) charges payable by the borrower for non compliance with any of his commitments laid down in the credit agreement; (ii) charges other than the purchase price which, in purchases of goods or services, the consumer is obliged to pay whether the transaction is paid in cash or by credit; (iii) charges for receive towards payments funds and the transfer of charges for keeping an account intended to the reimbursement of the credit the payment interest and other charges except of the consumer does not have where reasonable the matter and where such charges are abnormally high; this provision shall not, however, apply to charges for collection of such payments, whether made in cash or otherwise; freedom of choice reimbursements or in (iv) membership subscriptions to associations or groups and arising from agreements separate from the credit agreement, even though such subscriptions have an effect on the credit terms; (v) charges for insurance or guarantees; included are, however, those designed to in the ensure payment to the creditor, event of the death, invalidity, illness or unemployment of the consumer, of a sum equal to or less than the total amount of the credit together with relevant interest to be and other charges which have imposed by the creditor as a condition for credit being granted. 3. (a) Where credit transactions referred to in this Directive are subject to the provisions of national laws in force 40 (b) only one mathematical formula for the annual percentage calculating rate of charge is used within their territory. to Six months before the expiry of the time limit laid down in point (a) the Commission shall submit the Council a report, accompanied by a proposal, which will make it possible in the light of experience, to apply a single Community mathematical formula for calculating the annual percentage rate of charge. (c) The Council shall, acting by a qualified majority on the basis of the proposal from the Commission, take a decision before 1 January 1996. in the the amount or In the case of credit contracts containing 6. rate of clauses allowing variations level of other interest and charges contained in the annual percentage rate of charge but unquantifiable at the time when it is calculated, the annual percentage the rate of charge shall be calculated on assumption interest and other charges remain fixed and will apply until the end of the credit contract. that necessary, 7. Where following assumptions may be made in calculating the annual percentage rate of charge: the there is no timetable if the contract does not specify a credit limit, the amount of credit granted shall be equal to the amount fixed by the relevant Member State, without exceeding a figure equivalent to ECU 2 000. for fixed if repayment, and one cannot be deduced from the terms of the agreement and the means for repaying the credit granted, the duration of the credit shall be deemed to be one year. the unless otherwise specified, where contract provides than one repayment date, the credit will be made available and the repayments made at the earliest the provided agreement. for more time for in than and, where those described to (v) not impose on 1 March 1990 which the annual limits on maximum percentage rate of charge for such transactions such provisions permit standard costs in other paragraph 2(i) to be included in those maximum limits, Member States may, solely in respect of such transactions, not the aforementioned costs include when annual calculating the percentage rate of charge, as stipulated in this Directive, provided that there is a requirement, in the cases mentioned in Article 3 and in the the credit agreement, consumer be the amount and inclusion thereof in the payments to be made. that informed of (b) Member States may no longer apply point (a) from the date of entry into force of the single mathematical formula for calculating the annual percentage rate of charge in the the to Community, provisions of paragraph 5(c). N pursuant 4. (a) (b) 5. (a) the The annual percentage rate of charge shall be calculated at the time is concluded, without prejudice to the provisions of Article 3 concerning advertisements and special offers. contract credit is valid that for The calculation shall be made on the credit the assumption contract the period agreed and that the creditor and the consumer their obligations under the terms and by the dates agreed. fulfil a transitional measure, As notwithstanding the provisions of paragraph 1(a), Member States to 1 March 1990, which, prior applied legal provisions whereby a mathematical formula different from that given in Annex II could be used annual for rate, of charge, may percentage continue formula that within their territory for a period of three years starting from 1 January 1993. c a l c u l a t i ng applying the Member States shall the appropriate measures to ensure that take 41 Annex II National Legislation transposing Directive 90/88/EEC Further details on the national legislation can be found in the Report prepared by Professor Seckelmann on the Method of calculation of APR in the EEA States, available from DG XXIV. Belgium Transposing Legislation: Scope: Term used: Formula used: Elements of cost: Other: Denmark Transposing Legislation: Scope: Term used: Formula used: Elements of cost la consommation relative au crédit à Loi / Wet op het consumentenkrediet 1991/1723 of 12. 6. 91, supplemented by Arrêté Royal relatif aux coûts. du crédit à la consommation / Koninklijk besluit betreffende kosten. van het consumentenkrediet 1992/2311 of 4. 8. 92, both of which have been amended since. Most kinds of credit (including mortgages and current accounts), Wider than the marketing of credit, activities of intermediaries. Directive, with limits on interest rates and lifespans of loans and specifies inadmissible terms Taux Annuel Effectif Global / Jaarlijkse Kostenpercentage Equivalent to EC formula Open list of elements to be included. Same exemptions as in Article 1a2 reasonable choice is given. Other legislation on the subject: Loi 1992/1833 of 6. 7. 92, Arrêté Royal / Koninklijk besluit 1992/2905 (Errata) of 4. 8. 92, Arrêté Royal / Koninklijk besluit 1992/2312 of 4. 8. 92, Arrêté Royal / Koninklijk besluit 1993/1226 of 27. 4. 93, Arrêté Royal / Koninklijk besluit 1993/1381 of 29. 4. 93 Insurance not excluded, is whether but criterion lov n* 284 of 29/04/92 and Lov om kreditaftaler 1990/398 of 13. 6. 90 amended by Lov n* 322 of 31. 05. 91, lov n° 226 of 06. 04. 94, supplemented by Bekendtgorelse n° 896 of 21. 12. 90 and Bekentsgorelse 970 of 07. 12. 92and Bekendtgorelse n° 497 of 13. 06. 94; Lov om maerkning og skiltning med pris n° 395 of 13. 6. 90; and Bekendetgorelse n° 902 of 12. 11. 92 Wider than the Directive - deals with real estate loans secured by mortgage (traded as bonds) ârlige omkostninger i procent EC formula Same exemptions as in Article 1a2 though more comprehensive (account and transfer costs are only exempted if consumer has reasonable choice and costs are not excessive) Other: Germany Transposing Legislation: Other legislation on the subject: Lov 1991/456 of 17. 6. 91 amended by Lov 1994/429 of 1. 6. 94; n° 322 of 31. 05. 91, n° 284 of 29. 04. 92, n° 226 of Bekendtgorelse 06. 04. 94, n° 1098 of 21. 12. 94, n° 970 of 07. 12. 92 and n" 1228 of 21. 12. 92 Erste VO (von 03. 04. 92) zur Anderung der Preisangabenverordnung (von 14. 3. 85) 42 Scope: In some respects wider than the Directive, with regulations on default and intermediaries. effektiver Jahreszins or anfanglicher effektiver Jahreszins Term used: Formula used: Derogation in Article 1a5a - Staffelrechnung (cascade calculation) Elements of cost: Literal transposition, using the exemptions in article 1a2. Insurance which does not secure repayment is exempt, whether mandatory or not. Other: Other legislation on the subject: 14. 3. 85, Article Ausfuhrungshinweise zu §4 PAV of 18. 12. 92; Verbraucherkreditgesetz of 17. 12. 90, amended 27. 4. 93 609a BGB; Preisangabenverordnung of Greece Transposing Legislation: Scope: Term used: Formula used: EC formula Elements of cost: Other: Ministerial Decision 01-983 of 7. 3. 91 As in Directive etisio pragmatiko epitokio As in Article 1 a2 Other legislation on the subject: Decision 1993/524 of the Committee of Money and Credit of the Bank of Greece, of 8. 4. 93; Acts of the Governor of the Bank of Greece n° 1993/2213 of 15. 6. 93; n° 1993/2258 of 2. 11. 93; n° 1994/2286 of 28. 1. 94 Spain Transposing Legislation: Scope: Term used: Formula used: Elements of cost Ley de crédito al consumo 1995/7 of 23. 3. 95 and correction 12. 5. 87 As in Directive, but interest rate and total cost must also be stated for mortgages. tasa anual équivalente and porcentage anual de cargas financieras Equivalent to EC formula All charges are included in the rate, including mandatory insurance charges (and non-mandatory insurance charges are not listed as exempted). Other: Other legislation on the subject: Ley 1965/50 of 21. 7. 65; Orden Banco de Espana of 16. 6. 88, Ley 1988/26 of 29. 7. 88; Orden 1989/303 of Min. Economia y Haciendas of 12. 12. 89; Circular Banco de Espana 1990/8 of 7. 9. 90, n° 1993/13 of 21. 12. 93 and 1994/5 of 22. 7. 94; Ley 1994/2 of 30. 3. 94, Orden Banco de Espana of 5. 5. 94; Directive 90/88 has not been transposed in France. France Transposing Legislation: Scope: taux effectif global Term used: Formula used: -- Elements of cost: Other: By existing legislation, all charges are included in the rate Other legislation on the subject: Loi 1966/1010 of 28. 12. 66, Loi 1978/22 of 10. 1. 78 amended by 1979/596 of 13. 7. 79; Ordonnance 1986/71243 of 1. 12. 86; Loi 1988/15 of 5. 1. 88; Décret 1988/293 of 31. 3. 88; Loi 1989/1010 of 31. 12. 89; Loi 1992/60 of 18. 1. 92; Décret 1985/944 of 8. 9. 85; Loi 1993/949 of 26. 7. 93; Décret n* 1978/372 of 17. 3. 78, n* 1987/509 of 24. 3. 78; n" 1988/293 of 25. 3. 88; Loi 1995/125 of 8. 2. 95 43 Ireland Transposing Legislation- Scope: Term used: Formula used: Elements of cost: Other: 1995 Consumer Credit Act, 28. 7. 95 Wider than the Directive annual percentage rate of charge EC formula Generally the same as Art. 1a2 Other legislation on the subject: Consumer Information (Consumer Credit) Order SI 1987/319 of 10. 12. 87 Italy Transposing Legislation: Scope: Term used: Formula used. Elements of cost: Other: Legge communitaria 1991/142 of 19. 2. 92; Decreto vista 1992/142 of 8. 7. 92 Wider than the Directive - neither loans before notaries nor loans to be repaid by 4 instalments in 12 months are not exempted, and credit purchases are included. tasso annuo effettivo globale EC formula legge la As in Article 1a2. Open list of charges to be included Other legislation on the subject: Legge 1992/154 of 17. 2. 92; Decreto on Legge 1992/154, 24. 4. 92; Instruzioni della Banca d'ltalia legge 1992/154, 24. 4. 92; Legge in materia bancaria e creditizia 1993/385 in attuazione della Luxembourg Transposing Legislation: Scope: Term used: Formula used: Elements of cost: Other: Règlement Grand-Ducal 26. 8. 93 As in Directive but credit card accounts are treated the same as other accounts taux annuel effectif global EC formula Same as in Article 1 a2 Other legislation on the subject: Loi 9. 8. 93; Avant-projet de règlement grand-ducal déterminant les modalités de calcul du montant de la réduction équitable du coût total de crédit Netherlands Transposing Legislation: Scope: Term used: Formula used: Elements of cost Wet op het consumentenkrediet 4. 7. 90 Stb 1990/395 Wider than the Directive and very detailed. Regulation of intermediaries and obligation on lenders to advise debtors. Maximum rates. effektief kredietvergoedingspercentage (op jaarbasis) Equivalent to EC formula Only 1a2(i) & (ii) are used. obligatory, they are not exempted. If account fees or insurance fees are Other: Other legislation on the subject: Besluit n' 1991/515 and 1991/516 of 9. 10. 91; n° 548 of 17. 10. 91, n* 549 of 16. 10. 91, n* 550 of 18. 10. 91; Regeling 1991/220 of 6. 11. 91; Regeling register vergunninghouders Stcr 1991/220 of 6. 11. 91 44 Austria Transposing Legislation: Scope: Term used: Formula used: Elements of cost Other: 13. 07. 93 Bankwesengesetz BGBL n° 532 of Verbraucherkreditverordnung n° 110 of 13. 05. 93 Wider than the Directive in some respects. No form of credit exempt - applies to real estate loans, mortgages and loans of any amount or duration. Certain leasing transactions also seen as being equivalent to hire-purchase. (dekursiver) effektiver and fiktiver Jahreszinssatz Equivalent to EC formula (Section VIII); Only 1a2(i) & (iii) are used. 360 day year used Other legislation on the subject: Insurance is included if mandatory. Konsumentenschutzgesetz 1979/140 of 8. 3. 79, amended by 1993/247 of 16. 4. 93; Konkursordnungsnovelle 1993/974; Gewerbeordnung 1994/194 Portugal Transposing Legislation: Scope: Term used: Formula used: Elements of cost: Other: Decreto-Lei 1991/359 of 21. 9. 91 Wider than the Directive in the range of credit covered. Mortgages not covered. taxa anual de encargos efectiva global EC formula Same as in Article 1a2. Intermediaries' costs included. Finland Transposing Legislation: Scope: Term used: Formula used Kuluttajansuojalaki / Konsumentskyddslag 1978/38 of 20. 1. 78, as amended by 1986/385 of 23. 5. 86, 1993/85 of 8. 1. 93 and 1994/16 of 5. 1. 94: Asetus / Fôrordning 1993/1602 of 30. 12. 93 as amended by 1994/16 of 1. 7. 94 Wder than the Directive - includes loans to buy homes and mortgages. todellinen vuosikorko / effektiv rànta Derogation in Article 1a5a. Formula: Decision of Ministry of Trade and in Chapter 7 of the Industry on the application of certain provisions Consumer Protection Act (1986/874 of 30. 06. 86 as amended by 1994/661) Elements of cost: Other: All charges, except for non-mandatory insurance, are included Other legislation on the subject: Luottolaitoslaki / Kreditinstitutslag 1993/1607 of 30. 12. 93 Sweden Transposing Legislation: Scope: Term used: Formula used: Elements of cost. Konsumentkreditlag 1992/830 Wder than the Directive - covers all forms of loans, including mortgages and those connected with credit-purchases and current accounts effectiv rànta EC formula All charges are included (no exemptions are listed though in practice Insurance is not mentioned but if those in the Directive are used). it is mandatory, must be included. Other: Other legislation on the subject: Guidelines 1992/4 for the application of Konsumentendreditlag 1992/830; Executive Order 1992/1010 of 22. 10. 92 45 United Kingdom Transposing Legislation: Scope: Term used: Formula used Elements of cost: Other: 1 9 7 4; T he C o n s u m er C o n s u m er C r e d it Act (Agreements)(Amendments) Regulation Statutory Instrument 1984/1600 of 22. 10. 94 More comprehensive than the Directive annual percentage rate of charge Equivalent to EC formula C r e d it As in Article 1a2. All mandatory costs included. Other legislation on the subject: Consumer Credit Act 1974; The Consumer Credit Regulations - Statutory Instruments 1980/51 of 29. 1. 80, 1983/1553 of 3. 11. 83, 1983/1562 of 3. 11. 83, 1983/1564 of 3. 11. 83, 1985/1192, 1989/596 of 14. 4. 89; 1989/869 of 24. 5. 89; 1989/1125 of 6. 7. 89; 1989/1126 of 6. 7. 89 Iceland Transposing Legislation: Scope: Term used: Formula used: Elements of cost Log urn neytendalan 1993/30, amended by 101/1993 - consolidated in Log urn neytendalan 1994/121 of 21. 9. 94 Hirepurchase and leasing agreements are included ârleg hlutfallstala kostnaôar EC formula As in Article 1a2. All costs, including non-mandatory insurance, are included. Other: Other legislation on the subject: Regulgerô 1993/377 of 3. 9. 93 and Regulgerô 1993/491 of 3. 12. 92 Liechtenstein Transposing Legislation: vom 22 Oktober Gesetz (Liechtensteinisches Landesgesetzblatt 1993 n°50 von 9/3/93) Effektiver Jahreszins EC formula 1992 ùber den Konsumkredit Term used: Formula used: Elements of cost: As in Article 1a2 Other: 360 day year used Norway Transposing Legislation: Scope: Term used: Formula used: Elements of cost Other: Lov om kredittkjop 1985/82 of 21. 6. 85 as amended; Forskrift kredittkjopsloven 1986/1616 of 15. 7. 86; Forskrift 1990/437 of 1. 6. 90 Narrower than the Directive in that it only covers purchase credit, but wider in that only immovable property is exempt - covers more than consumer purchases, covers wider range of current accounts, effectiv rente EC formula (to be implemented in 1996) til As in Article 1a2 Other legislation on the subject: Lov om amendment 4. 12. 92 finansieringsvirksomnet og finansinstitusjoner 1988/40 and 46 Annex III For the references to the German and French formulae, see footnotes 46 and 50 respectively. Formula used for calculating APR in Finland: Single Credits: P= 1 2 x 2 0 0 xR K x (T + L) in which P= R = K = T = L = APR the amount of total costs the amount of initial loan repayment period expressed in months the interval between repayments expressed in months Current Accounts: 100 x yearly credit costs P = typical amount of credit [Provided by the Consumer Ombudsman's Office, Finland] 47 EXPLANATORY MEMORANDUM Background - Directives 87/102/EEC and 90/88/EEC 1. 2. 3. In 1975, the Council adopted the Preliminary Programme of the European Economic Community for a consumer protection policy\ in which they emphasised the fundamental nature of the consumer's right to protection of their economic interests, and urged that priority be given, inter alia, to the adoption of measures at Community level to harmonise the general conditions of consumer credit. The Commission's original proposal on consumer credit2 was amended3, following Parliament's suggestions, to provide the establishment of a uniform method for the calculation of the annual percentage rate of charge for credit. for The Council adopted Directive 87/102/EEC4 for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit, on 22 December 1986. The ninth recital and Article 5 of this Directive provided for the introduction of a Community method or methods of calculating the 'annual percentage rate of charge' for credit. However, as the elaboration of a common formula for the calculation of the 'annual percentage rate of charge', and the elements to be includea in this calculation, had proved contentious, Directive 87/102 stated that, "pending a decision on a Community method or methods of calculating the 'annual percentage rate of charge', Member States should be able to retain existing methods or practices" and that the "total cost of credit to the consumer" (Article 1. 2d) and the 'annual percentage rate of charge' (Article 1. 2e) should be determined and calculated in accordance with the provisions, practices and methods existing in the Member States. Following discussions with government experts, the Commission presented a proposal for a Directive5. The European Parliament6 and the Economic and Social Committee7 recommended the regulation not only of the mathematical aspects but also of the elements of cost to be included in the calculation. As most Member States were willing to adopt the actuarial method of calculation and were also willing to deal with the elements of cost to be included, an 1 OJ C 92 25. 04. 75 2 OJ C 80 27. 03. 79 p. 4 3 OJ C 183 10. 07. 84 4 O JL 42 12. 2. 87 5 OJ C 155 14. 6. 88 p. 10 6 EP Report A2-418/88 of 06. 03. 89; EP Resolution of 15. 03. 89 7 ECOSOC Opinion, OJ C 337 31. 12. 88 p. 1 <h 4. 5. 6. 7. 8. amended proposal dealing with both aspects was presented in 19898. Directive 90/88/EEC was adopted on 22 February 1990 and introduced a Community method of calculating the 'annual percentage rate of charge' for consumer credit and defined the credit cost items to be used in the calculation by indicating those costs which were not to be taken into account. All Member States9 were to ensure, at least, that only one mathematical formula for the calculation was in use in their territory for that purpose. For a transitional period until 1 January 1996, those Member States which, on a legislative basis, used a different mathematical formula for the calculation of the 'annual percentage rate of charge' (prior to 1 March 1990) were permitted to continue to do so10. Article 1a(5)(b) of Directive 87/102 (as added by Directive 90/88) requires the Commission to present to the Council "a Report, accompanied by a proposal" which will make it possible to apply a single Community mathematical formula for calculating the 'annual percentage rate of charge'. The Commission has prepared a Report on the operation of Directive 90/8811 which explains in more detail the reasons for the proposals for amendment presented below. This Report is based on a study prepared by a consultant expert in financial mathematics12, on studies of the transposition of the Directive into domestic law13 and, particularly, contacts with government experts14. While Article 1a(5)(c) states143 that the Council shall, acting on the basis of the Commission's proposal, "take a decision", this is not a 'Decision' as defined by Article 189 of the Treaty but rather, since its objective would be to require This interpretation is in Member States to change their laws, a Directive. OJC 155 23. 06. 89 p. 4 Directive 90/88 was incorporated into the Agreement on the European Economic Area (EEA) and the Report (see footnote 11 infra) therefore covers Iceland, Liechtenstein and Norway as well as the 15 members of the European Union Article 1a(5)(a) of Directive 87/102 (as added by Directive 90/88) COM(96)79 Professor Seckelmann has prepared a study on the Methods of calculation in the European Economic Area of the Annual Percentage Rate of Charge (available from DG XXIV) Footnote 3 of COM(95)117, Report on the operation of Directive 87/102/EEC on the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit Meetings were held in Brussels in April 1995 and January 1996, with continued direct contacts in the intervening months. The French and Italian versions of the Directive do not refer to a "decision" 9 10 11 12 13 14 14a Eto accord with that previously given to Article 5 of Directive 87/102 which referred to a 'decision' on the introduction of a Community method - the method was in fact introduced by a Directive (Directive 90/88/EEC). Proposals for the amendment of Directive 87/102 (as amended by Directive 90/88): 9. 10. As has been explained in more detail in the Report on the operation of Directive 90/8815, there are almost as many denominations for the Annual Percentage Rate of Charge in use as there are Member States. this reason, in the interests of transparency and of For the same reasons that it is desirable, in order to ensure the proper functioning of the Internal Market and to ensure a high level of protection of consumers, that one single method be used for the calculation of the annual percentage rate of charge be used throughout the European Community and the other members of the EEA, it is also desirable that consumers should be able to recognise the terms used in other Member States to indicate this rate. increased For comprehension by consumers, it is desirable that a common feature be included in order to enable consumers to recognise these terms as being equivalent to the one in use in their own Member States. Following discussions with government experts, and the principles of proportionality and subsidiarity, it is not proposed to suggest the harmonisation of the different terms in the different languages, but rather to require the use in all consumer credit of a symbol advertisements and written agreements with consumers. This symbol will be identical in each Member State. This will entail the amendment of Article 3 and 4(2) of Directive 87/102 (as amended by Directive 90/88) in order to require the use of a sumbol in addition to the existing term "annual percentage rate of charge" in all consumer credit advertisements and written agreements with consumers. in addition to the existing in accordance with term 11. In order to harmonise the different existing language versions of the Directive, the amendment of Article 1a(1)(a) in the English and Greek language versions of the Directive is required16. The article will now read as follows (identical to the French language version): The annual percentage rate of charge, which shall be that rate, on an annual basis, which equalises the present value of all commitments (loans, repayments and charges), future or existing, agreed by the creditor and the borrower, shall be calculated in accordance with the mathematical formula set out in Annex II. 15 16 Paragraphs 113 - 120 of the Report This amendment has been discussed with and agreed by Ireland and the United Kingdom (as far as the words "that rate. which equalises" are concerned). 5Ï and the proposed wording for the Greek version of Article 1 a(1)(a) is as follows: "TO OVVOXl KÔ €TT)0~ LO 1TpOty\JaT L KO 1TOOOOTÔ 6 7T L (Sap V V 07] Ç ITOU 6 £ LOù3V€ L oe eTf\o'ioL (3aorj TLÇ ^eXXovTLKù)vviToxpeù)oeix)v(ôoiveiG)v, TTOV éxovv KOLTOLVOlXbiTT), VÏÏOX OJ L f 6 TOL L O V P0W V 01 Ue TO \lŒÔ T]\l0LT L K. O TV1TO TTOV •ïïOtpOLT L de TOtl OTO 7TOL p Ôt p T7][\a. I I ". f) eCocfrXijoeuv KŒL eir L(3ocpv voeuv) i f ope vo) irocpovoeç a £ i eç TOV ovvôXov otvotXr)<fid et airô TWV rpexouoûv TO ôaveLUTf) (ôave non TO 12. 13. Article 1a(3) of the Directive permitted Member States who had national laws in force on 1 March 1990 which imposed maximum limits on the annual percentage rate of charge and which excluded costs other than those referred to in Article 1a(2), to continue to rely on these provisions (provided that the consumer is informed of these charges). As no Member State has made use In any event, it of this possibility, it is appropriate to delete Article 1a(3). would be necessary to delete this Article once the formula was confirmed as proposed by the present proposal for a Directive. in the Report on the Operation of Directive As has been demonstrated 90/88/EEC, the formula contained in Annex II of the Directive is completely correct and should be confirmed throughout the European Economic Area. This will entail the replacement, in Germany, France and Finland, of the formulae presently in use. Neither the German nor the French formulae use exponential calculation, resulting in a situation where neither can apply a one year compounding period for all circumstances. The main differences in relation to the German formula17 relate to short term credit, a form increasingly used e. g. credit cards. Indeed, some German banks already use the EC formula for calculating rebates because the older system is inapplicable in cases of unequal instalments. With the French18 formula, the monthly rate is converted to an annual rate by multiplying by twelve. This is misleading as it is not based on an annual compounding period and thus leads to very significant differences with the EC formula. French consumer credit contracts thus appear artificially more favourable to consumers than those of other Member States. While the German system is mathematically inconsistent and creates artificial differences in calculations, it has only modest effects on most ordinary instalment credit. The French system deviates so significantly as to mislead not only non-French consumers but also French consumers. 14 As an example, in a loan of 1000 ECU, with 10 ECU interest each month, the following results are achieved using the different formulae: 17 See paragraphs 64-75 of the Report on Directive 90/88 18 See paragraphs 76-81 of the Report on Directive 90/88 5X Term (months) 6 12 18 24 48 Cost German method EC method French method 60 120 180 240 480 21. 49 24. 66 24. 27 24. 34 23. 09 22. 29 23. 70 24. 00 23. 84 22. 86 20. 29 21. 46 21. 65 21. 58 20. 75 15 16. The German deviation is signficant for periods of less than one year while the French deviation is more general and serious. The advantages of the EC formula19 are that mathematically, the use of a single formula is the only way to guarantee that the price represents equal conditions; that it enables consumers to shop across borders in the Single Market; that it simplifies the legal framework for consumer credit in different Member States and promotes consistency in the national transposition measures. Production costs for software companies and financial institutions will be reduced due to the economies of scale provided by the use of a single formula throughout the Single Market. The potential cost of adapting computer programmes and price structures to handle the EC formula is not a striking argument as banks in those Member States which already use the formula have already made this investment. Those banks that will now be obliged to change frequently adapt their programmes to take account of case law and administrative rules on the subject and, in addition, already use the EC formula for some (internal) calculations. It is therefore necessary to delete Article 1a(5), the Article which provided a derogation until 31 December 1995 (used by Germany and Finland) to those Member States who wished to retain a different method for the calculation of the annual percentage rate of charge. As has been demonstrated in the Report on the Operation of Directive 90/88/EEC, the formula contained in Annex II of the Directive should be confirmed throughout the European Community and other members of the EEA. As a result, Article 1a(5)(a) (the derogation), Article 1a(5)(b) (the reference to the Report and this legislative proposal) and Article 1a(5)(c) (the reference to the decision to be taken by the The Council), are no longer necessary and should be deleted. confirmation of the formula contained in Annex II will entail changes in the legislation presently in force in Germany, France and Finland. 17. Linguistic changes have also been proposed to the wording of the definitions in Annex II in certain language versions - namely Spanish, French and Dutch. 18. While the Directive does not at present define the degree of accuracy required 19 See paragraphs 82 - 93 of the Report on Directive 90/88 55 in the calculation of the annual percentage rate of charge, the examples in Annex III presuppose accuracy to at least one decimal place. Most Member States require accuracy to at least one decimal place. As the scope of many Member States'consumer credit legislation covers higher amounts and longer terms than in the Directive, the differences as a result of the level of accuracy become important, especially in those Member States which include mortgage credit in the scope of their legislation. It is therefore necessary that accuracy to two decimal places should be required (though accuracy to one decimal place could be allowed where the difference is less than ECU 50). This would also entail amendment of Annex II and of the examples in Annex 19. 20. 21. The Directive states in Annex II that intervals shall be expressed in "years or in fractions of a year". This dates from the pre-computer era when, for ease of calculation, a year was defined as having 12 equal months, 52 weeks and 360 days. Compounding periods were likewise set at full months or years in order to make end-of-year calculations possible. This leads to situations where the 31st day of some months is ignored and 2 days are added to February in order to arrive at 12 equal 30 day months. In practice, most Member States (with the exception of Germany, Austria, Sweden, Liechtenstein and Norway) have introduced the correct calendar into their calculations. Even in those Member States, the correct calendar year of 365 days is used for certain calculations. Use of a 365 day year is, moreover, in conformity with computer programmes all over the world - computers automatically calculate on the basis of a 365 day year and the number of days in a given time period. As the differences in the rates for credit calculated on a 360 day year and a 365 day year can be significant, it is necessary that Annex II should be amended to state that a year is presumed to have 365 or 366 days20. This would also entail amendment of Annex II and of the examples in Annex III. This proposal would, in practice, only affect Germany, Austria, Sweden, Liechtenstein and Norway, who presently use a 360 day year in their calculations. A miscalculation in the fourth example in Annex III also needed correction - instead of 13. 21% the answer should have been 13. 1855 or 13. 19%. This correction has, however, been overtaken by the recalculation of the examples on the basis of accuracy to 2 decimal places and the use of a 365 or 366 day year. 22. No proposals are put forward at this time concerning the list in Article 1a(2) of the Directive (the elements of cost to be excluded from the calculation of the annual percentage rate of charge) as most Member States include the same elements and such differences as do exist are minimal in nature. As regards amendment of any other substantive elements of Directive 90/88/EEC, any 20 While Denmark uses a year of 365. 25 days, averaged over 4 years, in order to take account of leap years, this is not proposed for the Directive as the difference would not be significant enough to be noticed in a calculation which uses accuracy to 2 decimal places. 9i proposals in this regard would be considered together with proposals for the amendment of the original Consumer Credit Directive, Directive 87/102/EEC21. Legal situation pending the adoption of the proposed Directive 23. 24. As a result of changed circumstances following the enlargement of the European Union to include Austria, Finland and Sweden, and the delayed transposition of Directives 87/102 and 90/88 by certain Member States, the Commission was unable to present the Report and proposal mentioned in Article 1 a(5)(b) by 1 July 1995, and the Council and Parliament were unable to adopt the proposed draft Directive by 1 January 1996. Article 1a(5)(a) of Directive 87/102 permitted Member States, as a transitional measure, to continue to apply legal provisions for the calculation of the global annual effective rate different to those in the Directive for a period of three years starting from 1 January 1993 (i. e. until January 1 1996). The Commission interprets Article 1a(5)(b) as an implicit prolongation of this period until the adoption of the Directive referred to in Article 1a(5)(c). Germany, France and Finland may therefore continue to apply existing legal provisions different to those in Annex II of Directive 87/102 until the adoption of the proposed Directive. 21 A Report on the operation of which was published in May 1995 [COM(95)117 of 11. 05. 95], reactions to which are currently under consideration by the Commission. Any subsequent legislative proposal in this respect could include amendments to Directive 90/88. 55 DIRECTIVE 96/ OF THE EUROPEAN PARLIAMENT AND THE COUNCIL of 1996 amending Directives 87/102 (as amended by Directive 90/88) for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit T HE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION, Having regard to the Treaty establishing the European Community, and in particular Article 100a thereof, Having regard to the proposal of the Commission1, Having regard to the opinion of the Economic and Social Committee2, Acting in accordance with the procedure laid down in Article 189b of the Treaty3, Whereas it is desirable, in order to promote the establishment and functioning of the internal market and to ensure that consumers benefit from a high level of protection, that one method of calculating the annual percentage rate of charge should be used throughout the European Community, Whereas Article 5 of Council Directive 87/102/EEC4 provides for the introduction of a Community method or methods of calculating the annual percentage rate of charge for consumer credit; Whereas, in order to introduce this single method, it is desirable to draw up a single mathematical formula for calculating the annual percentage rate of charge and for determining the credit cost items to be used in the calculation by indicating those costs which must not be taken into account, Whereas Annex II of Directive 90/88/EEC (5) introduced a mathematical formula for the calculation of the annual percentage rate of charge and Article 1. 2 of Directive 90/88 provided the charges to be excluded from the calculation of the 'total cost of credit to the consumer', Whereas during a transitional period of three years from 1 January 1993, Member States which prior to 1 March 1990 applied laws which permitted the use of another mathematical formula for calculating the annual percentage rate of charge, were permitted to continue to apply such laws, 4 5 OJ n° L42 12. 2. 87 p. 48 OJ L61 10. 3. 90 p. 14 5f Whereas the Commission has submitted a Report to the Council (6) which makes it possible, in the light of experience, to apply a single Community mathematical formula for calculating the annual percentage rate of charge, Whereas no Member State has made use of Article 1a(3) of the Directive by which certain costs were excluded from the calculation of the annual percentage rate of charge in certain Member States, it has become obsolete, Whereas accuracy to two decimal places and the use of a 365 or 366 day year is necessary, Whereas it is desirable that consumers should be able to recognise the terms used in different Member States to indicate the 'annual percentage rate of charge', and that the use of a common symbol, in addition to the existing term, should be mandatory in all consumer credit advertisements and written agreements with consumers throughout the European Community, HAVE ADOPTED THIS DIRECTIVE: COM(96)79 3 Article 1 Whenever the term "annual percentage rate of charge", or the equivalent term in another Community language, is used as required by Directive 87/102, it shall be accompanied by the following symbol: it it w it it % it it it it it it^it Article 2 Article 1a(1)(a) shall be replaced by the following: in the Greek language version of the Directive: eTijoLO TLÇ "To OVVOXIKO eTf)oia. Pâorj [ieXXovT L KQV VTroxpcûoeuv ixovv vnoXoyi Trapâprr/Uck; I I ". f e ra i avU^wva ' irapoûoeç a£ïeç irpocy\JaT L KO TTOOOCTO eir ifiâpu vorjç TTOV e^toûvei ce f) (ôav e ïuv, e^o4>Xf)oeuiv KÙ L eir tfiotpv voeojv) TTOV non TO (ôave L f ôUe v o) KaTcuvaXuTfj, [iaôr}[iaT L KO TOTTO TTOU uapaTÏ 6 e Ta L OTO TÙJV Tpexovoœv ovvôXov \ie TO rov avaXri(f)d et otirô TO botveiOTf] in the English language version of the Directive: The annual percentage rate of charge which she!! be that rate, on an annual basis which equalises the present value of all commitments (loans, repayments and charges), future or existing, agreed by the creditor and the borrower, shall be calculated in accordance with the mathematical formula set out in Annex (II). ' Article 1a(3) shall be deleted. Article 1a(5) shall be deleted. Article 3 Article 4 Article 5 Article 3 shall be amended as follows: Without prejudice to Council Directive 84/450/EEC of 10 September 1984 relating to the approximation of the laws, regulations and administrative provisions of the Member States concerning misleading advertising, as amended by Council Directive /96 of. 1996 concerning comparative advertising, and to the rules and principles applicable to unfair advertising, any advertisement, or any offer which is displayed at business premises, in which a person offers credit or offers to arrange a credit agreement and in which a rate of interest or any figures relating to the cost of the credit are indicated, shall also include a statement of the annual percentage rate of charge, accompanied 5f by the symbol as mentioned in Article 1 of this Directive, by means of a representative example if no other means is practicable. Article 6 Article 4(2)(a) shall be amended as follows: (a) a statement of the annual percentage rate of charge, accompanied by the symbol as mentioned in Article 1 of this Directive Annex I attached hereto shall become Annex II, replacing Annex II of Directive 87/102 (as amended by Directive 90/88). Article 7 Annex II attached hereto shall become Annex III, replacing Annex III of Directive 87/102 (as amended by Directive 90/88). Article 8 Article 9 1. Member States shall bring into force the laws, regulations and administrative provisions necessary for them to comply with this Directive no later than 31 December 1996 and shall inform the Commission thereof. When Member States adopt those measures, they shall include references to this Directive or shall accompany them with such references on their official publication. The Member States shall lay down the manner in which such references shall be made. 2. The Member States shall communicate to the Commission the texts of the provisions of national law which they adopt in the field governed by this Directive. This Directive is addressed to the Member States Article 10 Done at Brussels, 1996 L Annex I Annex II THE BASIC EQUATION EXPRESSING THE EQUIVALENCE OF LOANS ON THE ONE HAND AND REPAYMENTS AND CHARGES ON THE OTHER K = m E A f -1 A -^-7 (1 + / ) '* K' = m' - E fC =1 A* * (1 + /)'*• Meaning of letters and symbols: K K' AK A\- J2 is the number of a loan is the number of a repayment or a payment of charges is the amount of loan number K is the amount of repayment number K' represents a sum m is the number of the last loan m ' is the number of the last repayment or payment of charges tK tK- i is the interval, expressed in years and fractions of a year, between the date of loan No. 1 and those of subsequent loans Nos. 2 to m is the interval, expressed in years and fractions of a year, between the date of loan No. 1 and those of repayments or payments of charges Nos. 1 to m' is the percentage rate that can be calculated (either by algebra, by successive approximations, or by a computer programme) where the other terms in the equation are known from the contract or otherwise. Remarks (a) (b) (c) (d) The amounts paid by both parties at different times shall not necessarily be equal and shall not necessarily be paid at equal intervals The starting date shall be that of the first loan Intervals between dates used in the calculations shall be expressed in years or in fractions of a year. A year is presumed to have 365 or 366 days The result of the calculation shall be expressed with an accuracy of 2 decimal places. If the figure at the third decimal place is greater than or equal to 5, the figure at the second decimal place shall be increased by one. 61 Annex II "Annex III: EXAMPLES OF CALCULATION First example Sum loaned: S = 1000 ECU on January 1 1994 It is repaid in a single payment of 1200 ECU made on June 30 1995 (547 days after the date of the loan) 1 2^ 647 (1+4 365 The equation becomes: 1000 = or 547 (1+4 365 ~ 1. 2 1 + i= i = 1. 129444207. 0. 129444207. This amount will be rounded to 12. 94% Second example The sum loaned is S = 1000 ECU but the creditor retains 50 ECU for administrative expenses, so that the loan is in fact 950 ECU; the repayment of 1200 ECU, as in the first example, is again made on June 30 1995. The equation becomes: 547 365 = 1 ,2 1200 547 365 (1+J) 950 = or (u& I1 +0 =1200 950 =1 I 2 631 57 1 + i = i = 1. 1688996. 0. 1688996. rounded to 16. 89% a Third example The SLm loaned is 1000 ECU, repayable in two amounts, each of 600 ECU, paid after one and two years respectively. The equation becomes: 1000=- 600 1 +/ 600 (1 +/)730/365 600 600 1 +/ (1 + /)2 It is solved by algebra and produces i = 0. 1306623, rounded to 13. 07% Fourth example The sum loaned is 1000 ECU, on January 1 1994, and the amounts to be paid by the borrower are: After 3 months After 6 months After 12 months (0. 25 years ) (0. 5 years ) (1 year ) 272 ECU 272 ECU 544 ECU Total 1088 ECU The equation becomes: 1 0 0 0 = ^ ^+. 89 (1+/)365 2 72 5 44 180 (1+/)365 365 (1+/)365 This equation allows i to be calculated by successive approximations, which can be programmed on a pocket calculator The result is: i = 0. 13226, rounded to 13. 23% C2. ISSN 0254-1475 COM(96) 79 final DOCUMENTS EN 10 06 Catalogue number : CB-CO-96-090-EN-C ISBN 92-78-00976-8 Office for Official Publications of the European Communities L-2985 Luxembourg £s