On 4 June 2020 the Danish parliament adopted new and stricter rules for quick loans. In addition to a significant tightening of the rules for the marketing of quick loans, a maximum limit is introduced for the the annual costs of a loan as well as a cap on how much a consumer may repay in interests and fees. The rules become effective on July 1 2020 and apply to agreements concluded after that date.
The new rules for quick loans are based on the broad political agreement concluded by the government at the end of 2019 with most Danish political parties on an adjustment of the expensive quick loans, which have citizens in impossible debt traps. Annual costs (APR) have been seen to exceed 800%.
The new rules will introduce a maximum limit to the annual costs of a loan as well as a cap on how much a consumer may repay in interest and fees. The rules also introduce significant restrictions as to when enterprises may promote consumer loans.
Thus, the object of the rules is to further strengthen consumer protection by prohibiting some consumer loans and to limit the lenders' possibilities of promoting their products.
Various initiatives have already been introduced with the intention of strengthening consumer protection on the consumer loans market. On 1 July 2019, new requirements were introduced, stating that companies providing consumer loans need authorisation from the Danish Financial Supervisory Authority to conduct their activities. Further, it was specified that the companies are obligated to conduct thorough credit assessments, ensuring that consumers will be granted loans only if they are able to repay them. Rules on good practice were also introduced, obligating consumer loans companies to perform their activities in accordance with fair business practice.
Highlights of the new rules
With the new rules, Denmark will have one of the strictest regulations of the consumer loans market in the EU.
The rules include the following main features:
- APR cap of 35%
- Costs cap of 100%
- Marketing prohibition for companies providing loans with APRs exceeding 25%
- Marketing prohibition on quick loan companies and quick loans in connection with gambling activities and gambling providers.
Caps on APR and costs
The new rules introduce a prohibition on consumer credit agreements with APRs exceeding 35%. This prohibition does not apply to credit agreements regarding real property.
A consumer loans company that concludes a credit agreement with a consumer in violation of the cap for annual percentage rates cannot charge credit costs in excess of what corresponds to annual costs of 35% and must recalculate the agreement.
As for other enterprises, they cannot charge costs in excess of 35%, including costs in connection with default on the obligations set out in the agreement.
Moreover, a costs cap of 100% is introduced, so that consumers as a maximum will repay twice the amount borrowed in interest, fees and repayments combined.
The costs cap does not apply to credit agreements regarding real property or overdraft facilities or revolving facilities that need not be fully repaid by a date fixed in advance.
Violation of the rules on the APR and costs caps will be sanctionable by fine or imprisonment for up to four months on gross or repeated violation.
A marketing prohibition is introduced as well, stating that companies that provide loans with APRs exceeding 25% may not promote any consumer loans.
Consequently, if a consumer loans company provides even one consumer credit agreement with an APR of 25% or more, the company will not be allowed to promote any type of consumer credit facility, regardless of the APR.
The marketing prohibition does not apply to credit agreements regarding real property.
Further, there are three exceptions to the marketing prohibition:
- Promotion at the business place of the consumer loans company.
- Promotion at the website of the consumer loans company or in a system for distance selling operated by the consumer loans company.
- Promotion if credit is provided with a view to purchasing a specific item or service (under certain conditions).
Also, promotion will be prohibited for consumer loans companies and for credit facilities to consumers in connection with gambling and gambling providers. The prohibition does not apply to credit agreements regarding real property or promotion if credit is offered with a view to purchasing a specific item or service (under certain conditions).
Violation of the marketing prohibition is sanctionable by fine. The persons to be charged are the consumer loans companies and the person/company that provides consumers with credit facilities in connection with gambling and gambling providers. Gambling providers are not persons to be charged.
Nor are media enterprises persons to be charged under the new rules of the Danish Marketing Practices Act, but they may be fined for violating the Executive Order on Marketing.
Comments by Bech-Bruun
The new rules clearly indicate which types of consumer loan agreements may be concluded validly and legally with Danish consumers. The introduction of an APR cap and a costs cap has thus provided clear rules in the area.
The marketing prohibition received some criticism in the consultation responses, for one thing because the permitted APR in the promotion is 10 percentage points below what may validly and legally be agreed.
Moreover, the marketing prohibition against consumer loans companies and credit facilities in connection with gambling and gambling providers was criticised for not being sufficiently clear. The explanatory notes to the bill provide some examples of what is to be understood by "in connection with", but these examples leave some questions.
Also, the marketing prohibition has received criticism from media enterprises, since they generally have no control over the blocks of commercials and thus are burdened with administration in relation to reviewing them manually.
In connection with the above, we note that promotion on the internet and on TV is subject to the country of origin principle due to the E-commerce Directive and the AVMS Directive. As a result, the promotion of consumer loans companies through websites and TV channels established in other countries need not comply with the new Danish marketing prohibition. Consequently, Danish enterprises may be subject to distortion of competition compared with enterprises established in other EU countries.
However, it should be mentioned that enterprises in other countries are still obligated to comply with the rules on APR cap and costs cap towards Danish customers, as these are mandatory contractual obligations.