On 27 July, the Ministry of Economic and Digital Affairs published Order ETD/699/2020 of 24 July on revolving credit (the 'Order') which sets out new rules for increased transparency in the marketing of revolving credit by financial institutions. This Order applies to, among others, Spanish and foreign credit institutions operating in Spain, whether through agents, a branch or on a freedom-to-provide-services basis.
The Order has been in the making following several years of increased litigation regarding the interest rates charged by credit institutions on revolving credit cards. This litigious period peaked with a ruling from the Supreme Court in March 2020 which held that charging an interest rate of approximately 27% on a revolving credit card qualifies as usurious.
It is worth noting that while the court rulings largely revolve around the interest rates of these credits, the Order focuses on their design and marketing. In practice, as explained by the Ministry in the Order, how these type of credits work is not always fully clear to customers, who end up repaying their debt after long periods of time and accumulating very high interest payments.
Accordingly, the Ministry has not limited the interest rates charged on this type of credit but, rather, established rules that: (i) reinforce the assessment of the credit-worthiness of customers taking out revolving credit; and (ii) increase the information provided to the customers prior to the conclusion of the credit agreement as well as during its term.
The Order now requires lenders to assess whether customers have the capacity to repay a revolving credit without becoming over-indebted and this assessment must be repeated each time the credit limit is increased. For that purpose, the annual repayment amounts must equal at least 25% of the credit on an annual basis.
Key information requirements
With respect to the pre-contractual information, the Order adds further requirements to those already set out in consumer credit legislation and which apply to revolving credits that are open-ended or have a fixed term that is renewed automatically.
Lenders must now inform customers, prior to the conclusion of the credit agreement, and in addition to the Standard European Consumer Credit Information (SECCI)required under the Consumer Credit Directive (2008/48/(EC)), whether: (i) the credit is of a revolving nature; (ii) it allows for the capitalisation of due and unpaid amounts; and (iii) the customers can change the payment method at any time during the life of the credit.
Additionally, how the credit works must be illustrated through a representative example, which also must be included in all publicity for the product. The Order also reminds institutions of the existing duty to explain the pre-contractual information to the customer and stresses its importance when the credits are promoted and marketed in shopping centres.
Once the credit agreement has been executed, institutions must provide to the customers on a quarterly basis information on the amount of the credit drawn down, the interest rate, the method of repayment (whether it is of a revolving nature or not) and the estimated date of full repayment of the credit in view of the repayment instalments. In particular, the customer needs to be informed of the date on which it would fully repay the credit should no further drawdowns take place and the total amount it would be required to repay on that date, indicating the principal and interest amounts. If the credit combines different methods of payment, the information should be provided individually per specific payment method.
Additional information must be provided in order to prevent over-indebtedness. In particular, if at any time during the life of the credit the amounts to be repaid by the client in a given year account for less than 25% of the credit during that year, the customer will need to be informed of:
- the date on which they would repay the credit in full should they increase the yearly payments by 20, 50 or 100%; and
- the monthly instalments that would allow the customer to fully repay the credit within a year.
The Order generally enters into force on 2 January 2021 but does not require institutions to redo the credit-worthiness assessments of existing clients unless they increase their credit.
These new transparency measures aim to reduce customer long-term indebtedness and high interest payments in revolving credits.