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Roundtable on InteRest Rate RestRIctIons

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					Roundtable on
 InteRest Rate
  RestRIctIons
     Brussels, 10 September 2010
about
euRoFInas



Eurofinas is the voice of the specialised consumer
credit industry at European level.

Eurofinas, the European Federation of Finance House Associations, is the voice of the specialised
consumer credit providers in the EU. As a Federation, Eurofinas brings together associations
throughout Europe that represent finance houses, specialised banks, captive finance companies of
car, equipment, etc. manufacturers and universal banks. The scope of products covered by Eurofinas
members includes all forms of consumer credit products such as personal loans, linked credit, credit
cards and store cards. Consumer credit facilitates access to assets and services as diverse as cars,
studies, furniture, electronic appliances, etc. It is estimated that together Eurofinas members financed
over 320 billion Euros worth of new loans during 2009 with outstandings reaching 720 billion Euros
at the end of the year.




2 | euRoFInas Roundtable on Interest Rate Restrictions
    contents




    FOREWORD	                                                 p.	4


    PARTICIPANTS	                                             p.	5


    INTRODUCTION	                                             p.	6


01 Risks of lending	                                          p.	7


02 CalCulation of aveRage inteRest Rates	                    p.	11


03 unfaiRness of CRedit ContRaCts	                           p.	14


04 impaCts of statutoRy pRiCing RestRiCtions	                p.	17


05 ConClusion	                                               p.	22




    3 | euRoFInas Roundtable on Interest Rate Restrictions
FoReWoRd
by	pedro	Guijarro
Eurofinas Chairman




Price restrictions have a profound impact on the economic activities that are subject to them. In the
case of consumer lending, such restrictions have far reaching consequences as they condition not
only the lenders’ access to the market but also the consumers’ ability to be granted credit.

A thorough analysis of the impacts of interest rate restrictions on market conditions including
market concentration, product diversity and financial inclusion is necessary in order to properly
assess the appropriateness of such mechanisms and avoid unintended consequences.

The Roundtable organised by Eurofinas in September 2010 provided an excellent opportunity to
exchanges views and reflect on the subject matter, thereby contributing to a better understanding
of the impacts of price restrictions in the field of retail credit.




pedro guijarro
Eurofinas Chairman




4 | euRoFInas Roundtable on Interest Rate Restrictions
PaRtIcIPants




Bieszki Miroslaw, Independent Financial Services Expert (PL)

Brandt Christian, Finans og Leasing, Managing Director (DK)

Fabry Olivia, Eurofinas, Junior Adviser

Filotto Umberto, University of Rome, Professor (IT)

Giraud Alexandre, Eurofinas, Legal Adviser

Hartmann-Wendels Thomas, University of Cologne, Professor (DE)

Kargaard Søren, Dan-Aktiv, Chief Executive Officer (DK)

Langlois François, BNP Paribas Personal Finance, Director Institutional Relations (FR)

Montesinos Trigo Maria Dolores, European Commission – DG Markt, Policy Officer

Murphy Ben, International Personal Finance, Head of Legal Affairs (UK)

Pears John, Bank of America, Consumer Risk Executive (UK)

Pellé Philippe, European Commission – DG Markt, Deputy Head of Unit

Poletto Andrea, Consum.it, Director General (IT)

Sofroniou Stefanos, European Commission – DG Markt, Policy Officer

Suanet Alex, Santander Consumer Finance, Head of Risk Management (Benelux)

Szakun Mira, Konferencja Przedsiebiorstw Finansowych, Solicitor (PL)

van Atteveldt Cindy, Crédit Agricole Consumer Finance, Chief Risk Officer (NL)

van de Werve Tanguy, Eurofinas, Director General




5 | euRoFInas Roundtable on Interest Rate Restrictions
IntRoductIon




On the 10th September 2010, Eurofinas organised a half day discussion roundtable on
interest rate restrictions in Brussels. The aim of this event was to bring together European
Commission (EC) officials and experts from different markets and professional backgrounds
(lenders, academics, solicitors) to share their experiences and exchange views on pricing
restrictions. The number of participants was limited to ensure maximum interaction.

The roundtable was organised in such a way as to provide EC officials with the opportunity to
directly interact with market participants and local experts. The roundtable was not aimed at
discussing all legal regimes in place across Europe but rather to identify, through a sample of
existing systems, the main impacts of rate restrictions on lending activities.

This report provides a brief overview of the main points presented and discussed at the
roundtable.

The roundtable was organised around four key themes:

• Risks of lending
• Calculation of average interest rates
• Unfairness of credit contracts
• Impacts of statutory pricing restrictions




Disclaimer
The views expressed in this report are solely those
of the participants and do not represent Eurofinas’ views.




6 | euRoFInas Roundtable on Interest Rate Restrictions
01
RIsks oF lendIng




What are the risks of lending? What are the ways for lending institutions
to mitigate these risks? To what extent can/do interest rates reflect
these risks? Are there any differences to be made between customer
segments, types of products, countries/regions in that respect?

A first presentation was given by Cindy van Atteveldt, Chief Risk Officer at Credit Agricole Consumer
Finance (NL), on statutory interest rate restrictions in the Netherlands.

When providing their services, lending institutions must take into account a wide range of risks
commonly categorised as follows: credit (including mortality and fraud), legal (including claims and
compliance), operational, reputational and liquidity risks.

One of the major risks for lending institutions is undoubtedly credit risk. Credit risk is, to a certain extent,
predictable and relatively constant and is an important element in the pricing of a loan.

In the Netherlands, an objective control of interest
rates was introduced through the set-up of a statutory
rate ceiling. The maximum applicable interest rate
corresponds to the sum of the legal interest rate (3%)
and the maximum loan rate (12%). Interest rates are
therefore currently capped in the Netherlands at 15%.
The Ministry of Finance has authority to change the
legal interest rate twice a year. Statutory restrictions do
not apply to corporate loans, loans which have a total
                                                                     Cindy van atteveldt
duration of less than three months and loans above                   Chief Risk Officer at Credit Agricole Consumer Finance (NL)

EUR 40 000. Any additional charges to consumers are
prohibited.




7 | euRoFInas Roundtable on Interest Rate Restrictions
What are the impacts of this statutory restriction?

In the Netherlands, the overall consumer credit outstanding as a percentage of GDP is three times
lower than in Germany or Spain, twice lower than in Sweden or Italy. This is in sharp contrast with the
overall value of mortgages outstanding as a percentage of GDP which is more than twice as high in
the Netherlands than it is in Germany and close to five times higher than in Italy.

Consumer credit outstanding (% of GDP)                                     Mortgages outstanding (% of GDP)

12%                                                                        120%

                                                                                                                                       109%
       10,6%
10%                                                                        100%
                 9,4%     9,2%                                                    95%

 8%                                                                        80%
                                   7,6%
                                                                                        68%
                                             6,1%     6%                                                            62%
 6%                                                                        60%
                                                                                                 52%

 4%                                                                        40%                             38%
                                                                3,2%
                                                                                                                            22%
 2%                                                                        20%



 0%                                                                         0%
         UK      Spain   Germany   France   Sweden   Italy   Netherlands          UK    Spain   Germany   France   Sweden   Italy   Netherlands


Source: Datamonitor, Interntaional Monetary Fund. OC & C Analysis 4A.


Interest rate restrictions on consumer credit products have a clear impact on the level of lending
transactions in the Netherlands.



What is the impact on the number of credit providers active in the market?

Competition in the Netherlands for the consumer credit lending business is extremely limited. The
maximum loan rate of 15% is clearly an obstacle for specialised types of providers to enter the
market. In 2008 and 2009, six providers withdrew from the consumer credit lending business.
Although rate restrictions are not the only reason determining the number of providers in a given
market, they do have a restrictive impact on the level of development and dynamism of the market,
at least they do in the Netherlands.


            The maximum loan                                   What is the impact on credit availability?
          rate of 15% is clearly
      an obstacle for specialised        Applicant borrowers’ risk of default influences the price
      types of providers to enter        of credit. As a consequence, statutory restrictions impact
                 the market.             on the availability of credit for those most in need in the
                                         Netherlands. Unemployed, those under temporary job
                                         contracts, youngsters, singles and tenants (as opposed
to landlords) have very limited access to consumer credit in the Netherlands. A conflict between
the pricing of a new loan and the maximum applicable rate will automatically result in a reduced
supply of credit.

Those interest rate restrictions, together with the loan to income ratio applicable in the Netherlands,
have led credit suppliers to restrict their activities to loans higher than EUR 2 500 as lending below
such an amount is either not profitable or legally too complex.




8 | euRoFInas Roundtable on Interest Rate Restrictions
When asked about consumers’ perception of the existing regulatory framework, Cindy van Atteveldt
defined it as being “volatile”. On the one hand, complaints arise when borrowers are unable to
pay back their loans. On the other hand, front office staff are regularly confronted with complaints
related to the limited availability of credit even for individuals that have more than adequate levels
of income.

In addition, the current system can often lead to an involuntary
                                                                                                     The current system
lock in of borrowers to a single institution. This may happen when
they have been granted a credit line based on a specific income and
                                                                                                    can often lead to an
under regulatory provisions or ratios in force at a specific time. In                              involuntary lock in of
this context, if their level of income decreases or the statutory ratios                           borrowers to a single
are changed by the Dutch authorities, the opportunity for them to                                        institution.
get an equivalent disposable amount of credit with an alternative
provider will be nearly impossible. This has a logical significant
impact on borrowers’ mobility within the Dutch market.

                                                                  The purchase of private vehicles often requires that
                                                                  consumers get an appropriate financial solution. It was
                                                                  asked how under such restrictive regulatory provisions,
                                                                  consumers could obtain a loan to this end. Alex Suanet,
                                                                  Head of Risk Management at Santander Consumer Finance
                                                                  (Benelux) mentioned that in such a situation a high number
                                                                  of consumers either pay cash for the purchase of their car or,
                                                                  extend their existing mortgage to get the necessary funds.


alex suanet                                                       Ben Murphy, Head of Legal Department at International
Head of Risk Management at Santander Consumer Finance (Benelux)
                                                                  Personal Finance (IPF - UK), then provided participants
                                                                  with a case study on IPF activities in CEE markets.

IPF was established as a division of UK-based Provident Financial but de-merged from its parent
company and was listed on the London Stock Exchange in July 2007. Its market capitalisation is
circa £600 million and the company employs over 6 000 full-time staff and works with over 26 000
representatives in six different countries (including five EU Member States). IPF has over two million
customers.

                                                                  IPF operates in a sector of the consumer credit market
                                                                  that is not favoured by most credit providers. It provides a
                                                                  home credit service for small loans (below the threshold of
                                                                  mainstream lenders) and in cash. Initial loans are typically
                                                                  of a limited amount i.e. EUR 75 to EUR 200. They are
                                                                  normally repayable over 26 or 39 weeks. Subsequent loans
                                                                  are of higher value e.g. EUR 300 and repayable over 39
                                                                  or 52 weeks once a borrower’s payment performance has
                                                                  been established. Lending is unsecured and guarantors
Ben murphy
Head of Legal Department at International Personal Finance (UK)
                                                                  are not required.

There is a strong credit demand for which market offer is scarce. Consumers usually turn to these
services because they either cannot borrow such low amounts from other credit providers or do not
have easy access to mainstream providers. For instance, almost 60% of individuals in Poland do not
regularly use a bank account.



9 | euRoFInas Roundtable on Interest Rate Restrictions
Also, it is a simple, convenient and transparent way of borrowing money. The strong consumer
demand for such loans (as evidenced by the number of customers) is barely compatible with pricing
restrictions. This is because the average amount of the loans, the business model and the customer
profiles require full pricing flexibility.

IPF infrastructure in Poland




             5                          35                 150             1000 13000
        Divisional                    Regional               Area           Development
    Operation Managers           Operation Managers        Managers          Managers          Representatives




      It is vital to allow                      In this context, there is no “one-size-fits-all” solution as far
       the possibility of                       as interest rate restrictions are concerned. It is vital to allow
                                                the possibility of servicing different market segments. Certain
     servicing different
                                                segments are by their nature more expensive to service. This
  market segments.
                                                is necessarily reflected in pricing and the cost associated
                                                to the wide representative network required to make credit
                                                more accessible to otherwise excluded customers.




10 | euRoFInas Roundtable on Interest Rate Restrictions
02
calculatIon oF aveRage
InteRest Rates



What are the average interest rates in European markets? For those
countries that have statutory interest rate restrictions, shall these
market rates be considered as a basis to establish the level of
ceilings? Shall there be any differentiation between types of products
or customer segments?

Prof. Dr. Thomas Hartmann-Wendels from the University of Cologne in Germany, gave a presentation
on the challenges inherent in calculating interest rate restrictions based on the example of the differences
witnessed between the Deutsche Bundesbank Statistic (Schwerpunktzins) and the European Central
Bank (ECB) statistic for Monetary Financial Institutions (MFI) interest rates.

A snapshot of interest rates in several EU markets was first presented and discussed.

Loans for consumption over 1 and up to 5 years, narrowly defined effective rate*

    Germany           Spain          France         Italy

  12



  10



   8



   6



   4



   2



   0
                jun               jun                jun               jun                jun                jun               jun                  jun
               2003              2004               2005              2006               2007               2008              2009                 2010


*Excluding revolving loans and overdrafts, convenience and extended credit card debt, households and non-profit institutions serving households.
Source: European Central Bank, Statistical Data Warehouse, MFI interest rate



11 | euRoFInas Roundtable on Interest Rate Restrictions
Loans for consumption, Annual Percentage Rate of Charge (APRC), all maturities*
    Germany, Euro     Spain, Euro     France, Euro   Italy, Euro   Netherlands, Euro   Poland, Polish Zloty    Sweden, Swedish Krona

  25




  20




  15




  10




   5




   0
                jun                  jun              jun              jun                jun                  jun               jun                jun
               2003                 2004             2005             2006               2007                 2008              2009               2010


*Excluding revolving loans and overdrafts, convenience and extended credit card debt, households and non-profit institutions serving households.
Source: European Central Bank, Statistical Data Warehouse, MFI interest rate


The German situation was then described. There are no statutory interest rate ceilings in Germany.
However, the Federal Court of Justice considers that contractual conditions are excessive when i) the
effective Annual Percentage Rate of Charge (APRC) is twice as much as the effective market rate or ii)
the effective APRC exceeds the effective market rate by more than 12% percentage points.

A key issue is therefore to identify what the effective APRC in the market is. Until 2003, the
effective market rate was provided by the German national bank using the prevailing interest rate
(Schwerpunktzins) charged for instalment loans between EUR 5 000 and EUR 15 000 and of a
maturity of 36 to 60 months.

Since 2003, it is the MFI interest rate statistics that are used as a basis to determine the effective
market rate. These statistics correspond to the interest rates charged for all consumer loans with an
initial rate fixation of over one year and up to five years. The MFI interest rate is on average 58%
lower than the “prevailing interest rate” (Schwerpunktzinssatz) which was used as a benchmark
to determine the effective market rate before 2003. This has an important impact for lending
institutions and shows that the benchmarks used to calculate ceilings are all but anecdotal when it
comes to ensure the viability of a pricing restriction.



What makes the difference between these two interest rates?

Firstly, scopes and definitions differ. Unlike the present
system, the “prevailing interest rate” included the
aggregation of all costs payable by the borrower. The
mode of averaging of interest rates is also different. Interest
rates are now correlated to the volume of transactions.
Finally, the MFI interest rate includes all subsidised or
secured car loans which typically have a lower interest
rate due to regular sales promotions or the use of the
financed vehicle as collateral.
                                                                                                prof. dr. thomas Hartmann-Wendels

It is estimated that all these elements have on average        University of Cologne, Professor (DE)


an impact of at least 1% percentage point each on the
effective market rate. As a consequence, the interest rates reported within MFI interest rate statistics
are inadequate for assessing the usurious or extortionate characteristic of a loan agreement. The
MFI interest rate should be adjusted upwards by at least 50%.

12 | euRoFInas Roundtable on Interest Rate Restrictions
Difference between “Schwerpunktzins” and MFI interest rate
  Schwepunktzins      MFI interest rate
12




10


                                                               Difference: 3.71- 4.00
                                                               percentage points i.e. on average
 8                                                             58% based on the MFI interest rate




 6




 4
          January     July       January   July     January   July   January   July   January       July      January       July        January   July
           2001       2001        2002     2002      2003     2003    2004     2004    2005         2005       2006         2006         2007     2007


Source: Deutsche Bundesbank Statistic and ECB Statistic


The cost of credit varies significantly depending on the borrower’s creditworthiness and on credit
volume/maturity. In all cases, for those markets where restrictions are in place, a benchmark interest
rate must include the total charge for credit and reflect the terms of a typical consumer credit. A
single ceiling on interest rates for all types of consumer credits would negate the heterogeneity of
the consumer credit market.

Tanguy van de Werve, Director General of Eurofinas, highlighted that, as shown in the first
presentations, the amount of a loan is a key element to consider whenever setting interest rate
restrictions. It is therefore questionable whether a “one-size-fits-all” approach would ever be an
appropriate solution.

John Pears, Consumer Risk Executive at Bank of America
(UK), mentioned the recent review of the high-cost credit
sector conducted by the UK Office of Fair Trading. The
report published in June 2010 concluded that introducing
price controls would not be an appropriate solution to
particular concerns that have been identified in this
sector. They may lead to an outcome in high-cost credit
markets which is unlikely to be of benefit for consumers
particularly as regards short-term small sum loans.
                                                                                      John pears
                                                                                      Consumer Risk Executive at Bank of America (UK)




13 | euRoFInas Roundtable on Interest Rate Restrictions
03
unFaIRness oF
cRedIt contRacts



What makes a credit contract unfair? How is the unfairness of contracts
controlled and sanctioned? What are the underlying reasons for pricing
limits? Are pricing controls/limits an efficient way of addressing
unfairness of contracts? Shall pricing be considered as a potential unfair
element per se?

Alexandre Giraud, Legal Adviser at Eurofinas, introduced the discussion on the unfairness of
credit contracts. It was pointed out that there is currently a diversity of statutory interest rate
restrictions in place across Member States. These systems are founded on a variety of rationales
but usually aim at providing a response to individuals’ over-confidence (in their ability to repay) or
to a perceived lack of market competition that would lead to supra-normal prices. They all share a
common objective: to ensure a fair price in transactions.

Against this backdrop, a number of questions arise: Do
                                                                    Can fair pricing be
the restrictions result in the exclusion of some part of the
                                                               ensured in the absence
population from the market? Do current systems really
help addressing over-indebtedness? Are high interest
                                                               of statutory interest rate
rates necessarily unfair? Can fair pricing be ensured in the   restrictions?
absence of statutory restrictions?

In this context, it was mentioned that a number of European provisions or instruments such as
the standardisation of information (including the “total cost of credit”) and common European
standards on both unfair commercial practices and contract terms already provide a common
consumer protection framework. In parallel, a number of local provisions coexist with these
common standardised rules.




14 | euRoFInas Roundtable on Interest Rate Restrictions
Mira Szakun, Solicitor and Representative of the Konfer-
encja Przedsiebiorstw Finansowych in Poland provided
participants with a number of elements to be taken into
account in the context of consumer protection.

Traditionally, consumer protection rules are dissociated
from statutory interest rate restrictions and contractual
conditions are always subject to a number of limitations.

For example, in Poland, a legal act which is inconsistent
                                                              mira szakun
with the principles of community life shall be treated as     Solicitor and Representative of Konferencja Przedsiebiorstw
                                                              Finansowych (PL)
null and void. Additionally, under civil law, in case one
party takes advantage of a state of necessity, inefficiency or inexperience of the other party, the
latter may ask for a reevaluation of the contract terms and conditions.

These provisions reflect principles of contractual fairness and morality. In this context, abusive
charges are prohibited even in the absence of statutory rate restrictions. The entire corpus of
consumer protection rules must therefore be taken into account. High prices may be unfair under
some circumstances but not all and certainly not per se.

From a purely legal point of view, restrictions on pricing do not impact on lending institutions’ duty
to comply with operational or commercial practices requirements. There is a difference between
misleading actions related to the price, the manner in which the price is calculated, the absence/
existence of a specific price (dis)advantage and the actual cost.

                                               Statutory restrictions will never address potentially
     Statutory interest                        misleading pricing practices. Mira Szakun recalled that the
rate Statutory interest
     restrictions will                         Consumer Credit Directive aims to prevent such misbehaviour
rate restrictions will
never address potentially                      by introducing a number of very relevant rules such as the
never address potentially
misleading pricing                             provision of exhaustive standardised information. In addition,
misleading pricing                             the importance of educating consumers and providing them
practices.
                                               with the skills to recognise what is acceptable and what is not
practices.
                                               was emphasised.

Stefanos Sofroniou, Policy Officer at the European Commission, highlighted that while initiatives to
educate consumers are indeed valuable, it should not be assumed that consumers behave rationally
under all circumstances. Raising awareness is therefore not always sufficient. The question of
whether consumers could easily contest unfairness of contracts was raised as well.



                                                                                   Raising awareness is not
                                                                                      always sufficient.


                                                      According to Mira Szakun, the legal instruments in place
                                                      in Poland create robust grounds to fight against excessive
                                                      interest rates. These instruments are commonly applied
                                                      by Polish jurisdictions. All participants recognised that
                                                      the ease with which a consumer can contest the validity
stefanos sofroniou
Policy Officer at the European Commission
                                                      of a lending practice (including pricing) is paramount.




15 | euRoFInas Roundtable on Interest Rate Restrictions
The potentially damaging consequences of interest rate
restrictions on market inclusion were then stressed. The
introduction of statutory rate restrictions in a given market
unavoidably leads to a debate where State interference
through pricing limits and freedom of choice are opposed.

Philippe Pellé, Deputy Head of Unit at the European
Commission, while making it clear that the Commission,
had yet to form its opinion on the subject matter, said
that potential regulatory limits were not incompatible                  philippe pellé

with a free market.                                                     Deputy Head of Unit at the European Commission




John Pears expressed doubts on whether people would ever feel more protected if they no longer
had access to credit as a result of pricing restrictions.


                                                        A common misconception is that
                                                    interest rate restrictions help getting
                                                    cheaper credits.


                                                    Prof Dr. Umberto Filotto, from the University of Rome (IT),
                                                    recalled that a common misconception is that interest
                                                    rate restrictions help getting cheaper credits. This is not
                                                    true. As previously discussed, pricing responds to more
prof dr. umberto filotto                            sophisticated mechanisms. On the other hand, market
University of Rome, Professor (IT)
                                                    exclusion is a real consequence of such restrictions.

Tanguy van de Werve highlighted that the starting point of any policy discussion should be to first
identify the problems which have to be resolved. For instance, is there a problem of over-indebtedness
to be tackled? Only then should the relevance of regulatory responses, such as rate restrictions, be
assessed and discussed.




16 | euRoFInas Roundtable on Interest Rate Restrictions
04
case studIes
impacts OF statUtORY pRiciNG REstRictiONs




What are the characteristics of regulatory restrictions that are in place?
What are the impacts of restrictions on lending institutions, credit
availability, market exclusion and on over-indebtedness? Are interest
rate restrictions a barrier to the cross border provision of consumer
credit in the EU?

Miroslaw Bieszki, Independent Expert (PL), presented the pricing restriction system in place in
Poland and his views on its impact on the Polish market.

                                                         In Poland, interest rate restrictions were only introduced
                                                         in February 2006.

                                                         The restrictions concern two elements. Firstly, the
                                                         maximum amount of interest charged in any legal contract
                                                         cannot exceed four times the Lombard1 credit interest rate
                                                         of the National Bank of Poland. Then, the total amount of
                                                         all costs cannot exceed 5% of the total amount of credit (a
                                                         provision included in the consumer credit Act).

 miroslaw Bieszki
 Independent Expert (PL)
                                         In terms of economic impacts, according to Miroslaw
                                         Bieszki, these restrictions led to a relative increase of credit
risk costs and to an averaging of costs for all customer segments i.e. as part of a compensation
mechanism, less risky customers are charged more.

Obviously, these restrictions incentivised lending institutions to modify their market strategies
including limiting the product range on offer to fit the changing risk ceiling. Where lending
institutions maintained their offer to riskier consumers, ancillary charges were increased to cover
the risks associated with such segments.

1. Interest rate charged by the Central Bank for very short term loans to lending institutions against approved collateral.

17 | euRoFInas Roundtable on Interest Rate Restrictions
The reform also resulted in riskier segments looking for other types of provider (for example credit
unions).

The overall impact of these restrictions must be assessed as well in a context of economic downturn.
It is natural that, in such circumstances, these restrictions largely overcame their initial objective
with an increasing range of market exclusion, a decreasing number of products on offer (with
exclusion of the most recent and innovative products) and, importantly, a decreased margin on
consumer credit activity.

                                                    Søren Kargaard, Chief Executive Officer at Dan-Aktiv (DK),
                                                    presented the Danish experience related to interest rate
                                                    restrictions.

                                                    According to Danish contract law and banking regulation,
                                                    unreasonable prices are assessed and possibly modified
                                                    by complaint boards or by courts. Charging usurious rates
                                                    is a criminal offence. However, there are no statutory
                                                    ceilings on interest rates in Denmark.
søren kargaard
Chief Executive Officer at Dan-Aktiv (DK)
                                          The possibility of introducing such restrictions was
                                          discussed in recent years. It was notably argued by a
number of consumer advocates that such restrictions would limit consumers’ over-indebtedness.
As lending institutions would not lend above a certain level of risk, restrictions on pricing would
therefore inevitably constrain market activity.

According to Søren Kargaard, this position is based on a number of misconceptions. Firstly, over-inde-
btedness is usually not the result of over-borrowing but mainly linked to unforeseen events (such as ill-
ness, divorce or unemployment). Then, over-indebtedness affects all categories of the population. It is a
mistake to believe that “high-risk” borrowers are necessarily more exposed to over-indebtedness than
other consumer segments. Also borrowers reflect the overall population. The large majority of custo-
mers are middle-aged, well educated and benefit from good employment conditions. Last but certainly
not least, all lending institutions perform creditworthiness assessments before granting a loan.

The Danish Government recently decided that sta-                           Everything should be done
tutory restrictions on consumer lending were neither
                                                                     to improve the quality of lending
useful nor desirable. In particular, it was mentioned
by the authorities that the impacts on competition,
                                                                         institutions’ creditworthiness
market exclusion, innovation and pricing would                                       assessments.
outweigh the potential benefits of such a reform.

                                                    According to Søren Kargaard, it is clear however that
                                                    everything should be done to improve the quality of
                                                    lending institutions’ creditworthiness assessments. It is
                                                    believed that better access for creditors to consumers’
                                                    data would be particularly valuable in that respect.

                                                    Maria Dolores Montesinos Trigo, Policy Officer at the
                                                    European Commission, asked whether any initiatives
                                                    have been taken in this field.
maria dolores montesinos trigo
Policy Officer at the European Commission




18 | euRoFInas Roundtable on Interest Rate Restrictions
Christian Brandt, Managing Director at Finans og Leasing
(DK), mentioned that a formal request for the creation of
a positive credit database was recently submitted to the
Danish Data Protection Authority.

To a question on whether any formal work had been carried
out on the subject matter in Denmark, Søren Kargaard
referred to an official government report on interest rate
restrictions published in August 2010. The report covers
                                                                                       Christian Brandt
a wide range of questions including some of the points                                 Managing Director at Finans og Leasing (DK)

discussed at the roundtable.

Andrea Poletto, Director General at Consum.it (IT),
presented the current mechanism in place in Italy to
prevent usury and provided participants with his views on
the overall impacts of the Italian system.

In 1996, Italy migrated from a “subjective” to an “objective”
control of interest rates. The interest ceiling is 50% above
market average, broken down by different categories of
                                                                                       andrea poletto
consumer credit products and by loan amounts.                                          Director General at Consum.it (IT)




The ceiling results from the average of interest rates as reported and published on a quarterly basis,
the so-called Tasso Effettivo Globale Medio (TEGM) increased by 50%. The TEGM is calculated and
published every quarter by the Ministry of Economy and Finance, with the support of the Bank
of Italy. The TEGM includes all the expenses related to financing, namely interest rate, insurance
premiums and all other fees excluding taxes.

Credit cards TEGM trend
             Amount financed ≤ € 5.000            Amount financed > € 5.000



18%



16%



14%



12%




10%
                    Dec 09               Jan 10                Feb 10         Mar 10            Apr 10                  May 10       Jun 10

Source: National Bank of Italy




In practice, in the last three quarters, TEGM has been decreasing for personal loans, point of sale
financing and “wage guaranteed loans”. On the other hand, credit card TEGM has been slightly
increasing.

According to Andrea Poletto, the Italian objective control system of interest rates is a compromise
that works in the sense that the “50% increase rule” and quarterly adjustment helps to minimise
negative market distortions. However, small ticket loans and short duration loans may be affected by
the regulatory system in particular when interest rates rise quickly in a very short period of time.

An exemption for small ticket loans should be considered by the Italian regulator.



19 | euRoFInas Roundtable on Interest Rate Restrictions
At the same time, the “all inclusive” TEGM approach aims to cover all costs paid by borrowers
and contributes to rationalisation of intermediation chains, for instance in wage guaranteed
loans. Andrea Poletto concluded that the Italian system worked well and was adapted to the
characteristics of the complex Italian market. It was mentioned that usurious practices however
still exist in the market.

Ben Murphy mentioned the difficulty in estimating, in general, the exact proportion of consumers
forced to the black lending market.


Umberto Filotto added that the establishment of a common definition of usury would prove
particularly challenging in view of the various market characteristics in this field.


                                                                         François Langlois, Head of Institutional Relations at BNP
                                                                         Paribas Personal Finance (FR), presented the position of
                                                                         a pan European player on interest rate restrictions and
                                                                         provided participants with his analysis of the French
                                                                         statutory control system.


                                                                         In France “any conventional loan granted at an annual
                                                                         rate exceeding 133% of the average rate which has been
                                                                         applied during the last quarter by credit companies,
 françois langlois                                                       for the same nature of operations with similar risks” is
 Head of Institutional Relations at BNP Paribas Personal Finance (FR)
                                                                         considered to be usurious.


A report commissioned by the French Ministry of Finance on statutory rate restrictions was
recently published. The report aimed to identify possible reforms of the mechanisms currently in
force. The present system distinguishes between i) personal loans, ii) revolving credit, linked credit
and overdrafts. The new system which will be in force as of April 2011, will distinguish between the
amount of loans i.e. below EUR 3 000, between EUR 3 000 and 6 000 and above EUR 6 000. The
statutory restriction system therefore shifts from “product logic” to a system which differentiates
de facto between the type of financing i.e. consumption, equipment or investment.

Proportion of revolving and personal credit as part of total consumer credit
               revolving loans            personal loans
60%



50%



40%



30%



20%




10%
           1993       1994       1995       1996       1997       1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008

Source: French National Bank




Since 2000, personal loans have been subject to regular “discount/promotional rates”. As a result,
the average market interest rate for these loans and the corresponding ceiling heavily decreased.
The direct consequence was that only revolving loans could match the profile of riskier customers
or small ticket loans. For those loans, most specialized finance companies were obliged to hold their
rates close to the statutory ceiling thereby provoking an increase of the said ceiling.



20 | euRoFInas Roundtable on Interest Rate Restrictions
Revolving credit is suitable to respond to finance consumption or treasury needs. The limited
duration and the amount of loans explain the higher interest rates. As an example the impact of
EUR 80 of fixed costs corresponds to 17 points of APR for a loan of EUR 1 000, 8 points of APR for a
loan of EUR 2 000 and 3 points of APR for a loan of EUR 3 000.


However, the context previously described explains why a number of riskier customers used these
products to finance larger purchases. This situation was criticised and led to the reform of the
statutory restriction system.

François Langlois continued giving two examples of market exclusion. Under the current statutory
restrictions, micro credit between EUR 1 500 and EUR 3 000 is impossible to grant. This is due
to the restrictions per category of products. The new system will facilitate the development of
this type of credit. On the contrary, as an example, consumers with no fixed addresses (such as
travelling communities) will be less able to obtain credit in the future. In light of the level of risk of
this customer segment, the previous restriction mechanism was more favourable. This will notably
affect their ability to finance vehicles (cars, vans, caravans etc.). It was recalled that this customer
segment represents around 50% of the total market for these types of vehicles which are very often
financed through linked credit agreements.

This shows that there is no one size fits all solution: what may benefit one specific customer
segment might restrict another’s access to credit.

Lastly, François Langlois mentioned the abolition in 2003 of interest rate restrictions on business
loans. This reform was extended to individual enterprises in 2005.

                                                  A report from the French National Bank shows that the
    What may benefit one                          abolition positively improved SMEs financial situations,
                                                  notably for start-ups, without weakening the overall
specific customer segment
                                                  quality of lending institutions portfolios. The report
might restrict another’s
                                                  recommends exploring the transposition of this reform to
access to credit.                                 private individuals, taking into consideration issues such
                                                  as solidarity, cost of credit, market exclusion and over-
                                                  indebtedness.

To conclude, a question was raised on whether the set-up of price controls at European level was
appropriate. It was highlighted that a uniform concept of usury requires a strong homogeneity of
markets and practices.




21 | euRoFInas Roundtable on Interest Rate Restrictions
05
conclusIon



Concluding the discussions, Alexandre Giraud made a number of remarks.

Several price control mechanisms for credit agreements coexist in Europe. These vary from ex ante
statutory interest rate restrictions to ex post judicial or out-of-court controls. Each has its own
rationale.

The Roundtable highlighted significant differences among markets. On the one hand, certain
countries have recently reformed their existing price restrictions systems. On the other, a number
of national regulators have taken clear positions against the introduction of rate caps into their
regulatory frameworks. Beyond these different national approaches, what makes these markets
comparable is the consumers recurrent need for credit.

Should these needs be constrained? If so, what should be the justifications for such limitations?
Is there a risk that such constraints lead to detrimental consequences both for consumers and
lenders?

Participants stressed the impact statutory interest rate restrictions have on competition, financial
inclusion, product innovation and lenders’ product mix. Consistent European-level problems are yet
to be identified. If commonalities exist among countries, efficient solutions should then be assessed
and discussed.

As recognised in the discussions, independently of the existence of any price control mechanism, the
validity of potential extortionate pricing clauses in credit agreements must be challenged in court
or through alternative dispute resolution (ADR) systems. This implies however that the procedures
in place are known to the consumers, fast, simple and cheap ; and that interim measures can be
promptly taken to safeguard consumers’ position.




22 | euRoFInas Roundtable on Interest Rate Restrictions
Responsible	Editor: Anne Valette, Head of Communications
Editors: Alexandre Giraud, Legal Adviser
Olivia Fabry, Junior Adviser

Contact:
Eurofinas AISBL
Boulevard Louis Schmidt, 87
B-1040 Brussels
www.eurofinas.org

Published by Eurofinas - January 2011

Disclaimer
The views expressed in this report are solely those
of the participants and do not represent Eurofinas’ views.
Boulevard Louis Schmidt 87
1040 Brussels – Belgium
T +32 2 778 05 60
www.eurofinas.org            Publication date: January 2011

				
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