Response by RBS to: EC Consultation on the Study on Interest Rate Restrictions in the EU

Size: px

Start display at page:

Download "Response by RBS to: EC Consultation on the Study on Interest Rate Restrictions in the EU"

Austen Davis
5 years ago
Views:

1 Introduction Response by RBS to: The Royal Bank of Scotland Group (RBS) welcomes the opportunity to respond to the Consultation Document on the study on interest rate restrictions, following the publication of the Institut für Finanzdienstleistungen (iff) and the Zentrum für Europäische Wirtschaftsforschung (ZEW) Study on interest rate restrictions. RBS took part in the study by completing and submitting a provider questionnaire on Interest Rate restrictions (IRR) as requested by the report authors. RBS provides a variety of financial services for personal, business and commercial customers. The RBS and NatWest brands serve some 15 million customers through our network of branches and ATMs in the UK as well as through telephone and internet banking. Products provided by RBS include current and savings accounts, personal loans, credit cards, mortgages, pensions and investment products. In addition RBS provides services to clients through Coutts, Adam & Co and Ulster Bank. RBS is strongly opposed to the use of price caps for consumer credit in any form. The IFF/ZEW study shows that the nature and content of regulatory frameworks differ largely across Europe. The origins, underlying objectives and the social, commercial and historical context in which these frameworks have been promoted also vary between EU member states. This variation makes it very difficult, if not impossible to draw uniform conclusions on the subject or to consider solutions applying throughout the EU without regard to all the surrounding circumstances that differ so widely from one Member State to another. RBS has responded to the consultation questions below. Should the Commission require any further information, RBS would be happy to discuss this response further. Please address any questions in the first instance to Dan Firth, The Royal Bank of Scotland, External Risk, Floor 2, Bankside 2, Southwark Street, London, SE1 0SW. dan.firth@rbs,co.uk. Telephone: +44(0) General assessment 1. Do you think that the inventory of IRR presented in the study accurately reflects the reality in EU27? If not, please explain why, and what information you think is missing or incorrect. RBS is not able to validate the accuracy of the inventory presented for other EU countries. In relation to the UK, we broadly agree that the inventory is accurate. 2. Do you think IRR policies are justified? Why? Under which conditions? RBS does not believe that IRR policies are justified under any circumstances. Imposing IRR on effective interest rates can result in a wide range of possible outcomes, some far different from those intended. Whilst on the surface IRR seek to ensure outcomes protect consumers, RBS believes that IRR do not work and could 1

2 lead more consumers into debt or force them to borrow from unscrupulous lenders who operate on or outside the fringes of regulation. In other countries which impose a maximum interest rate, the cap becomes the normal price for credit and rates that are lower than the cap all converge towards it. If the limit is set too high, consumers end up paying more, and if the limit is set too low, lenders will be forced to exit the market leaving vulnerable customers prey to loan sharks. The UK has a wide, varied and sophisticated credit market which is highly competitive. Access to credit is determined based on the customer s and lender s risk profile i.e. ability to pay and appetite to lend. RBS believes that charging interest rates based on risk is a feature of prudential lending. The transparency of interest rate and charge structures offered by lenders and the ability of debtors to switch from lender to lender is a far better control on any possibility of unacceptable behaviour by lenders than IRR. Impact of interest rate restrictions 3. Do you agree with the conclusions of the analysis of the 12 hypotheses examined in the study? H1 IRR reduce credit access, in particular for low-income borrowers (plausible) RBS agrees that IRR reduce access to credit for low-income borrowers. Without the ability to fully reflect the risk of lending within the interest rate offered, providers are likely to stop lending to some higher-risk groups. This will have the consequence of pushing these customers in to the non-regulated sector, where they will still be able to access credit, but without the level of protection available from a regulated provider. H2 IRR lead to a decline in the volumes of consumer credit granted (unlikely) As outlined in H1 above, RBS believes certain customer segments will find it more difficult to access credit if IRR are in place. It therefore follows, that this would mean that IRR would lead to a decline in volumes of consumer credit granted. Clearly, the extent of the decline would, amongst other things, be influenced by the level at which the IRR was set. We believe it is somewhat inconsistent for the study to state that H1 is plausible, and then find H2 as being unlikely. If supply of credit to low income borrowers is reduced, we can see no explanation as to why this would lead to supply increasing to any other segments. Therefore, the net impact is a reduction in overall supply. H2a Without IRR, more product types exist in the market (plausible) RBS agrees that IRR will reduce the range of products available in the market. The UK is a good example of a country where IRR do not currently exist, and there are a broad range of products serving a diverse customer base. 2

3 H3 IRR lead to credit from non-bank sources, such as paying bills late (inconclusive) If some customers are no longer able to access credit through the mainstream banking sector, it certainly seems possible that they will need to find alternative sources for credit. Alongside the non-regulated providers, this might also mean gaining short term relief by paying utility bills late. H4- IRR lead to a substantial illegal market in lending (inconclusive) The study states that it is likely that IRR would increase financial exclusion for lowincome borrowers. It would seem likely that at least some of these consumers will seek borrowing elsewhere, including in the non-regulated sector. H5a The lack of IRR has particularly adverse effects on default rates/overindebtedness in the presence of negative shocks (e.g. recession) to the economy. (inconclusive) There are a number of factors, aside from IRR, that might have an impact on default rates or overindebtedness at various points of the economic cycle e.g. employment rates, creditor policies. It is unclear what impact IRR would have in relation to the other factors. H6 The average consumer (or even more so: the low risk consumer) would be granted cheaper credit in the presence of IRR (inconclusive) RBS does not believe that IRR would lead to the average consumer being granted cheaper credit. There is evidence to suggest that interest rates will start to converge towards the interest rate cap. For many borrowers this will mean an increase in interest rate. H7 IRR lead to increased charges as providers will try to compensate the reduced interest revenues by increased charges (plausible) Depending on the level at which IRR are set, there is a high probability that providers will need to change their current pricing model in order to make up for any reduction in the current flexibility they have to set an appropriate interest rate. This would mean increases to fees and charges. H8 IRR represent barriers to consumer credit market integration (inconclusive) RBS believe that there are a number of barriers to a harmonised consumer credit market, and that although IRR might be one of these, there are other more important factors. (see response to question 4 below). H9 IRR lead to lower competition in the consumer credit industry (unlikely) The introduction of IRR in the UK would likely lead to reduced competition. For example it is clear that IRR represents a real threat to the viability of UK credit card lenders that specialise in the sub-prime or near-prime markets. This has the knockon effect of making it difficult for those who have impaired credit history from being able to gain credit that will allow them to rebuild their credit history. 3

4 H10 IRR lead to a convergence of all consumer credit interest rates at the level of the interest rate cap (inconclusive) Depending on the level at which the IRR is set, there is a very real danger that interest rates will converge at the level of the cap, and thereby reduce the variety of options available to consumers in the current market. 4. Do you think that IRR are a barrier to the EU credit market integration? There are a number of barriers to EU credit market integration, such as: Local laws and regulations Difficulty of collating customer s credit history when they have held products in other countries. Lack of consumer demand, except in certain border areas Different legal processes to recover debt Cultural and language differences IRR could also legitimately be listed as a barrier to integration of the credit market, but is unlikely to be one of the most significant factors. 5. Which would be the impact, at social and consumer level, of a ban of IRR As the UK doesn t have IRR it is difficult for RBS to comment on what the impact of a ban of IRR in other EU countries, where they do exist, might be. 6. What system/type of IRR, if any, do you find is most appropriate/effective to prevent potential consumer over-indebtedness? Please describe. We do not support any form of IRR, for the reasons outlined in our responses to previous questions. It is not clear that the price of credit at the point at which it is taken out is an important factor in over-indebtedness. Life events such as redundancy, relationship breakdown, bereavement are far more likely to be drivers of indebtedness. 7. What system/type of IRR, if any, do you find has less negative effects in terms of limiting the access to credit? Please describe. We do not support any form of IRR, for the reasons outlined in our responses to previous questions. 4

5 Possible follow-up 8. Do you believe that, based on the findings of the study, there is a need for further action at EU level? If yes, what form such a policy response should take? No, we are opposed to the introduction of IRR. We believe that any area where there is a suggestion of customer detriment is best dealt with at a national and on a product by product basis. Rate caps are a blunt instrument, particularly if applied broadly, that risk harming rather than furthering consumers interests and with a particular potential impact on the financially excluded sector. We do not believe there is a need for any further action at EU level in considering the merits or otherwise of rate capping. 5

European Commission Consultation Document on the Study of Interest Rate Restrictions in the EU

European Commission Consultation Document on the Study of Interest Rate Restrictions in the EU The UK Cards Association Response General Assessment 1. Do you think that the inventory of IRR presented in