Responsible lending and borrowing in the EU Answers and views on the Commission s public consultation paper

Transcription

1 SOS Sdružení obrany spotřebitelů, o.s. Consumers Protection Association Responsible lending and borrowing in the EU Answers and views on the Commission s public consultation paper Author: Mgr. Tomáš Palla Mail: palla@spotrebitele.info

2 I. Introduction is the organization defending interests of consumers in the Czech Republic. SOS is also a member of international and European organization concerning consumers rights which means that SOS observes not only Czech law but also legal system of consumer protection of other states and especially European legal norms which affect Czech legal system very intensively. Many consumers in the Czech Republic have grave problems with their financial situation which flows from their former decisions to take a consumer credit or mortgage. Some of these consumers look for help by our organization. We try to help them but in many cases we aren t able to find the suitable solution because we disclose the deficiencies of the Czech legal regulation of this part of financial market. There are more problems concerning consumer credits by our opinion. Low income consumers with limited information never reach to mortgage loan but they can reach some financial products of predatory lenders who specialize on more risky loans for low income consumers. More risk means more nonstandard contractual conditions and practice and more problems with these financial products. Other reason could be the amount of money which is different by consumer credits and mortgage loans. This means that more attention is paid to the contract with mortgage lender than to the contract with creditor. If we could name the biggest problems of the Czech regulation of consumer credits, it would be: Insufficient regulation no professional skills or education is needed if someone wants to lend money. This leads to the situation when many predatory lenders provide consumer credits with high interest rates, use very consumer-unfriendly contractual conditions and in the case of consumer s default they execute their sanctions provisions very soon. Insufficient level of legal protection for consumers. Czech regulation of alternative disputes resolution (ADR) is very benevolent and the arbitration clauses in the contracts are often abused to prevent consumers to search justice by the court. The combination of above mentioned points means that the level of consumer protection at the financial markets, especially concerning the consumer credits, is very low. dne pod č. VSC/ /93-R DIČ: CZ sídlo:

3 II. Answers for the questions of the Commission: Question 1: Do you have evidence of misleading or unfair advertising or marketing practices with regard to mortgage and consumer credit? As we have already mentioned, we don t have the direct experience with unfair practices with the mortgage loans. We have much evidence of unfair practices of the providers of consumer credits. These cases concern non-bank creditors in majority. These creditors are more interested in low income consumers and sometimes they try to provide misleading information to the public to attract the attention of more consumers. For example we have some evidence that creditors advertised lower annual percentage rate of charge applicable to the credit than it actually was. This problem is joined with the legal provision which insufficiently define the annual percentage rate of charge. Question 2: What are your views on the development of risk guidelines? We don t think that risk guidelines would help ordinary consumers. It would help only some part of the public which could be better informed but predatory lenders would never tell the consumer all risks joined with the consumer credit. They profit just from the lack of information they provide to the consumer. 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? We don t think that this type of categorization is possible. The suitability of the credit product should be assessed individually. The best possibility is to provide the product which fits the concrete consumer needs. We don t think that any standardization is the right way because it implies that some part of consumers will be underestimated. 1 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? 1 See also Consumer protection in financial services / edited by Peter Cartwright 1st publ. The Hague : Kluwer Law International, 1999 dne pod č. VSC/ /93-R DIČ: CZ sídlo:

4 We promote the idea of creditworthiness assessments. It should be joined with some kind of responsibility of the creditor if he doesn t perform it and the consumer has the problems to repay the credit. In this case the creditor should have the right to only limited default rate and other sanctions. We promote the loan-to-income ratios model. Question 5: How should the lender or credit intermediary demonstrate or document the adequacy of the creditworthiness and suitability assessment? It could be documented by the standardized form filled during the negotiation of the consumer credit contract with the necessary information about the income and property of the consumer. 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. With experience of the Czech law and practice we are a little bit skeptic about these advice standards. After all the creditor is the businessman whose main interest is his profit. It is the consumer who should gather the information to make well-informed choice not the creditor. Question 7: Apart from a focus on financial education, are there any measures that could be taken to encourage responsible borrowing? We think that education is the basement for responsible borrowing. There should be also the good legal regulation to protect the consumer against the predatory practice of some lenders. 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 appropriate to differentiate between full-time credit intermediaries and persons who offer credit intermediation on an incidental basis? Please explain why (not). Yes, definitely. Credit intermediaries are usually those who negotiate with the consumers and they should have some professional duties which could bring some better information and protection to the consumers. We don t see the reason for differentiating between mentioned categories of intermediaries. We often resolve the problems of consumers who concluded their consumer credit contract just with the intermediary who offer the credit on dne pod č. VSC/ /93-R DIČ: CZ sídlo:

5 an incidental basis. All the intermediaries should have some professional skills and appropriate duties by our opinion. 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. There are some differences between the mortgage and consumer credit. These two types of financial product should be distinguished. We are against the distinguishing between different types of consumer credits low and high consumer credits, point of sale credit, leasing, credits from the current accounts etc. Tied and untied intermediaries are separated in fact. It is the question if this separation should be reflected also in the legal regulation. We don t have precise opinion to this question. 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? There are big problems with the providers of goods and services who act also as a credit intermediaries. They often provide the consumer with misleading information about the credit conditions because they want to sell their goods or service. Question 11: Does the regulatory patchwork for credit intermediaries present a problem, in your view? We think that the harmonization of the regulation could help in the European view. We can t predict the direct consequences to the Czech law and practice. 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? We are not sure if this is the best way. The creditor should have the chance to motivate people who work for him. We don t think that this means such a harm for the consumer. Question 13: What are your views on the registration and supervision of credit intermediaries? dne pod č. VSC/ /93-R DIČ: CZ sídlo:

6 We definitely promote it. The credit intermediary should be the professional and the member state should guarantee some level of the professional skills of such a intermediary. The registration or licensing of credit intermediaries is a good idea. 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)? We promote all of above mentioned requirements, especially professional qualification and professional indemnity insurance. This is one of the problem which we have in the Czech republic - the creditor and also the credit intermediary can be every natural or legal person who has the legal capacity. It causes many problems in the Czech practice. Question 15: How do you think the activities of credit intermediaries could be brought within existing complaints and out-of-court redress mechanisms? Effective ADR models should be promoted. Unfortunately the benevolent regulation in the Czech Republic facilitate the abuse of arbitration clauses in consumer contracts and it causes grave problems to our consumers because it denies the access to the courts and justice. dne pod č. VSC/ /93-R DIČ: CZ sídlo: