Intesa Sanpaolo is registered in the Register of Interest representatives and its identification number is

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1 International Affairs INTESA SANPAOLO RESPONSE TO THE CONSULTATION ON RESPONSIBLE LENDING AND BORROWING IN THE EU 1. General Comments Intesa Sanpaolo Group, created as from 1 January 2007 as a result of the merger of Banca Intesa and Sanpaolo IMI, is the largest banking group in Italy and one of the major players in the European market. Intesa Sanpaolo S.p.A. welcomes the opportunity to comment on the Commission s public consultation on Responsible lending and borrowing in the EU and fully shares the Commission s desire to create an appropriate framework to ensure that all parties involved in a credit transaction act responsibly. Intesa Sanpaolo is registered in the Register of Interest representatives and its identification number is The Italian context Despite high rates of growth in recent years, the level of indebtedness incurred by Italian households in relation to disposable income is still well below other industrialised countries (Italy 47%, France 69%, Germany 95%, Spain 124%, United States 134%). The proportion of indebted Italian households amounts to only 22% of the total. Households which have had greater access to credit have a younger head of household and a higher level of education; they are on average better off in terms of income and also have a higher level of overall wealth. This evidence goes hand in hand with greater and more diversified use of financial products, geared towards medium-term investments. In the consumer credit sector, 77% of the market is covered by non-bank financial intermediaries who demand significantly higher 1 interest rates. 1.2 Intesa Sanpaolo s initiatives in the area of responsible lending - Credito al lavoro Financial Check-Up Intesa Sanpaolo is committed to providing credit on the basis of background checks and professional judgment, to clients who are able to make regular repayments without getting into financial difficulties. 1 Around 200 basis points for loans above 5000 Euros and around 650 basis points for smaller loans. 1

2 In this regard, in June 2008 Intesa Sanpaolo has launched the Credito al lavoro Financial Check-Up initiative, an innovative project aimed at providing a significant contribution to the financial planning of Italian households, with a particular focus on salaried employees. The primary objective of the initiative - founded on a study on Italian households and their prospects for accessing credit, carried out by Intesa Sanpaolo s Research Department in partnership with think-tank Prometeia - is to enable Italian households to enjoy a quality of life which is not compromised by forms of borrowing that may be incompatible with their income. On the basis of the study and through the establishment of a series of parameters, Intesa Sanpaolo branches perform a Financial check-up on the client s situation and develop financing proposals consistent with his/her profile. Credito al Lavoro Financial Check-up introduces a new methodology founded on the concept of well-informed and sustainable borrowing, strengthening those business practices in the provision of credit that are also fostered by the recent Consumer Credit Directive, which EU Member States must implement by Through a carefully designed interview and with the support of statistical models, the Financial check-up allows the client s financial balance and profile to be identified; this information is then shared with the client. The financial balance is the difference between actual income and the non-discretionary expenses which are essential for maintaining the household: this amount is the part of income potentially earmarked for saving, debt or discretionary consumption. The profile steers the financial consultant and client towards developing an appropriate plan for raising the loan. The profile and any possible solutions developed through the Financial check-up are ultimately described in a clear and simple document: this is made available free of charge to the client, to allow him/her to use it as support in planning the household s finances in an informed and sustainable manner. Check-up is a service which the 6,500 branches of the Group are making available to anyone who requests it, even if they are not a client. Through Credito al Lavoro as the name of the scheme suggests Intesa Sanpaolo strives to make the most of the client's work situation. In particular, Intesa Sanpaolo apply a discount on the rate of the Prestito Multiplo (Multiple Loan) personal loan and the Clessidra instalment repayment card, the loan card for salaried employees and pensioners who credit a salary or pension into their account. A further reduction in rate is foreseen for employees of companies who have joined the Credito al Lavoro initiative and have become scheme partners. There are currently around 1,300 companies. A favorable rate is also reserved for the self-employed who have a personal account and channel the income drawn from their professional activity to the bank. This new service model, introduced by a Group with the standing of Intesa Sanpaolo, aims to create a strong image of modernisation and efficiency within the consumer credit sector, similar to what has been achieved in the mortgages sector. In the latter area Intesa Sanpaolo has also contributed towards stimulating 2

3 competition between market players; allowing mortgages to be renegotiated from variable to fixed rates, introducing options for flexibility and instalment holidays and bearing the survey and notary s expenses for the subrogation formalities. The above described initiative testifies Intesa Sanpaolo s will to adopt an approach where the focus is on the client s needs and not on the product, with a view to establishing in a context where the customer mobility and the willingness to switch to new providers increases - a long-standing relationship based on mutual confidence. Moreover, the bank s ability to get a full and comprehensive view of the client also creates marketing opportunities for the bank (cross/up-selling). 1.3 Responsible lending and the recent financial crisis It is worth stressing the fact that those irresponsible lending behaviors that have been highlighted in some markets (namely in the US subprime residential mortgage market) and have contributed to the origination of the recent crisis on the financial markets are marginal in the EU (in particular in Italy, the borrowers default rate is at 1,6% and the outstanding residential mortgage lending, despite the difficult market conjuncture, has increased 2% from December 2007 to December 2008). 1.4 No need for new rules Intesa Sanpaolo believes that the objective to create an appropriate framework to ensure that all parties involved in a credit transaction act responsibly does not imply the need for new legislative initiatives, for the following reasons: - the lack of significant examples of inadequate lending practices. On the contrary as testified also by Intesa Sanpaolo s initiatives in the area of responsible lending above outlined - the industry in the EU has applied strong and sustainable lending standards; - the Capital Requirement Directive already provides for the obligation to assess the borrower s creditworthiness 2 ; any additional obligation different from that stemming from the prudential rules would only increase the disputes and the uncertainties linked to the courts judgments over the fulfillment of this obligation. This would result in higher risks and costs for both the bank and the customer, as well as in a credit crunch; - The recent Consumer Credit Directive has been the result of a thorough debate and has achieved important results on the harmonisation of the key issues, on the identification of the features of the consumer credit market and the consequent definition of the scope of the rules, on the issue of responsible lending and on the obligation to provide the clients with adequate explanations. It is therefore inopportune to re-open a legislative debate on these aspects. Moreover the CCD implementation process is 2 Moreover, in Italy lenders have limits on the Loan-To-Value (LTV) ratios (e.g. 80% for residential mortgage loans). 3

4 already under way and banks are undertaking considerable efforts in order to update all the contractual and pre-contractual documentation; - As to a possible extension of the scope of the EU rules on consumer credit agreements to mortgage credit agreements, this option has already been ruled out both at EU level and at the level of the majority of Member States in consideration of the fact that those two areas are characterized by very different features, problems and requirements. 2. Specific comments Practices prior to the lending transaction Question 1: Do you have evidence of misleading or unfair advertising or marketing practices with regard to mortgage and consumer credit? Question 2: What are your views on the development of risk guidelines? Question 1 - We are not able to provide accurate data on misleading or unfair practices. The reports from the Italian Antitrust Authority (Autorità Garante della Concorrenza e del Mercato) have highlighted some cases of unfair commercial practices and misleading advertising. However their weight, in particular when the provider is a bank, does not appear to be significant. Question 2 - As to the development of risk guidelines, we believe that the precontractual information should focus on a few key issues (e.g. those covered by the Consumer Credit Directive). Any additional requirement to provide the customer with additional documents may be ineffective or even result in an information overflow. In this regard, consumer testing practices should be developed in order to achieve the appropriate balance between completeness and intelligibility of information. Moreover, the consumer s ability to understand the benefits and the risks of a specific product (which are strictly intertwined with its personal condition) can be improved through the efforts aimed at strengthening the level of financial literacy in the EU. It is also important to stress the fact that providing the consumer with standardized and generic risk guidelines which would leave the personal circumstances of the borrower out of consideration, could be not only useless but even misleading. Suitability and creditworthiness 4

5 Question 3: In your view, are there certain (categories of) credit products that are inherently unsuitable for sale to retail borrowers? Would you welcome a set of standardised or certified credit products to be offered to consumers? Question 4: Do you consider that mortgage lenders and credit intermediaries should always perform creditworthiness and/or suitability assessments before granting consumer and mortgage loans? For mortgage credit, what are your views on the criteria to be used in assessing suitability, such as loan-to-income or loan-to-value ratios? Question 5: How should the lender or credit intermediary demonstrate or document the adequacy of the creditworthiness and suitability assessment? Question 3 - In our opinion, the standardisation of the products would not bring concrete benefits for EU consumers. In particular, the following objections could be raised: - It is currently very difficult to establish an EU-wide (or even a nationwide) definition of customer needs and requirements; consequently, it is hard to outline the possible features of a standardised product. In fact, what could be considered as a standard product in a given market, could have no appeal in a more advanced and sophisticated one; - Product standardization stemming from legislation instead of market demand could stifle competition and innovation; moreover, the need to standardise products could hamper the evolution of the bank-customer relationship towards more advanced services the customer could need in the future. In this respect standardization could even result in greater difficulties in lending and borrowing responsibly. For the same reasons, we do not support the idea of defining a priori a list of products which could, in absolute terms, be identified as unsuitable for sale to retail borrowers. Besides, the presence of credit products that could be considered unsuitable for sale to retail borrowers such as those that were marketed in the US subprime market is marginal or non-existent in EU markets. Question 4 - As already remarked in our general observations, prudential supervision rules, and in particular the Capital Requirement Directive implementing the Basel 2 Agreement, already provides for the obligation to assess creditworthiness of the borrower. Imposing any additional obligation would only increases the risk of disputes and the uncertainties linked to the courts judgments over the compliance with such an obligation. 5

6 Moreover, banks have the greatest interest in fully assessing their customers creditworthiness, as in case of default, the bank will have to incur the losses and the expenses associated with enforcement procedures (which in some countries are very lengthy and burdensome). This is particularly true in the Italian market, and more in general in EU markets, where the OTD (Originate to distribute) model played a limited role. Moreover, even when some assets are distributed after origination, the recent initiatives launched by the industry (aimed at increasing the level of confidence and transparency in the securitisation market) and by EU policy-makers (the 5% retention requirement aimed at aligning the interests of investors in securitisations on the one hand and those that originate loans and structure securitisations on the other hand) represent adequate responses to the risk of low underwriting standards. As to the criteria to be used in assessing suitability, such as loan-to-income or loan-to-value ratios, we believe that any harmonisation in this area would result in stifled competition and innovation and in the impossibility to suit the needs of the various market segments. Question 5 - Concerning the attestation that the lender or credit intermediary has carried out an adequate creditworthiness and suitability assessment, in Italy the banking supervisor (Bank of Italy) requires the supervised entities documentary evidence about the assessment process and the level of risk undertaken. We would consider appropriate the extension of such a requirement to the credit intermediaries, which in Italy and several other Member States are currently not required to provide this evidence. Advice standards Question 6: Do you think that these advice standards would be appropriate in an EU context? Are there others that should be considered? What would be the most appropriate means to introduce and enforce the applications of advice standards? Question 6 - When debating the rules on consumer credit, EU rule makers avoided the introduction of any duty to advise. This choice has been the result of a thorough debate where the following reasons have been highlighted: - a general statutory duty to provide assistance, even to those customers who do not need and/or request it, would give rise to a considerable (in particular for loans involving small amounts) and very costly additional administrative burden; - the need to document the compliance with such an obligation would force lenders to question each consumer extensively regarding his/her personal situation and the intended use of the loan and subsequently provide extensive advice in order to 6

7 minimise the risk of future claims for damages on the grounds of insufficient advice. The associated time and effort spent in this context would naturally give rise to substantial costs. Despite the efforts, the legal uncertainty over the ability to effectively prove the compliance with the duty to advise - which is likely to become crucial in case of litigations in the context of defaulted credits would persist. As a result credit costs may rise, and credit supply may also be restricted. Responsible borrowing Question 7: Apart from focus on financial education, are there any measures that could be taken to encourage responsible borrowing? Question 7 - Situations of potential over-indebtedness can be limited by providing consumers with sufficient information and addressing clearly unfair business practices. An adequate level of financial education is key in putting consumers in a position to fully understand the impact of their financial decisions. Therefore we support the efforts currently undertaken by policy makers and trade bodies aimed at increasing the level of financial literacy. In our opinion, it is neither efficient nor effective to use consumer protection regulation to seek to eliminate all cases of over-indebtedness. Such an approach would only result in higher costs, less access to credit and weaker incentives for the consumer to weigh up its decisions. In practice, there will always be some borrowers who are not able to meet their financial obligations for reasons that cannot be anticipated at the time the loan is granted (job loss, divorce, etc.). These cases of over-indebtedness can be dealt with by appropriate insolvency regulation or the purchase of insurance products by borrowers. Moreover, regulation should not provide borrowers with moral hazard opportunities: responsible borrowing can be encouraged only by making consumers accountable for their own misbehavior (e.g. provision of false information). Defining credit intermediaries Question 8: Do you consider that the scope of the definition of Credit Intermediary as set out in the Consumer Credit Directive could also be applied to the mediation of credit not covered by that directive? Would it be 7

8 appropriate to differentiate between full-time credit intermediaries and persons who offer credit intermediation on an incidental basis? Please explain why (not). Question 9: Do you think policymakers should make distinctions between credit intermediaries in terms of the products they sell (mortgage, consumer credit, 'point of sale' credit)? Should credit intermediaries be treated differently in terms of the status of their relationship with lenders (tied versus untied intermediaries)? Please explain your answer. Role of credit intermediaries Question 10: Could you give examples of cases of misconduct, mis-selling or any other instances of consumer detriment linked to credit intermediaries in your country? Question 8 - Intesa Sanpaolo supports the idea of establishing a specific regulation on credit intermediaries. As to the possibility to differentiate between full-time credit intermediaries and persons who offer credit intermediation on an incidental basis, in general, the same business, same risk, same rules principle should apply. Consequently, we would support a differentiation based upon the activities carried out by the intermediary (e.g. an agent whose sole role is to put the parties in contact, should be subject to a less stringent regulatory regime). Question 9 As to a possible distinction between credit intermediaries in terms of the products they sell (mortgage, consumer credit, 'point of sale' credit), we would consider such an approach appropriate, both at the level of the products marketed and at the level of the intermediary s status (tied or untied). Framework for intermediaries in the EU Question 11: Does the regulatory patchwork for credit intermediaries present a problem, in your view? At the current stage, the emphasis should be put more on ensuring high standards of professionalism in the credit intermediation activity than on achieving a fully harmonized framework in the EU. 8

9 Information disclosure on intermediaries Question 12: What would be the most appropriate way to address potential conflicts of interest, particularly with regard to fee/ bonus/ commission structures? Should any measures in this regard apply to bank client-facing staff as well as intermediaries? Intesa Sanpaolo supports the proposals aimed at strengthening the intermediaries disclosure obligations. In this respect the approach adopted in the recent Consumer Credit Directive seems appropriate. In particular, the credit intermediary should disclose to the consumer: the extent of his powers and whether he works exclusively with one or more creditors or as an independent broker; the fee, if any, payable by the consumer to the credit intermediary for his services. Moreover the fee payable by the consumer to the credit intermediary for his services should be included in the calculation of the annual percentage rate of charge. Registration, licensing, and supervision of credit intermediaries Question 13: What are your views on the registration and supervision of credit intermediaries? Question 14: What are your views on prudential and professional requirements for credit intermediaries (such as minimum capital, professional indemnity insurance, educational or professional qualifications)? Intesa Sanpaolo supports the establishment of a registration and supervisory framework for credit intermediaries. The access to credit intermediation activities should be subject to specific prudential standards and to minimum professional requirements. Complaint and redress Question 15: How do you think the activities of credit intermediaries could be brought within existing complaints and out-of-court redress mechanisms? 9

10 Intesa Sanpaolo believes that bringing the activities of credit intermediaries to a system of alternative non-court based dispute resolution (ADR), would increase the consumers confidence and protection. For any further comments or questions, please contact: Alessandra Perrazzelli Head of International Affairs alessandra.perrazzelli@intesasanpaolo.com Stefano Mazzocchi Regulatory Advisor stefano.mazzocchi@intesasanpaolo.com Francesca Passamonti Regulatory Advisor francesca.passamonti@intesasanpaolo.com Intesa Sanpaolo S.p.A. International Affairs Square de Meeûs, 35 B 1000 Brussels 10