Executive Summary
- What’s new: Significant regulatory reforms in the EU and UK are aimed at strengthening consumer protection in the consumer loan market, including the adoption of the EU Consumer Credit Directive 2 and the UK’s initiative to overhaul its consumer credit regime.
- Why it matters: These developments expand regulation scope, enhance transparency and impose new obligations on lenders.
- What to do next: European lenders may want to carefully review their policies, procedures and contractual documentation to ensure compliance with the new requirements in CCD2 and monitor the parallel developments in the UK.
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There have been significant developments in the regulation of consumer loans across both the European Union and the United Kingdom in recent years. In response to evolving market dynamics, technological advancements and the emergence of new credit products, legislators and regulators have introduced comprehensive reforms aimed at strengthening consumer protection, enhancing transparency and fostering innovation in the lending sector.
Below, we provide an overview of the:
- Key changes introduced by the EU Consumer Credit Directive 2 (CCD2) and its implementation in Germany.
- UK government’s ongoing initiative to overhaul its consumer credit regulatory regime.
European Consumer Credit Directive 2
The European Parliament and Council adopted CCD2 — formally known as Directive (EU) 2023/2225 — on 18 October 2023, replacing the EU Consumer Credit Directive (Directive 2008/48/EC), which had established the initial framework for consumer loans across the EU (including the UK).
Several factors prompted the revision:
- Only partial effectiveness of the original directive.
- Imprecise wording that led to divergent implementations by member states.
- Significant market changes driven by digitalisation and the emergence of new credit products, especially online and short-term credit.
CCD2 was designed to serve the following purposes:
- Ensure consumer protection throughout Europe, in particular with regard to abusive lending.
- Strengthen the single market in the field of (online) lending.
- Adapt to new technological developments.
Because CCD2 is intended to be a “full harmonization” directive, there is limited scope for individual member states to “gold plate” the relevant requirements.
Key changes include increasing the types of consumer loans subject to regulation, such as small loans under €200, certain short-term or interest-free loans, and “buy now, pay later” schemes.
In addition, CCD2 provides:
- Changes to the precontractual information rights (with essential information having to be provided in the standardized format of the Standard European Consumer Credit Information form).
- Limits to the right of withdrawal from a consumer credit agreement.
- A prohibition on discrimination against consumers legally resident in the EU based on nationality or place of residency when taking out a consumer loan.
- An obligation to conduct the creditworthiness assessment in the interest of the consumer to prevent overindebtedness.
- A consumer’s right to human intervention in case of automated rejection of creditworthiness assessments.
- A right to reasonable forbearance before the initiation of enforcement proceedings.
Member states are required to transpose CCD2 into national law by 20 November 2025, with application from 20 November 2026 onward.
Implementation of CCD2 in Germany
The Federal Ministry of Justice and Consumer Protection published its draft act to implement CCD2 into German law in June 2025, followed by the implementation draft, which generally adheres to the proposals of the September 2025 ministerial draft (Implementation Act).
The Implementation Act provides for comprehensive amendments to the Civil Code, the Introductory Act to the Civil Code, the German Banking Act and numerous ancillary laws in order to transpose the requirements of the CCD2 into national law.
Expanded Scope and New Definitions
To reduce the number of risky and unregulated products in the market, and to prevent the exploitation of weaknesses and certain patterns of consumer behaviour, the Implementation Act expands the scope of the general consumer loan requirements — in particular, including for:
- Gratuitous loan agreements.
- So-called microloans under €200.
- Short-term loans with a maturity of three months and less.
- Deferred payments and other similar financial accommodations (i.e., “buy now, pay later” schemes).
Rent and lease agreements fall under the expanded scope, where the agreement itself (or a separate agreement) includes an obligation or option for the consumer to purchase the object in question at the end of the agreement.
Formal Requirements and Digitization
Reflecting the digital transformation of the credit market, the written form requirement for general consumer loans will be abandoned in favor of text form, thereby simplifying consumer access to contractual documentation. Real estate consumer loans will continue to require a written form.
This change means that concluding a contract by email or text message will be possible. However, a general consumer loan agreement may not be concluded by means of options preselected by the lender, however. If selection “boxes” are used for the conclusion of such agreements, specific requirements have to be met to ensure the consumer actively and knowingly consents to the conclusion of the agreement.
End of the ‘Eternal’ Right of Withdrawal
In order to increase legal certainty while avoiding lawsuits, the maximum period for the assertion of the right of withdrawal (“Widerrufsrecht”), i.e., the right to step away from the agreement, will be 12 months and 14 days after the conclusion of the general consumer loan agreement.
However, that maximum period will only be applicable in cases where the consumer was duly instructed beforehand about their right of withdrawal. The instruction must include, inter alia:
- The time limit for the assertion of the right of withdrawal.
- The durable medium that may be used for the declaration of the revocation.
- If the loan has already been paid out, the obligation to repay the loan without delay but no later than within 30 days, with interest as well as the owed interest per day.
A template for the instruction will no longer be provided, and as a result, the previous assumption of legality associated with using the template instruction will no longer apply. This change places a greater responsibility on the lender to ensure that the instruction given to the consumer is compliant with the legal requirements.
The consumer’s right of withdrawal is further strengthened, in particular by specifying the formal requirements for the declaration of revocation. Here, the use of a durable data carrier — as chosen by the consumer at the time of the conclusion of the consumer loan agreement — is deemed sufficient. However, using a durable medium other than the one specified in the agreement would not render the declaration void and would therefore not be detrimental to the consumer, as this effect would be contrary to the purpose of the CCD2.
It remains to be seen whether the durable medium requirement for the revocation declaration concerning general consumer loan agreements can be aligned with the obligation for financial services agreements concluded from a distance (“im Fernabsatz”) to implement an electronic withdrawal function, in cases where the agreement is concluded via an online user interface.1 Harmonizing the withdrawal requirements would be a logical step, particularly given the growing prevalence of distance agreements (including general consumer loan agreements).
Revision of Nullity Concept
The Implementation Act further introduces important changes concerning the validity of general consumer loan agreements where there is a significant disparity between the contractually agreed interest rate and the prevailing market effective annual interest rate.
A conspicuous disproportion (“auffälliges Missverhältnis”) is now regularly presumed when there is either a 100% difference or a 12 percentage point gap between the contractually agreed interest rate and the market effective annual interest rate. This new standard codifies and harmonizes the criteria that were previously established by case law.
That said, the assessment of a conspicuous disproportion is now based solely on objective criteria; subjective factors are no longer required. The market effective annual interest rate will be the primary standard for determining whether a significant imbalance is present, and the calculation method for that rate will be revised to incorporate any future costs related to the loan.
As a result, the market effective annual interest rate will provide a thorough measure, reflecting all expenses connected to the consumer loan.
Coupling Prohibition Now Broadened
The prohibition on coupling, previously applicable only to real estate consumer loans, has now been extended to general consumer loans. Under this prohibition, it is generally not permitted to offer or sell a consumer loan exclusively as part of a package with other distinct financial products or services. This restriction applies regardless of whether the additional products or services are acquired by the borrower or a third party.
An exception exists where the granting of the general consumer loan is made conditional upon the opening of a payment or savings account. The purpose of the account may only be the accumulation of capital for the loan repayment, paying installments, providing additional means required before the loan is granted or serving as additional collateral for the repayment of the loan.
If the coupling prohibition is violated, the “connected” agreement relating to the additional financial products or services is rendered void. However, the general consumer loan agreement itself remains valid and enforceable.
The practice of bundling — offering or selling a consumer loan together with other distinct financial products or services — remains permissible, provided that the consumer loan is also available separately. It is important to note that the terms and conditions of the general consumer loan may differ (i.e., be less favorable) when offered as part of a bundle compared to when it is offered on a stand-alone basis. However, bundling must not be used to circumvent the coupling prohibition.
Specifically, the terms for the additional products or services must not be so disadvantageous on a stand-alone basis that a reasonable consumer would not agree to them. If the stand-alone terms are excessively unfavorable, this may be considered an unlawful circumvention of the prohibition.
Creditworthiness Check and Right to a Human Decision
To further strengthen consumer protection, going forward, the repayment of a consumer loan must be “likely” at the time of assessment. This represents a shift from the previous standard, which required that there be “no significant doubts” regarding the consumer’s ability to fulfill their repayment obligations.
The new standard aligns the requirements for consumer loans with those already applicable to real estate consumer loans. If a general consumer loan application is rejected, the lender must notify the applicant without undue delay. Where appropriate, consumers should also be directed to debt counseling services to help support their financial well-being.
To that effect, the Implementation Act is complemented by a separate draft bill (the Debtor Counseling Services Act) designed to ensure that consumers who are facing, or may face, challenges in meeting their financial commitments have access to independent debt counseling services.
Where multiple individuals are parties to the general consumer agreement, the creditworthiness of each borrower must be assessed to confirm that all parties are able to meet the repayment obligations.
The creditworthiness assessment must be based on information regarding the consumer’s income and expenditure as well as other relevant financial and economic circumstances (in line with the principle of data minimization), using both internal and external sources that include credit databases such as SCHUFA and Creditreform but not information from social media.
Importantly, personal information protected under Article 9 General Data Protection Regulation — such as data revealing racial or ethnic origin, political opinions, religious or philosophical beliefs, trade union membership, genetic or biometric data, health data, or data concerning sex life or sexual orientation — must not be used in the assessment. Amendments to the German Banking Act will ensure that civil and supervisory law requirements concerning the creditworthiness check are harmonized.
Lenders are generally permitted to use automated processes to assess a consumer’s creditworthiness. However, important consumer rights apply when such automation results in a denial of a consumer loan application (but not if the creditworthiness check is merely supported by an automated processes).
If a consumer loan application is denied based on the automated processing of personal data, the consumer must be informed of:
- The fact that the denial was the result of an automated processing of personal data.
- The consumer’s right to request a human decision.
- The procedure for challenging the decision.
To ensure that the right is effective, the information has to be given to the consumer after the fact, so it not lost in the bundle of precontractual information the consumer receives before concluding the agreement.
When a consumer exercises their right to a human decision, the lender must provide the consumer with the following:
- A clear and understandable explanation of the creditworthiness assessment.
- An opportunity for the lender to present their own point of view.
- A review of the creditworthiness assessment and a new decision by the lender as to whether the consumer loan should be granted.
These requirements are designed to ensure transparency and fairness in the use of automated decision-making algorithms in consumer lending. Lenders may want to review their procedures to ensure compliance with these obligations.
New Obligation for Leniency
Lenders are now obliged to refer consumers who are struggling to meet their financial commitments — such as those who are more than 90 days overdue — to a debt counseling service. Additionally, before initiating any enforcement action against a consumer, lenders must show that they have exercised leniency. The steps taken should be adapted to the specific circumstances of each individual consumer.
Lenders are required to implement measures such as:
- (Partial) restructuring of the consumer loan.
- Changes to the terms of the loan agreement (including, but not limited to, extending the loan term).
- (Partial) deferral of installments.
- A reduction in the interest rate (“Sollzinssatz”).
These new requirements provide consumers with a civil law right to request leniency. Furthermore, it is an administrative offense for lenders to fail to comply with these obligations.
From an organizational perspective, credit institutions must establish procedures and strategies to identify consumers who may be experiencing financial difficulties at an early stage.
Supervision of Sales Financing
The Implementation Act also introduces The Act on the Supervision of Consumer Loans in the Context of Sales Financing (“Absatzfinanzierungsgesetz,” or AbsFinAG). This creates a supervisory framework for general consumer loans provided in the context of point-of-sale financing, such as payment deferrals and installment purchases offered by retailers and service providers.
The respective offerors will be supervised by the Federal Financial Supervisory Authority going forward. The AbsFinAG aims to close regulatory gaps that have emerged due to new business models, especially in e-commerce and online marketplaces, where merchants offer financing options directly to consumers, often in cooperation with financial institutions.
The law is designed to:
- Enhance consumer protection by ensuring that all providers of consumer loans in the context of sales financing are subject to appropriate oversight.
- Promote a level playing field by subjecting noncredit institution loan providers (such as retailers and service providers offering payment deferrals) to similar supervisory requirements as traditional credit institutions.
For lenders that are noncredit institutions, AbsFinAG introduces a registration obligation as well as an administrative sanction for acting without the respective registration.
Takeaways
The Implementation Act is scheduled to enter into law on 20 November 2026. Credit institutions, retailers and service providers involved in consumer lending should consider carefully reviewing their policies, procedures and contractual documentation to ensure compliance with the new requirements.
The changes not only impose additional obligations but also create opportunities to build consumer trust through greater transparency and fairness. Although the changes introduced by CCD2 will not take effect immediately, proactive adaptation will be essential to navigate the evolving regulatory environment and to continue offering compliant, consumer-friendly credit products in the EU and German markets.
UK’s Regulatory Regime Reform Initiative for Consumer Loans
After multiple reforms and updates, the regulatory regime for consumer loans in the UK is set out in various pieces of legislation, including the:
- Consumer Credit Act (CCA)
- Consumer Credit (EU Directive) Regulations 2010
- Financial Services and Markets Act (FSMA)
- Financial Conduct Authority (FCA) Handbook
This has resulted in a burdensome and fragmented system that the government considers unsuitable for future needs, and, much like in the EU, has been found to be poorly adopted to digital technology developments.
Therefore, the UK government is aiming to create a simpler, more agile and outcomes-based regulatory regime that puts consumers at its heart, supports innovation and aligns with the broader UK financial services regulatory framework. On 4 May 2025, following the government’s consultation process in 2022, HM Treasury published the consultation paper Consumer Credit Act Reform – Phase 1 outlining the government’s overall vision for the reformation of the consumer credit regime.
A key proposal is the repeal and recasting of the existing legislation for consumer loans. The new regime will aim to move away from prescriptive, technical requirements toward a more principles- and outcomes-based approach, allowing firms greater flexibility to tailor products and consumer journeys. The proposal would align the reform with the UK’s model of financial services regulations as introduced by FSMA, with Parliament and HM Treasury setting the regulatory perimeter and the FCA determining conduct and disclosure requirements.
Two-Stage Process for Reform
In its consultation paper, HM Treasury sets out a two-stage process for reform.
The initial phase outlines the government’s overarching vision for the new regime and seeks input on proposed measures relating to information requirements, sanctions and criminal offences. The consultation period ended in July 2025.
The second phase will involve a further consultation at a later date, which will detail the government’s intended reforms to the scope of regulation, definitions, rights and protections, as well as address any consequential amendments needed to other legislation.
Key Proposals of the First Phase
HM Treasury has announced its intention to repeal all information provisions under the CCA, in particular, requirements for pre-contract and post-contract disclosures, as well as notices relating to sums in arrears, default notices and notices of default sums.
Additionally, HM Treasury has proposed to remove the small agreements provision, asking the FCA to consult on whether and how its rules should apply to small agreements, and to also ensure consistency between the regulation of small agreements and “buy now, pay later” products that also fall within the small agreements definition. (For more on the new “buy now, pay later” regime, see our 23 May 2025 client alert.)
HM Treasury also proposes to repeal the legal framework for modifying agreements, which is currently seen as unnecessarily complex. Under the proposed changes, firms would no longer be required to reissue all disclosure documentation when agreements are modified. Instead, changes could be agreed with consumers in a more straightforward manner.
Consumer protections would remain robust, as firms would still be subject to the FCA’s Consumer Duty, general contractual principles and the fairness requirements of the Consumer Rights Act 2015.
Further, HM Treasury intends to repeal the multiple agreements provision, which has been identified as overly complex and difficult to comply with, often resulting in unclear documentation for consumers. The requirements regarding the electronic transmission of documents — specifically, the need for consumers to agree to the form of communication — are also set to be removed, with the FCA to consider this area further.
The repeal of most information disclosure requirements is expected to assist firms in managing “gone away” customers, as the current rules require firms to contact customers at their last known address, even if they no longer reside there.
HM Treasury has also suggested that the FCA regime operate could operate without the specific sanctions under the current consumer regime — in particular, a removal of the rule that consumer credit agreements will be unenforceable without a court order where there has been failure to comply with prescriptive disclosure requirements.
This position is based on the assessment that sanctions are not essential for ensuring firms comply with consumer loan requirements, given that the current FCA regime and court processes already offer strong consumer protections. Furthermore, the FCA’s broad supervisory and enforcement powers are considered to provide a substantial deterrent to noncompliance by firms.
Finally, HM Treasury is considering whether it remains necessary to retain some or all of the criminal offences currently set out in the CCA, or whether these offences could be repealed entirely. Should the decision be made to repeal these offences, the FCA could introduce additional rules for authorised firms as needed, specifically prohibiting the activities that are currently targeted by the criminal offences.
The FCA’s existing supervisory and enforcement powers — including the Senior Managers Regime — would enable the FCA to take enforcement action against firms and, where appropriate, against senior managers responsible for any breaches.
Next Steps
HM Treasury is reviewing the feedback received from the consultation that closed in July 2025. It will publish a formal response to the consultation and intends to launch a further consultation on Phase 2 of the CCA Reform in due course.
Takeaways
The UK government’s initiative to reform the consumer credit regulatory regime is intended to be a significant shift toward a more streamlined, principles-based and outcomes-focused framework.
By moving away from the current fragmented and prescriptive system, the proposed changes aim to:
- Foster greater flexibility for firms.
- Support innovation.
- Ensure that consumer protection remains at the heart of the regulatory landscape.
The planned repeal and recasting of existing legislation, including the removal of complex information requirements and outdated provisions, are intended to simplify compliance and improve the consumer experience.
The alignment of the new regime with the broader UK financial services regulatory framework, under the oversight of the FCA, is expected to deliver a more agile and responsive system that can better adapt to technological advancements and evolving market practices. As the reform process progresses through its consultation phases, stakeholders should closely monitor developments.
Outlook
The EU and UK reforms are motivated by similar challenges — market evolution, digitalization and the need for stronger consumer protection.
However, the potential for these regimes to increasingly diverge across the UK and EU (and even within the EU) will pose a challenge for cross-border consumer credit lenders in terms of monitoring the implementing the various requirements. In addition, the general increase in consumer protection may also require lenders to reevaluate the cost of doing business and pricing of their products.
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1 The requirement stems from Directive (EU) 2023/2673 to amend the Consumer Rights Directive with respect to financial services agreements concluded at a distance.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.