British borrowers in EU jeopardy

European consumer credit legislation, currently in draft form, could weaken the consumer rights currently held by borrowers in Britain.

This warning doesn't come from a Brussels-bashing Europhobe, but from a Labour MP who has campaigned on consumer issues. Mark Lazarowicz is sounding the alarm bell over a directive for consumer credit which will set the ground rules for borrowing and lending in all European Union countries, replacing existing national legislation.

Even though it might sound like something far off and too dusty to think about, this directive is expected to go before the Council of Ministers in a couple of weeks, and will be before the European Parliament this autumn. And it will affect anyone using credit or borrowing money.

Providing a common code for lending is intended to encourage more cross-border trade in consumer credit, so that we could be as confident about taking out a loan in Lille as Leeds. But the problem being raised by Mr Lazarowicz is that the level of protection under the new Europe-wide directive looks as though it could be less than we have already.

For example, under current British law, if you make a purchase with a credit card, and the goods don't arrive or they're faulty, the credit card company is jointly liable. But under the proposed European regulations, this protection would be lost.

Citizens Advice has also raised this issue. Among their concerns is a lack of regulation over home-improvement loans, which have been a source of disputes over sales tactics and the level of interest charged.

And they say there does not seem to be protection against extortionate credit terms, which exists to a limited degree under current law. They also warn that the proposals would seriously weaken the current regulation of debt collection agencies.

The Consumers' Association says that it supports the principle of Europe-wide regulation, but is worried that in practice it could "reduce rather than enhance United Kingdom consumer protection".

It argues that regulations should reflect the practical needs of consumers, making information more clear and simple. For instance, it says that introducing a new measure for interest rates, to be known as total lending rate, will confuse a public that's only just got to grips with APRs (annual percentage rates).

A spokesperson for the Department of Trade and Industry says that they're aware of concerns - and that the British government is lobbying hard to prevent a "watering down" of consumer protection. In particular, it says that it is contesting the question of joint liability for credit card companies.

It is also unhappy at the way the regulations could inhibit the mortgage market. The Council of Mortgage Lenders has already warned that the directive, as it stands at present, would "kill off" flexible mortgages.

The DTI says that there is a long way to go before the regulations are implemented, probably in 2005.

However, once agreed, these regulations will come under the heading of "maximum harmonisation", which means that national governments will not be able to toughen them with their own local variations.

The plan to set a uniform regime for such a diverse range of credit markets is certainly ambitious. And adding another complication is the expansion of the European Union, with a number of eastern and central European countries likely to have joined by the time the directive is enforced.

Applying the same consumer credit regulations in Blackpool, Bratislava and Barcelona means a system broad enough to incorporate very different credit cultures and financial practices. And the understandable fear is that there will be levelling down rather than levelling up.

Of course, throwing another Spaniard in the works will be our own angst-ridden relationship with the European Union, with some people unable to see any faults and others unable to see any benefits. And any debates about these important changes risk being lost in a fog of pro and anti-European rhetoric.

A common credit market should encourage more competition, which should give more choice to consumers. But we shouldn't be blind to the consequences of setting such regulations on a European level.

Another concern is the sheer lack of public awareness of what is being proposed. Teresa Perchard of Citizens Advice says that there needs to be a greater recognition of the wider implications of changing consumer credit law. It's not just about returning faulty goods, she says, it's about regulating a sector that in Britain has become very important to the economy.

It might all sound too dry and bureaucratic, but its impact will be felt by borrowers from Budapest to Bognor.