Swiss Consumer Credit Act (FLCC) Explained Simply, 2024

The Swiss Consumer Credit Act (FLCC) regulates the granting of personal loans between CHF 500 and CHF 80,000 to protect consumers from over-indebtedness and ensure transparency in the credit market. The FLCC excludes interest-free and fee-free loans as well as mortgages or loans with typical bank collateral as security.

Important consumer protection measures of the law include a 14-day right of withdrawal, the right to early repayment of the loan without additional fees, a ban on aggressive advertising, a statutory maximum interest rate, the obligation for the lender to check solvency, and an obligation to report all loans granted to the Central Office for Credit Information (ZEK).

Lenders are also subject to other legal regulations, such as the Swiss Code of Obligations, the Data Protection Act, the Banking Act, and the Anti-Money Laundering Act, which together form a thorough system of regulation and protection for consumers and lenders.

Violations of the Federal Law on Consumer Credit are severely punished, with measures ranging from fines to the revocation of business licenses, depending on the type of violation.

What falls under the Consumer Credit Act?

Almost all personal loans issued in Switzerland fall under the Consumer Credit Act. The Consumer Credit Act regulates the granting of loans and financial assistance to consumers. It aims to protect consumers from over-indebtedness and ensure transparency in the credit market.

The Consumer Credit Act only covers loans between CHF 500 and CHF 80,000. The reason for the lower limit is that CHF 500 does not represent a serious risk of indebtedness. The reason for the upper limit is that loans over CHF 80,000 involve more bureaucracy anyway and are regulated more precisely by contract. However, loans over CHF 80,000 are still subject to the Swiss Code of Obligations. Articles 305 to 318 of the Code of Obligations build the basis.

Credit agreements secured by mortgages and those covered by standard bank collateral or sufficient assets held by the consumer are also exempt from the FLCC. Loans granted without interest and fees, and loans without interest if the loan is repaid in one lump sum, are also not covered by the FLCC. Further exceptions are loans that must be repaid within a maximum of three months and contracts for ongoing services or utilities where partial payments are permitted.

The FLCC is limited in its scope due to the desire to create a balanced legal framework that ensures the protection of consumers from over-indebtedness and abusive practices while at the same time not unnecessarily restricting the availability of credit for legitimate, low-risk purposes. By exempting certain forms of credit from regulation, an excessive administrative burden on lenders and borrowers is avoided, and flexibility in the financial sector is promoted.

What consumer protection measures are in the FLCC?

There are numerous consumer protection measures in the KKG, which are set out in legal articles. The most important protective measures are the following 6.

1. 14-day right of withdrawal after signing the contract (Art. 16)
2. Right to early repayment of the loan (Art. 17)
3. Ban on aggressive advertising for consumer credit (Art. 36a)
4. Legally determined maximum interest rate (Art. 14)
5. Obligation to report loans (Art. 25)
6. Mandatory credit check by the lender (Art. 27a)

1. 14-day right of withdrawal after signing the contract (Art. 16)

Consumers are granted a 14-day right of withdrawal from the day the contract is signed. This right enables consumers to withdraw from the contract without giving reasons and without financial loss. The measure gives consumers time to rethink things to protect them from making hasty financial commitments.

2. Right to early repayment of the loan (Art. 17)

Borrowers have the right to early repayment of the loan. Early repayment reduces the total cost of the loan, as the interest for the remaining term of the loan is waived. Lenders may not charge any additional fees for early repayment in Switzerland.

3. Ban on aggressive advertising for consumer credit (Art. 36a)

The Consumer Credit Act prohibits aggressive advertising methods that tempt consumers to take out loans without thinking. This includes misleading statements about conditions or the concealment of important information.

4. Legally determined maximum interest rate (Art. 14)

According to Article 14 of the Federal Consumer Credit Act, the Federal Council determines the maximum interest rate. According to the Consumer Credit Act, it may not exceed 15 percent. The maximum interest rate is reviewed and adjusted at least yearly to ensure it corresponds to current market conditions. This measure protects consumers from usurious interest rates and keeps the cost of loans transparent. The following maximum interest rates for consumer loans have been applied since January 1, 2024.

• 12 percent for personal loans.
• 14 percent for overdraft loans, which are used, for example, for installment facility options on credit cards.

5. Obligation to report loans (Art. 25)

The reporting obligation requires lenders to report all loans granted to the Central Office for Credit Information (ZEK). This reporting obligation makes it possible to monitor consumers’ credit activities and obligations.

6. Mandatory credit check by the lender (Art. 27a)

Lenders must carry out a comprehensive assessment of the applicant’s solvency before granting a loan. The check ensures that consumers can meet the financial obligations of a loan without falling into a debt trap. The assessment includes a review of income, existing debts, and other financial obligations.

What is the ZEK, and what does it do?

The ZEK (Central Office for Credit Information) is the central information office in Switzerland that collects and manages information on private individuals and companies relevant to creditworthiness. The ZEK plays a key role in the Swiss credit system by enabling lenders to assess the creditworthiness of potential borrowers.

How is creditworthiness checked?

Creditworthiness is checked by analyzing all available data on a person’s past payment habits. It is, together with the solvency assessment, the most important part of the credit check and attempts to anticipate how likely a person is to default on bills. Each lending institution has its own methods for calculating creditworthiness.

What other laws are lenders subject to?

Lenders are subject not only to the Consumer Credit Act but also to other legal pillars in Switzerland. The Code of Obligations and the Data Protection Act are important for all lenders in Switzerland, while laws such as the Banking Act and the Anti-Money Laundering Act are primarily relevant for banks.

1. Code of Obligations (CO)

The Code of Obligations is a central component of private law and regulates, among other things, contractual relationships between lenders and borrowers. It includes general regulations on the conclusion of contracts, the obligations of the contracting parties, and the consequences of breaches of contract. For loan agreements, especially those that do not fall under the FLCC, the Code of Obligations forms the legal basis that protects the interests of both parties.

2. Data Protection Act (FADP)

The Data Protection Act regulates the handling of personal data. Lenders must comply with the provisions of the DPA when collecting, processing, and storing information about borrowers. This includes obtaining consent for data processing, ensuring data security, and giving data subjects the right to information about the stored data.

3. Banking Act (BankG)

The Banking Act provides the legal basis for commencing and exercising banking activities. Among other things, it defines the requirements for the licensing of banks, the principles of banking supervision, and the conditions for granting loans. Lenders acting as banks must comply with the provisions of the Banking Act, which include compliance with capital requirements and the guarantee of deposit protection.

4. Anti-Money Laundering Act (AMLA)

The Anti-Money Laundering Act aims to combat money laundering and financing criminal activities. Lenders are obliged to verify the identity of their customers and monitor transactions that indicate money laundering. They must report suspicious activities to the Money Laundering Reporting Office of the Swiss Confederation (MROS). The AMLA contributes to protecting the financial system from abuse.

How are violations of credit laws punished?

Violations of the laws governing consumer credit are punished depending on their severity and intent. In the case of inadvertent violations, only the contract is declared null and void, while severe penalties are imposed for deliberate fraudulent activities. Compared to other areas of the law, intentional offenses in the financial sector are quickly considered serious in Switzerland.

Violations by the lender

Lenders who violate an ordinance of the Consumer Credit Act, for example, by exceeding the statutory maximum interest rate, insufficiently checking creditworthiness, or through misleading advertising, are subject to sanctions. These range from fines and orders to rescinding contracts to withdrawing business licenses. Anyone who deliberately violates the ban on aggressive advertising is punished with fines of up to CHF 100,000 per Article 36b of the FLCC. The Swiss Financial Market Supervisory Authority (FINMA) and other competent authorities monitor compliance with the law and intervene in the event of violations.

Violations by the borrower

Borrowers who obtain loans by providing false information breach the Consumer Credit Act and are held liable under civil law. This entails reclaiming the entire loan amount, canceling the loan agreement, and, in severe cases, criminal prosecution. In addition, an entry is made with the Central Office for Credit Information (ZEK), which has a negative impact on the borrower’s creditworthiness.

Deliberate credit fraud

Credit fraud is a serious and intentional violation of the Consumer Credit Act and the Swiss Criminal Code (SCC). Legal action will be initiated if any type of credit fraud is suspected, whether through false statements by the borrower or unfair offers by the lender. Fraud is considered a crime in Switzerland and, at minimum, leads to fines. In severe cases, it leads to prison sentences of up to 5 years.