31. 12. 88 Official Journal of the European Communities No C 337/1 
II 
(Preparatory Acts) 
ECONOMIC AND SOCIAL COMMITTEE 
Opinion on the proposal for a Council Directive amending Directive 87/102/EEC for the 
approximation of the laws, regulations and administrative provisions of the Member States 
concerning consumer credit (l) 
(88/C 337/01) 
On 1 June 1988 the Council decided, in accordance with Article 100 A of the Treaty 
establishing the European Economic Community, to ask the Economic and Social Committee 
for an Opinion on the abovementioned proposal. 
The section for protection of the environment, public health and consumer affairs, which 
was responsible for the preparatory work, adopted its Opinion on 4 October 1988. The 
rapporteur was Mr Meyer-Horn. 
At its 259th plenary session (meeting of 27 October 1988) the Committee adopted the 
following Opinion by a majority vote with one abstention. 
1. Introduction 
1.1. On 2 May 1988 the EC Commission put forward 
a Directive aimed at amending Council Directive 87/ 
102/EEC of 22 December 1986 on the approximation 
of the laws, regulations and administrative provisions 
of the Member States concerning consumer credit. The 
draft Directive concerns the introduction of a uniform 
method of calculating the annual percentage rate (APR) 
of charge for consumer credit. The introduction of such 
a uniform method was expressly anticipated in the 
ninth recital and Article 5 of Directive 87/102/EEC. 
1.2. The proposed Directive submitted one and a 
half years later by the EC Commission is, however, 
concerned only with the mathematical aspects, i.e. the 
calculation formula, but not the items of charge which 
have to be taken into account. In the Explanatory 
Memorandum the Commission notes that there is at 
present no consensus on these items of charge. 
2. General comments 
The indication of the annual percentage rate of charge, 
as provided for in the consumer credit Directive (87/ 
102/EEC) of 22 December 1986, is intended (a) to make 
(') OJ No C 155, 14. 6. 1988, p. 10. the total cost of the credit (expressed as an annual 
percentage) clear to the consumer and (b) to make it 
easier for him to compare different offers of credit. 
Bearing this in mind, the present Commission proposal 
calls for the following general comments. 
2.1. In principle the decision to align the calculation 
of the annual percentage rate of change in the Member 
States as far as possible is to be welcomed, especially 
as it will prevent the future introduction of different 
formulae in individual Member States. 
Care should be taken, however, that this does not 
prejudice the consumer protection currently provided 
by national regulations. This is particularly important 
in areas adjacent to national frontiers. Consumers living 
in such areas must not be deceived by the mention of 
a uniform EC method of calculation when comparing 
offers of credit from their own country and from neigh­
bouring countries, if in fact there are other cost-related 
and legal conditions which have to be taken into 
account; these conditions may not be immediately 
apparent to the consumer and will continue, until they 
are harmonized, to vary from one country to another. 
What is really needed is a thorough alignment of con­
sumer protection, but this will be difficult to achieve 
as it is generally covered by the laws and regulations 
No C 337/2 Official Journal of the European Communities 31. 12. 88 
designed to protect the public interest, and these are 
organized completely differently from one country to 
another. Nor does the draft Directive cover all the 
consumer's problems in calculating interest rates; no 
account is taken of, for instance, the risk of subsequent 
changes in rates or of exchange rate fluctuations in the 
case of foreign-currency credit. 
2.2. However, it is not enough simply to have a 
uniform mathematical formula. There must also be 
agreement on the factors to be included in the formula, 
namely the items of charge. Until the items of charge 
are aligned in a later Directive, it should be ensured 
that consumers are informed when they take up credit 
of all charges not (yet) included in the calculation of 
the APR. These items of charge, which vary from case 
to case, comprise processing and brokerage fees, credit 
commissions, discount, and any insurance premiums. 
To our knowledge, at present Great Britain, France, 
Belgium and the Netherlands stipulate which items of 
charge must be included in the calculation and indicated 
to the customer. 
2.3. The inclusion of different items of charge could 
result in considerable differences in the APR. Depending 
on whether, and if so which, items of charge are (must 
be) included, differences result which could be of greater 
significance than those produced by variations in the 
formula. Hence the present proposal to align the 
methods of calculation is an important step towards 
comparability of the APR. However, for the consumer 
this goal will not be achieved merely by aligning the 
mathematical method. 
2.4. The danger of aligning only the method of calcu­
lation is that consumers will think that the rates quoted 
are comparable. In reality, they can only be compared 
if the relevant items of charge are also aligned. So the 
consumer could be misled, especially as some Member 
States already stipulate that other costs have to be taken 
into account. 
These items of charge should therefore be stipulated at 
the same time as a uniform method of calculation is 
introduced. For consumers, it would be a disadvantage 
if the uniform method of calculation came into force 
before the items of charge were standardized. 
At any event, the Directive should stipulate that, in 
addition to the APR, mention must be made of these 
additional costs. Without such information for con­sumers it is to be feared that many offerers of credit 
will gain a competitive advantage by increasing those 
charges which are not or do not have to be included in 
the calculation of the APR. 
2.5. As the indication of the APR not only makes it 
possible to compare different offers but is also intended 
to make the actual total annual cost clear to the bor­
rower, it is necessary from the consumer's point of view 
that the APR calculation be as simple as possible. It is of 
no great moment, however, whether the mathematical 
formula itself is complicated or not. But the consumer 
does want maximum transparency as to what is being 
calculated and which factors are included in the calcu­
lation. 
The method of calculation should therefore give the 
actual cost to the borrower in a form which he can 
understand and which he himself, or at least the con­
sumer organizations, can check. This would deter len­
ders or credit brokers from trying to gain a competitive 
advantage by stating APRs which are incorrect and 
difficult for the consumer to check. 
As the monthly cost is even more important for the 
consumer, the aim should be to inform him of the 
periodic costs in addition to the APR. Only if he is 
informed of all the costs to which he is liable, especially 
those not included in the APR, can he compare the 
various offers of credit, assess the extent of his potential 
indebtedness and thus estimate correctly whether he 
will be able to repay the credit. 
2.6. It would be to the point to state expressly that 
Directive 87/102/EEC of 22 December 1986 defines the 
general legal framework and sets out in particular the 
way in which the APR is to be indicated and the 
Directive's scope, which covers all grantors of consumer 
credit, private as well, including so-called credit bro­
kers. 
The redefinition of the Directive's scope is opportune 
because, since the adoption of the consumer credit 
Directive 87/102/EEC, the EC Commission has pro­
posed a second Directive [doc. COM(87) 715] on the 
coordination of banking supervisory regulations under 
which most banking services can be provided freely 
(with or without the setting-up of branches) throughout 
the EC. But many offerers of consumer credit and 
credit brokers would not be covered by this second 
coordination Directive because of its narrow definition, 
which is based on the first Directive on the coordination 
of banking supervisory regulations (77/780/EEC). See 
31. 12. 88 Official Journal of the European Communities No C 337/3 
the Opinion of the Economic and Social Committee 
(CES No 287/88 fin) on this draft Directive, in particu­
lar its point 2.1. 
2.7. In some Member States there are regulations 
against 'usurious' interest rates. In France for instance 
an interest rate is regarded as 'usurious' if it is more 
than double the average rate for government bonds. In 
this and other similar cases the obligatory disclosure 
under the new Directive of the APR — which in some 
cases will be calculated differently in future — could 
lead to legal conflicts in the event of criminal proceed­
ings. As the Commission has no influence on criminal 
law, a solution must be found to this problem. 
3. Comments on the individual Articles 
3.1. The purpose of Article 1 of the proposed Direc­
tive is to replace the ninth recital of Directive 87/102/ 
EEC by a new text. The Commission expressly states 
that the formula proposed in the Annex ensures a 
maximum of precision in the calculation of the annual 
percentage rate of charge. On the other hand, in the 
Explanatory Memorandum to its proposal, the Com­
mission admits that the formula is only a first 'useful' 
step. 
It must be reiterated that the consumer cannot compare 
rates of charge unless the items of charge are aligned 
too (cf. point 2.1 of the general comments). Logically 
a maximum of precision can only be aimed for after 
this, as a second step, (or better still, after the two steps 
are taken together). 
3.2. According to Article 1 of the draft Directive, a 
new Article 1 a is to be inserted into Directive 87/102/ 
EEC. Paragraph 3 of this new Article 1 a states that 
other methods of calculation are not to be allowed if 
the resulting annual percentage rate of charge diverges 
by more than 'one tenth of one per cent'. 
If this is intended to mean a fixed tolerance of 0,1 — 
which can be assumed — the text should read 'one 
tenth of one percentage point'. 
It is important that the consumer is not deceived by an 
excessively low annual percentage rate of charge and 
thus induced to accept an offer of credit which is in 
reality less advantageous than other offers. The indi­
cation of a slightly higher rate of charge does not harm 
the consumer, but the competing offerers of credit. 
Therefore it would be sufficient for the proposed Direc­
tive to prohibit other methods of calculation only if the 
resulting rate of charge was lower, the 0,1 tolerance being retained. This is what was proposed in the pre­
liminary draft of the Commission proposal (XI/245/87/ 
EEC). 
3.3. Under the draft Directive, offerers of credit will 
be obliged to use one version of an actuarial formula. 
The version recommended to the Commission by pro­
fessor E.S. Kirschen in his report of 19 October 1984 
clearly has the approval of most of the Member States. 
3.3.1. Professor Kirschen's formula, the so-called 
'Rule 803', is used internationally in calculating security 
yields. This formula allows for the continuous reinvest­
ment 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 on terms obtainable by the lender is deceptive. 
Taking this starting point it is doubtful whether the 
Kirschen formula is the ideal way of calculating the 
APR for consumer credit, where it is important to know 
the burden on the borrower. 
3.3.2. Taking into account the general comments set 
out in point 2.5, it is therefore suggested that the 
Commission reconsider whether the method of calcu­
lation which it has proposed is really the most appropri­
ate. There are other financially and mathematically 
sound methods (e.g. the 360-day method used in the 
Federal Republic of Germany and the proportional or 
'nominal' actuarial method which is the only legally 
valid method in France and whose value is recognized 
by all the relevant professional organizations in Euro­
pe). These methods also supply the necessary precision 
in the information yielded and each in its own way 
ensures comparability for the consumer. They have 
another advantage in that they enable the consumer to 
check whether the stated rate of charge is correct with­
out a specially programmed computer, e.g. by calculat­
ing the credit with the APR so that he can compare 
these interest rates more easily with the interest on his 
savings. Consumer protection is enhanced if it is easy 
to check the veracity of the APR announced by the 
lender or credit broker. 
Consideration could possibly be given to whether such 
alternative methods — equally sound from the financial 
and mathematical angle and with the aforementioned 
advantages — should be allowed at least if the resultant 
differences are not very significant. Such differences — 
as long as they are only minor — could be put up with 
in view of the extra advantages for consumers, i.e. easy 
checking of the APR. 
3.4. In the method of calculation as set out in 
Annex II, the statement 'n= 1' in the first part of the 
formula in the left-hand column (The general formula) 
should be corrected to 'k= 1'. 
No C 337/4 Official Journal of the European Communities 31. 12. 88 
In the 'simple illustration' in the right-hand column 
there is an error in the German version of the equation 
following the sentence 'The equation then appears as 
follows': the statement in the denominator '(l = i)' 
should read '(1 + i)'. In the last sentence of the example 
in Annex II, the sum of 713,66 ECU should be corrected 
to read 713,1 ECU. 
In the third from last paragraph the value of i is given 
as i = 0,1306... and then in the next (second from last) 
paragraph it is rounded off to i = 13,1 or 13,07. The 
reasons for this apparent inconsistency should be made 
clear in the draft Directive. 
As regards the assumption in Annex III (ii), it should 
be checked whether the figure given of 200 ECU is 
correct. 
3.5. Article 1 a (4) states that the assumptions set 
out in Annex III are to be used as a basis for the 
calculation of the APR for credit on current account, 
i.e. an overdraft or running account credit. It should 
be noted that these are not practical examples of a 
possible taking-up of current account credit. The 
assumptions are unrealistic for the following reasons: 
3.5.1. According to point (b) of Annex III the dur­
ation of the credit is assumed to be one year if there is 
no fixed timetable for repayment. As a rule, if a con­
sumer is overdrawn on his current account there are 
no special repayment arrangements. Repayment — eith­
er in full or in part — is through the regular receipts 
(usually wages) which are a prerequisite for an over­
draft. An overdraft is not only for one year, but for 
an indefinite period, often many years, provided the 
consumer does not commit any irregularities under 
the terms of the credit agreement which result in the 
termination of the account and the overdraft. If any 
one-off costs not dependent on the duration of the 
credit and incurred when the credit was granted (e.g. a 
processing fee of x%, which is not customary in any 
case) were to be charged on the basis of only one year, 
the consumer would be quoted a completely excessive 
total cost. 
Done at Brussels, 27 October 1988. 3.5.2. According to paragraph (c) of Annex III, it is 
to be assumed that the current account credit granted 
is equal to the credit limit and there is no time limit. 
This is not only unrealistic but impossible in practice 
as credit cannot be taken up over the limit and the 
take-up will be reduced automatically by the regular 
monthly sums paid into the account. 
If several statements of account are issued in the course 
of the year, giving the possibility of charging compound 
interest, the actual cost to the account-holder may be 
higher than the nominal interest rate; this only applies, 
however, if the credit is not redeemed by the date of 
the statement of account. The amount depends on how 
long the overdraft remains outstanding. The total cost 
may, however, be the same as the nominal annual 
interest rate if the credit is repaid — by the monthly 
receipts — on the statement date. This depends on the 
individual case and does not automatically conform to 
a particular model 
Instead of prescribing APRs based on unrealistic 
examples, perhaps it might be better to have a further 
set of rules for current account credit: for instance, as 
well as the real interest rate, the lender would have to 
state at what intervals statements of account were 
issued or interest charged to the borrower, and how 
high this could push the actual cost if a credit line were 
fully taken up. 
3.6. It is open to question whether the justified con­
cerns of the consumer are met by the 'simple illus­
tration' ('a quadratic equation (...) which can be solved 
by algebra') in the Annex and by the definition in 
Article 1 of the proposed Directive ('equalizes the pre­
sent values of the prospective or actual commitments 
of the lender and borrower'). It would be advisable for 
the Annex also to contain an example of the calculation 
of the rate for a period of less than 360 days. An 
example should also be given of a borrower's monthly 
repayments and in particular of payments at irregular 
intervals. 
The Chairman 
of the Economic and Social Committee 
Alberto MASPRONE