Consumer lending businesses will become subject to stricter regulation in Denmark

The introduced bill on a Danish Act on Consumer Loan Businesses (in Danish: Lov om forbrugslånsvirksomheder) (the "Act") is intended to improve consumer protection in Denmark by tightening the supervision of consumer lending businesses not licensed as a bank or mortgage credit institution, as these businesses will become subject to full supervision by the Danish Financial Supervisory Authority (the "Danish FSA") – not just subject to supervision under the Danish anti-money laundering rules. The bill constitutes gold-plating of provisions in the Consumer Credit Directive. 

The bill has far-reaching consequences for businesses that offer consumer loans today. Among others, such businesses will be required to:

• obtain a licence from the Danish FSA, including fit & proper approval of the management,
• establish administrative procedures and to identify their target group,
• promote good business practice, and 
• implement a whistle-blower scheme, to observe a duty of secrecy, and to take similar administrative measures.

The requirements are described in more detail below. 

Who and what will be subject to the Act?

Generally, all businesses offering to enter into credit agreements with consumers will be subject to the new Act if: 

• the credit agreement is wholly or partly for the purpose of buying goods or services from another business,
• the credit agreement is without any connection to a specific purchase of goods or services, or
• the provision of credit agreements is a separate business area, and the business grants the credit for the purpose of selling its goods or services.

Certain types of regulated businesses will be exempt from the scope of the Act (except the requirement for a so-called “creditworthiness assessment” as described below). This includes financial undertakings being subject to the Danish Financial Business Act, non-Danish financial undertakings carrying out activities in Denmark either on a cross-border basis or through a Danish branch, and mortgage credit companies offering mortgage credit agreements. In addition, payment institutions, e-payment institutions and businesses with limited licence to offer payment services under the Danish Payment Act will be exempted from some of the provisions of the Act.

Further, the Act will not apply to businesses that offer only: 

• credit agreements where the credit is granted free of interest and without any other charges;
• rental or leasing agreements where there is no obligation to purchase the object of the agreement neither in the agreement itself nor in any separate agreement;
• credit agreements entered into in connection with an industrial conflict, where the business is a trade union affected by that conflict (so-called "conflict loans"); or
• credit agreements where the credit is granted by a consumer lending business to its employees.

Licence and fit & proper requirements

In the future, consumer lending businesses must obtain a licence from the Danish FSA to offer the type of credit agreements that are covered by the Act. 

In order to obtain a licence, the business must further:

1. be based in Denmark or in another EU/EEA Member State; 
2. ensure that its board of directors and executive board or, in the absence of a board of directors or executive board, the manager meets the fit & proper requirement; and
3. establish the necessary administrative procedures.

Accordingly, a business based in a third country cannot offer consumer loans in Denmark after 1 July 2019 unless it establishes a subsidiary within the EU/EEA. In case of a hard Brexit, this will also include UK businesses. 

The Danish FSA will be authorised to withdraw the licence, e.g. if the business materially or repeatedly breaches the Act or the Danish Anti-Money Laundering Act. 

Procedures and identification of target groups

Consumer lending businesses will be required to establish several procedures, proving that they are capable of complying with fundamental consumer protection rules. These procedures must i.a. be established in the following areas:

• compliance with good business practice;
• creditworthiness assessment; and
• target group identification.

If – in the Danish FSA's opinion – the procedures are inadequate or reflect a flawed or faulty understanding of the rules, the business will not be granted a licence to carry out consumer lending activities. 

Further, it will be mandatory for consumer lending business to identify the target group for each product. The purpose is to ensure that the terms and conditions of the product reflects and is designed based on the identified target group for the product. A consumer lending business may only develop and offer products whose properties, costs and risks match the interests, objectives and characteristics of the target group identified. It means that consumer lending businesses must also identify those consumers who are deemed to fall outside the target group, having regard to their interests, objectives and characteristics. 

Good business practice and creditworthiness assessment

Under the current regime, consumer lending businesses are subject to the rules on fair business practice in the Danish Marketing Practices Act. But the Act requires consumer lending businesses to carry out business in accordance with good business practice within the industry. In the future, consumer lending businesses will therefore have to comply with the Danish FSA’s rules and practices. The Act authorises the Danish FSA to lay down rules on good business practice and we expect – based on the bill – that the new provisions will correspond to the current provisions of the Danish Marketing Practices Act on good practice and disclosure obligations.

The Act will also introduce disclosure and documentation requirements corresponding to the existing rules in the Danish Executive Order on Good Business Practice for Financial Undertakings. 

In addition, consumer lending businesses (however, here also including financial institutions, mortgage credit companies etc. that are otherwise outside the scope of the Act) must make a so-called creditworthiness assessment of the consumer to the extent they are not already required to do so under the Danish Consumer Credit Agreements Act (transposing the Consumer Credit Directive into Danish law). A creditworthiness assessment differs from a credit rating which involves an assessment of the lender’s risk of suffering a loss. The creditworthiness assessment, on the other hand, is intended to ensure that the consumer is only granted loans which he/she is capable of repaying. 

REQUIREMENTS FOR A CREDITWORTHINESS ASSESSMENT
Before entering into a consumer credit agreement, the consumer lending business must assess the consumer’s creditworthiness on the basis of adequate information, which – if relevant – is obtained from the consumer and – if necessary – by searching in relevant databases.

Other administrative implications

If the bill is adopted in its current form, it will also have a number of other administrative consequences for the consumer lending businesses that fall within the scope of the Act, including: 

• a duty to report all credit agreements entered into to the Danish FSA; 
• a duty of registration in a public register;
• a duty of confidentiality for the consumer lending business and its employees; and
• a requirement for a whistle-blower scheme for businesses with more than five employees.

Effective date

The Act is expected to enter into force on 1 July 2019. 

However, transitional provisions will apply to businesses that are already registered with the Danish FSA as lending businesses for anti-money laundering purposes at the effective date. Such businesses falling within the scope of the Act must apply for a licence with the Danish FSA no later than 1 January 2020. Until the Danish FSA has processed the application, the business may operate without a licence.  

Kromann Reumert’s view 

Overall, the introduced bill heralds a paradigm shift in consumer lending regulation in Denmark. In the future, consumer lending businesses will be regulated in largely the same way as financial undertakings. Accordingly, unregulated lending business will generally only be possible in Denmark if the lending activities do not target consumers. 

Consumer lending businesses that fall within the Act will have to implement new processes and establish and update their administrative procedures in a number of areas. 

Kromann Reumert further notes that the Act will apply not only to consumer lending businesses in the traditional sense. As an example, retailers granting loans for the purpose of selling their goods and services will, based on a specific assessment, also fall within the scope of the Act if the lending activities constitute a separate business area. It is a condition, however, that the loan is not granted free of interest and other charges (which would bring it outside the scope of the Act).

Read the full wording of the bill (in Danish).