Substantive harmonisation of cost caps on consumer credit: one step forward two steps sideways

This paper provides a critical analysis of Article 31 of the Proposal for a Directive on Consumer Credits of June 30, 2021, which requires the Member States to introduce caps on the cost of credit, in the form of caps on the interest rate and/or the total cost of credit to the consumer and/or the annual percentage rate of charge. Although this landmark intervention represents an important further step away from (over)reliance on information as a means of protection, there are two ‘sideways steps’ in the Proposal. First, it is unclear what are the constituent elements of the cap, especially whether loan extension fees, default interest, and default fees are part of the cap. Second, the provision is unclear what legal tools can be used as a ‘cap’. Although the Proposal may have in mind fixed caps, traditional general principles of laesio enormis and usury may be acceptable, but the general unfair terms rules would not be. It is argued that without clarification, these uncertainties are bound to lead to different understandings in the Member States compromising the effectiveness of Article 31 as a harmonising measure. The current approach only leads to ‘formal harmonisation’ leaving a large scope for different interpretations; whereas the proposal should strive to achieve ‘substantive’ harmonisation, which more fully unpacks the cap requirements along the suggestions in this paper to improve certainty, the degree of harmonisation, fairness, and consumer confidence.