ABI s remarks on the consultation paper drawn up by the European Commission Public Consultation on responsible lending and borrowing in the EU

Transcription

1 ABI s remarks on the consultation paper drawn up by the European Commission Public Consultation on responsible lending and borrowing in the EU August 2009 POSITION PAPER 7/2009

2 Introductory Remarks Bearing in mind the current international financial crisis, the European Commission published a consultation paper entitled Public Consultation on Responsible Lending and Borrowing in EU on 15 th June 2009 with the purpose of assessing the opportunity to come forward with specific measures at an EU level on responsible lending and borrowing, in order to ensure a high level of professionalism and ethical conduct by credit market operators (lenders and credit intermediaries) as well as an appropriate level of responsibility by borrowers. In particular, the concept of responsible lending refers to the principle whereby granted credit shall be both suitable to the borrowers needs and consistent with their creditworthiness. On the other hand, the concept of responsible borrowing refers the customers ability to take out a credit responsibly and consistently with their repaying ability. This entails that, in order for lenders to provide useful information to reach such level of responsibility, borrowers shall provide all necessary and relevant information on their financial and economic conditions. The issues addressed by the consultation paper regard aspects related to the specific phases of the process for granting credit: 1) phase preceding granting - advertising and marketing; - preliminary information; - definition of the risk profile of the credit product; 2) phase of the granting of credit - definition of tailor-made products (suitability); - accurate evaluation of the client s credit risk; - provision of personal advice. With reference to the responsible borrowing, the document envisages that the potential borrowers shall: 1) provide the lender with all useful information in utmost good faith regarding their financial circumstances; 2) make decisions consistently with their ability to repay credit as well as with their needs; Page 2 of 17

3 3) have all necessary information in order to evaluate the product as well as its associated risks. Lastly, the document defines a framework of reference regarding the credit market, the role and the activities of the credit intermediaries. ABI s Remarks 1. General Remarks The Italian Banking Association welcomes the opportunity to reply to this consultation. Some introductory remarks are hereinafter submitted to the attention of the Commission. The consultation paper does not define the proposals area of application nor any potential measures on responsible lending and borrowing, but from the questions, we have deduced that the subject of the paper concerns mortgage credit and partially involve consumer credit. Regarding the first point (mortgage credit), we point out that ABI is taking part in impact assessments, launched by the Commission itself, in order to evaluate the costs/benefits of the hypotheses for intervention (either regulatory or not) envisaged by the White Paper on mortgage credit conducted by the London Economics consulting group. Many of the questions addressed in this consultation paper are addressed in the London Economics questionnaire as well; in particular, we refer to the questions on advice, creditworthiness and on pre-contractual information. Therefore, it is necessary to clarify whether the purposes of the two consultations are different or if (as one can gather from their reading) there are indeed certain overlapping areas. Thus, we shall invite the Commission to: explain the relation between the two surveys ; specify whether, and in what terms, the document in question is designed to become a regulatory framework, transversal with respect to both the provisions regarding the consumer credit and to the initiatives adopted on mortgage credit; ensure a suitable coordination between the different initiatives under discussion on this matter, in order to avoid the risk of overlapping. With respect to the potential application of measures put forward in the consultation paper regarding the consumer credit market, we underline the Page 3 of 17

4 following critical points, which shall be addressed and explained in detail in the answers provided hereafter to the questions: the consumer credit directive hasn t been implemented yet by different Member States and, as it is commonly known, it shall come into force in June 2010; afterwards, both banks and financial intermediaries shall revise documents relating to credit granting (included the pre-contractual information, the APRC, etc.); at a Member State level, not only a new primary regulation shall follow thereof, but second-level provisions shall also be issued by the Supervisory Authority; the consumer credit directive has harmonized the key issues of consumer credit, identifying a specific area of application (which led to the exclusion of the mortgage credit) and undertaking specific legal choices (including the so called responsible lending ) that have taken into account the typology of consumer credit market, also in terms of amounts of credits. Further to these preliminary remarks, we do not deem necessary to reopen the discussion on specific issues that have already been regulated by the aforementioned directive (2008/48/CE), with particular reference to the possibility to apply to mortgage credit some of the Consumer Credit Directive provisions or the proposal of introducing a sort of advice provided to consumers. Directive 2008/48/CE has already addressed such issues and generically defined the requirement of adequate explanations instead of providing advice, which is not considered adequate because of the nature of the financing and by specific consumer needs. Moreover, if certain Member States have decided to apply some of the provisions of consumer credit directive to the a mortgage credit, they did it or are doing it according to non-harmonised procedures. Furthermore, in certain countries, such extension responds to the need to preserve the typicality of their regulatory regime on consumer credit and mortgage credit. On the other hand, national choices taken by some EU countries cannot be deemed sufficient to influence the decisions of other Member States with different legal frameworks: regulations in Italy governing both mortgage and consumer credit are distinguished based on the differences between the two markets. As regards the reference to the financial crisis, the Italian markets of mortgage credit and of consumer credit have not been affected by the financial turmoil, not even in terms of lack of confidence in banking and financial institutions. Page 4 of 17

5 With respect to the foregoing, ABI underlines that the international financial crisis derives from specific events that occurred on the US market, which have only indirectly affected European ones. In particular, when analysing the Italian market, one notices a substantial stability of the domestic financial/credit system: (i) the default rate of the borrowers on mortgage credit market does not exceed 1.6% (December 2008, source CRIF), (ii) despite the economic slump, figures still show a rising trend (as at December 2008 mortgage credits for the purchase of residential properties stood almost at EUR 231bn, recording a growth equal to 2%, if compared with the previous year), (iii) at the end of 2008, the indebtedness rate of Italian borrowers did not exceed 60% (the European average is 90%). Indeed, the European banking system and chiefly the Italian one - is subject to the provisions laid down by the Capital Requirement Directive (EU Directive2006/48/CE), which obliges lenders to assess the customer s creditworthiness upon credit granting, likewise in the case of mortgage credit, to specific limits of Loan-To-Value (LTV) ratios (80% in Italy for residential mortgage loans). According to the CRD and to the document issued by the Bank of Italy that has implemented the abovementioned regulation, the requirement to assess the client s creditworthiness is subject to supervision by the Supervisory Authority. This provides: a right assessment of the borrowers creditworthiness: the banks compliance to creditworthiness requirement; to avoide the introduction of a civil law responsibility for banks and credit intermediaries; an ordinary judge should not be responsible for verifying that borrowers creditworthiness had been performed accordingly by the bank. This fact could led to an increasing of litigation that consumers might initiate when they are not granted a loan or when they get in default. Lastly, we point out how some measures should be carefully evaluated in order to avoid controversial effects. Specifically we refer to risks clients incur that might derive from the provision of further obligations for banking operators concerning the granting of mortgage loans: an increase in requirements to be fulfilled might indeed easily entail higher administrative costs and, therefore, this might translate into a deterioration of credit conditions (increases in rates and charges, higher selectivity), causing potential cases of credit crunch, which might have serious repercussions either at a social or economic level, in a global economic recession. Page 5 of 17

6 2. Business practice in the context of lending transactions: advertising, marketing, pre-contractual information, risk guidelines On the whole, we agree upon the initiative put forward by the European Commission suggesting that credit intermediaries (i) should properly inform customers on their role of advisers and credit intermediaries making clear the differences between their activity and the activity of the lenders who assess creditworthiness and determine credit granting, (ii) should alert the borrower of costs as well as of fees paid for receiving advice. With respect to the foregoing, we point out that Italian law which sets up the principles and criteria for the implementation of Consumer Credit Directive in the Italian regulation envisages some specific requirements (concerning aspects of transparency) that credit intermediaries have to comply with, in order to conduct their activity also providing for such aspects of transparency. With further reference to credit intermediaries, in order to encourage responsible lending ABI welcomes the need to provide clients with clear and easily understood information, both in the product s advertising phase, as well as in terms of pre-contractual and contractual information, in order to consumers can make well-informed choices. The CCD already envisages that credit intermediaries provide information both in their advertising and in their documents for consumers, indicating the scope of their powers, in particular whether the credit intermediary operates exclusively on behalf of one or more creditors or as an independent agent. Furthermore, the CCD envisages that: a) the consumer is informed about the remuneration to pay the credit intermediary for receiving advice and that such fee is agreed upon by both the consumer and the intermediary and recorded on a paper or electronic document before any stipulation of credit agreement; b) the credit intermediary informs the creditor with the fee that the consumer must pay to the credit intermediary for the services provided, for the scope of the calculation of APRC. Moreover, concerning the issue of pre-contractual information, the new Italian supervisory regulations governing transparency envisage replying to the wish expressed by the Commission itself - a comparison of the different credit products submitted by banks to their customers. Furthermore, with reference to the European Standardised Information Sheet (ESIS), there are 425 Italian banks that have agreed to the initiative to date, representing the 79% of the entire Italian banking industry (in percentage of bank counters). We draw your attention to the fact that a potential obligation by the ESIS shall not only significantly increase costs associated to potential disputes, Page 6 of 17

7 but it might also impose some relevant costs on banks non-operating in mortgage market or that have a narrower range of mortgage credit products. Concerning consumer credit, ABI believes that the new pre-contractual information envisaged in the Consumer Credit Directive is valuable and it might be regarded as an adequate response to consumer needs, even in terms of comparability of offers. As we have previously underlined, we do not agree upon the statement included in the consultation paper, hereinafter: However, these initiatives have their limitations. The provisions of the Consumer Credit Directive do not apply to mortgage credit, unless the Member States decide to submit mortgage credit to its rules. Indeed, we confirm that the phases of drawing up and adoption of the Consumer Credit Directive were initiated from two common assumptions: on one hand, to satisfy consumer needs regarding the specific consumer credit market, which has been treated as a typical market, differently from the mortgage market and therefore requiring different rules; on the other hand, the opportunity to investigate the needs of both consumers and banking industry in the mortgage market, in order to decide whether, on what issues and with what procedures an intervention on the regulations of the mortgage credit was required, through the work initiated by the Commission itself with its White Paper on Mortgage Credit of Such evaluation, as already mentioned, is still underway. Question #1. Do you have any evidence of misleading advertising or marketing practices with regard to mortgage and consumer credit? We do not have relevant data on this case. Moreover, it is understood that should such practices take place, ABI would implement specific selfregulatory initiatives in order to reduce any critical aspects. ABI has been engaged in increasing awareness in its partners to the issue of regulation regarding misleading marketing practices. Question #2. What are your views on the development of risk guidelines? As we shall describe in detail in the answers provided hereinafter, the provision of key information envisaged by the CCD is deemed exhaustive and thoroughly studied by the European Institutions, taking into account the needs of those consumers who apply to this specific market. Page 7 of 17

8 Generally speaking, we believe that the introduction of Risk Guidelines would overlap with the information that is already submitted to consumers, thereby creating a high risk of superfoetation towards the client and that this action would only increase the client s cognitive asymmetries. The same Survey on pre-contractual information carried out in 2008 highlights this risk felt by consumers themselves of an excessive submission and overlapping of information. In this view, we deem it necessary to avoid the introduction of the requirement whereby this kind of information shall be provided and to devolve to self-regulatory initiatives and programmes of financial education concerning credit issuance. The task to carry out a proper focus on those criteria suitable to determine the risks entailed in taking out a mortgage, also in relation to the borrowers social, economic and working circumstances. 3. Business practices in the context of lending transactions 3.1. Suitability and creditworthiness Generally speaking, sub-prime mortgage loans have not been granted on the European market and, specifically on the Italian one; and cases of selfcertification mortgage or of buy-to-let mortgages have by no means been registered on those markets, which indeed characterise the US marketplace. The European banking industry and in particular the Italian one is compliant with the provisions laid down in the Capital Requirement Directive (EU Directive #2006/48/CE), whereby lenders are required to assess the client s creditworthiness on the granting of credit, as well as with specific limits of Loan-To-Value (LTV) ratios (80% in Italy for the residential mortgage loans). Question #3. In your view, are there certain (category of) credit products that are inherently unsuitable for sale to retail borrowers? On the retail market, there are no specific credit products that might be considered inherently unsuitable for the borrower s needs and circumstances. Banks store information provided by the borrower during its due diligence prior to the granting of credit. Based on and on account of this, they then proceed to the assessment of the customer s creditworthiness. Regardless the outcome, it is the borrowers who decide whether the credit product they Page 8 of 17

9 are being offered is suitable for them, based on their needs, financial or employment situation, etc. Therefore, ABI deems suitable that customers are provided with initiatives and financial education projects aimed at supporting them so that they can better assess whether the proposed credit is suitable to their needs. Lastly, we do not deem suitable to previously define the typologies of unsuitable credit products. This would limit the range of products offered to customers and might also negatively affect the opportunity to respond to borrowers different needs. Would you welcome a set of standardised or certified products to be offered to consumers? We do not agree with the proposal to define a set of standardised/certified credit products for single customers, due to the fact that customers themselves have different levels of risk and financial education. ABI has formally expressed its unfavourable opinion in a number of consultations launched by the European Commission (as has the entire European banking industry) on the standardisation of products and services offered. Furthermore, ABI s position has been shared by the EU Parliament in the Report by MEP Karas on the Green Paper regarding the retail financial services, wherein standardisation was clearly defined as undesirable, since this might not only upset the markets, but might also lead to fewer innovative products and therefore lower levels of satisfaction for customers. Financial institutions should be free to create their products taking into account the needs of their markets economical situation. Nonetheless, the development of such typology of products should be left to the markets and based on real demand (it is worth remembering that the banking industry has been offering a standard product of financial inclusion named the basic banking service in Italy since 2004). Lastly, we shall point out that any potential standardisation of credit products requires a harmonised regulatory framework for different Member States. This is currently lacking. 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 ratios or loan to value ratios? Page 9 of 17

10 We point out that banks granting any type of credit, including mortgage and consumer loans, are already required to assess the customers creditworthiness in compliance with provisions laid down in the EU Directive #2006/48 (Capital Requirement Directive, CRD), that has acknowledged the new Basel Agreement (Basel 2). Envisaging an ex lege provision for the assessment of the borrower s creditworthiness (already provided for by the Supervisory Authority) besides being not justifiably proven in relation to the low levels of default rate recorded at an EU level in the mortgage market would increase significantly the disputes between banks and clients: consumers who are not granted a loan or who are defaulting on their loans might appeal on an incorrect creditworthiness assessment. Moreover, it is deemed suitable to underline that the bank has interest in assessing the customer s creditworthiness: in general, due to the specificity of its business, strongly based on the level of confidence of the depositaries towards the financial institution; in Italy due to certain unpleasant peculiarities of its legal system, in the event of default, the bank shall bear all costs relating to executive procedures that might protract even over an extended period of time (on average about 60 months). Hence, it is deemed suitable that the requirement to assess creditworthiness applies exclusively to the abovementioned supervisory regulation, which has proven to be effective for the European banks and in particular for the Italian ones even during the recent crises that have affected the global marketplace. For mortgage credit, what are your views on the criteria to be used in assessing suitability such as loan-to income ratios or loan to value ratios? We agree with the issue that each bank assesses their customer s creditworthiness using the information and internal-scoring rating systems they consider more appropriate based on their experience. Specifically, the loan to value and loan to income ratios are deemed negligible criteria in the risk evaluation for credit in Italy. Question #5 How should the lender or credit intermediary demonstrate or document the adequacy of the creditworthiness and suitability assessment? The Bank of Italy, besides being the Italian supervisory authority, requires that banks provide documents that demonstrate the client s creditworthiness assessment process as well as the banks level of risk undertaken in granting credit. Consequently, this requirement s verification Page 10 of 17

11 of completion by the operators can be guaranteed without having high volumes of disputes between customer and bank. Such requirement is not envisaged for the credit intermediaries. Therefore, our proposal is to include this category in the requirement. 3.2 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 application of advice standards? Please explain. In the consultation paper, on page 8, it is stated that: The consumer credit directive does not regulate advice, but as a first step calls for adequate explanations to be given to the borrower, so that he/she can assess whether the proposed credit is adapted to his/her needs. With respect to the foregoing, we shall point out that the Directive #2008/48/CE does not regulate advice because lawmakers did not deem advice necessary in the regulatory framework governing consumer credit; on the contrary it was considered suitable to provide more exhaustive precontractual information as well as adequate explanations. These latter, therefore, do not represent a first step towards providing advice, but rather they represent a tool considered suitable by European lawmakers in order to fulfil the consumer needs within the specific consumer credit market. The adequate explanations referred to in the CCD, mentioned in the consultation paper in question, are not to be considered as advice, but a sort of clarification of pre-contractual information with particular attention to credit products. Moreover, according to the CCD, Member States have the opportunity to regulate procedures where explanations should be provided, in addition to the party who shall provide them, etc. This excludes the concept of advice between the banking institution and client in the CCD. Generally speaking, with regard to mortgage credit, providing advice represents an additional service to be agreed upon by bank and customer. The potential requirement to provide advice to the customer would bring about a burdensome increase in the product s costs without meeting the objective of preventing borrowers from defaulting. The requirement of a generic legal duty in order to provide advice would entail costs to customers for receiving such service. Hence, even consumers who do not request and/or do not require a consulting service (i.e. they Page 11 of 17

12 already possess strong financial knowledge), would unnecessarily be burdened with those relative costs. We believe it would be more suitable that the consulting service is provided upon explicit request, and when the customer is able to sustain the costs thereof. Thus, we deem it necessary that, following an offering of clear simple information for customers by lenders, Member States start initiatives and financial education projects for the general public, developed by different stakeholders, possibly in collaboration with each other. To this end, ABI advocates a stimulus initiative put forth by the European Commission for Member States as part of the plan for the promotion of financial education. 4. Responsible borrowing Question #7 Apart from a focus on financial education, are there any measures that could be taken to encourage responsible borrowing? ABI believes that clear and easily understood information as well as initiatives to promote financial education represent the most effective tools to foster responsible borrowing. With respect to the foregoing, ABI supports that new projects of financial education and information campaigns, developed by different stakeholders, possibly in collaboration with each other, should be started by all Member States, with particular reference to retail credit. Therefore, a stimulus initiative put forward by the European Commission to the Member States for the promotion of financial education is deemed suitable. 5. Credit intermediaries As regards the process of implementation of the CCD by the national framework, a specific regulation governing the credit intermediaries is envisaged. In particular, such regulation envisages: - specific requirements of uprightness and professionalism by the credit intermediaries; - the mandatory acceptance of the legal framework of the jointstock companies for credit intermediaries; Page 12 of 17

13 - direct supervision by the Bank of Italy. The Italian Banking Association welcomes and supports the principles laid down by such regulation aimed at ensuring high standards of professionalism and uprightness by these subjects in the interest of consumer protection. Question #8 Do you consider that the scope of the definition of Credit Intermediaries 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 appropriate to differentiate between full time credit intermediaries and persons who offer credit intermediation on an incidental basis? We believe it would be suitable to determine a specific set of rules governing credit intermediaries, providing a clear definition of their role, the requirements, and obligations with respect to their conduct, regardless of which credit product is proposed. Specifically, it would be suitable to exclude subjects who occasionally operate as credit intermediaries (for example, dealers) from this definition. The definition of credit intermediaries proves to be extremely generic. We believe it would be suitable to clearly distinguish those subjects who offer credit intermediation in an exclusive/full time way (e.g., intermediaries and agents) from those who, on the contrary, provide it on an secondary basis (e.g., dealers, traders). With respect to the foregoing, we highlight that ABI has on several occasions set forth the need (cf., the parliamentary bill promoted by Pinza, and the Green Paper on Retail Financial Services in the Single Market) to lay down specific regulations for credit intermediaries that should accurately define the terms and conditions for the execution of their operation; more stringent requirements for their enrolment in the specific Rolls; a code of conduct and/or self-regulatory initiatives with sanctions (including striking off from the Roll) for intermediaries who act irresponsibly towards consumers. Question #9 Should credit intermediaries be treated differently in terms of status of their relationship with lenders (tied versus united intermediaries)? Please explain your answer. The Italian parliamentary bill on the credit intermediaries already envisages such distinction. There is indeed a clear-cut distinction between credit intermediaries (united intermediaries) and the agents carrying out financial activities (tied intermediaries). Page 13 of 17

14 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? We do not possess relevant data respecting these practices. We underline that the Italian banking sector has undertaken to improve the relationships between banking institutions and credit intermediaries, by means of selfregulatory initiatives to protect consumers. Question #11 Does the regulatory patchwork for credit intermediaries present a problem, in your view? As reported in the introductory remarks, ABI positively views a specific regulation framework for credit intermediaries that effectively produces a high level of professional and ethical behaviour by these parties. Question #12 What would be the most appropriate way to address potential conflicts of interest, particularly with regard to fee/bonus/commission structures? ABI believes that the commissions and fees paid to credit intermediaries for placing credit products should be disclosed and included in the calculation of APRC. Question #13 What are your views on the registration and supervision of credit intermediaries? Our national system already provides for a Roll of credit intermediaries (roll of intermediaries and roll of agents). With respect to the foregoing, the new regulation envisages new forms of control by Bank of Italy, the Italian Supervisory Authority. We believe it would be suitable to lay down a specific set of regulations governing those subjects (dealers) who carry out activities of credit intermediation on an incidental basis and as an additional occupation. Page 14 of 17

15 Question #14 What are your views on prudential and professional requirements for credit intermediaries (such as minimum capital, professional indemnity insurance, educational or professional qualification)? ABI supports the prospect of specific professional and prudential requirements for credit intermediaries. Question #15 How do you think the activities of credit intermediaries could be brought within existing complaints and out-of-court redress mechanisms? ABI supports such possibility. The out-of-court redress mechanisms aimed at the out-of-court settlement of disputes and adopted by almost all Member States is viewed positively since they favour the resolution of disputes without the need for long and costly court trials. ID number is Page 15 of 17

16 Attachment With the opportunity of this current consultation, we shall account for the position held by the Italian banking industry concerning the issue of early repayment, which has already been explained in ABI s response to the questionnaire submitted by the London Economics Study on the Costs and Benefits of Policy Options for Mortgage Credit. In Italy, in the event of mortgage early repayment, penalty fees can no longer be applied since 2007; indeed, it has been established that borrowers have the universal right to prematurely repay their credit mortgage. With respect to the foregoing, ABI positively views the attention focused on the theme of early repayment, which certainly represents a key element in the cross-border mortgage market: the harmonisation of its governing standards would represent a meaningful move towards the integration of the EU market and would ensure that consumers may exercise their own rights at EU level, regardless of the Country where the selected lender resides. Moreover, the risks of negative repercussions on consumers would be removed (such as a possible rise in interest rates); these indeed might occur with a meaningful level of probability in the event that the lender is not able to reinvest the amounts early repaid by the borrower at a rate equal to the previous one. This risk is typically related to transactions of fixed rate mortgages, when as a proper management would recommend they are financed by fixed rate mortgage deposits having the same term (or by other forms of deposits not perfectly aligned with the investments, in terms of maturity and typology of interest rate, where, however, one resorts to hedging instruments in order to neutralise any risk of pre-payment as previously defined). This is evident whenever early repayment results from a drop in interest rates, thereby, on the one hand, the banking institution is forced to reinvest the refunded capital at a lower interest rate compared to the original one; and on the other hand, the bank is still forced to pay a higher interest rate on the relevant funding (or, however, to meet the hedging obligations in order to neutralise the risk of pre-payment). This is an aspect that also affects the different forms of funding (securitisation or covered bond) used by the banks. In other words, priority should be given to the issue of risk of early repayment in view of the fact that a lower probability of reducing the recourse to prepayment (for instance, through the prohibition of imposing Page 16 of 17

17 specific fee penalties) on certain national markets might bring about a series of negative impacts mainly for the consumers - including (i) a rise in the mortgage interest rates; (ii) a drop in the offer of fixed-rate mortgages, (iii) a reduction in the possibility of offering varied products, and lastly (iv) the setting-up of a real barrier to the entrance of foreign players. Following these remarks, and in order to make the mortgage loan market effective, ABI deems necessary a specific and clear form of hedging to protect the banking institutions against early repayment by means of penalties to be imposed on the borrower. Page 17 of 17