Brussels 2006 - Report on Workshop 7: "Can Risk-Based Pricing Work in the Absence of Comprehensive Credit Reporting?" chaired by Melina Mouzouraki INTRODUCTION Until recently the price of consumer credit (i.e. the interest rate) was being determined by objective parameters. There was a one and only interest rate per product. Since the mid-nineties there was a change in the USA, by which the interest rate varied according to the risk associated with the specific credit. This practice is currently being gradually expanded in Europe too. Banks argue that on the basis of this practice, consumers that would not have access at all to credit, can now get credit, but at a price that corresponds to their individual risk. SPEAKER INTERVENTION In her opening speech, the coordinator of the workshop, Melina Mouzouraki, lawyer, legal counselor of the Greek Consumers’ Association EKPIZO, argued that this practice is discriminatory and unfair. At the level of individuals, this approach is against the principle of equality: under the same financial and credit market conditions, some borrowers pay the use of money much higher. Unfairness is even more obvious with regard to a borrower who took credit on a significantly higher interest rate due to his personal characteristics, but fulfilled his contractual obligations on time. Moreover, in the model of risk-based pricing, information and private data, but also their evaluation-categorization acquire enormous importance, because they determine the value of the product (credit) and they co-define it. Management of the information and the personal data is central. In the absence of accurate personal data, in the absence of the choice of the right and proper data for the determination of the risk and in the absence of transparency in the market, the model of individualized determination of the cost of credit will produce distortion in the credit market. Ms Tatiana Jovanic, researcher at the University of Belgrade, focused on credit reference agencies, mainly in new EU Member States and South-East European countries. The central question is how much information is necessary and sufficient in order to evaluate the financial capacity of the consumer, who may furnish and access files and when data should be reported to and deleted from the data bases. Ms Jovanic spoke in favor of a stricter enforcement of consumer rights as a prerequisite for an effective and fair credit reporting system. Mme Anne-Lise Evrard, representative of the Belgian consumers’ association Test-Achats, informed the workshop attendants that the Belgian law requires from a credit institution to verify, before granting a credit, the solvability of the consumer. Moreover, since 2003, alongside with the “negative” data bank, a “positive” data bank has been created in Belgium, in which all credit obligations of a consumer are being registered. This registration has led to the diminishing of the default rates in Belgium. Last but not least, Ms Evrard spoke in favor of maximum interest rates and informed us that in Belgium there are currently 28 maximum interest rates, which differ according to the nature, the duration and the amount of credit. Emmanuel Masset-Denèvre, representative of the French Institut National de la Consommation (INC) reported that in France, like in Belgium, there are maximum interest rates applied in consumer credit, which are being revised every three months. With regard to risk based pricing, Mr Masset-Devevre said that there is not such pricing yet in France, and the existing scoring systems are used by the banks only in order to assist them to decide whether to grant the credit or not to the client and not to differenciate the price. In France there is currently no registration of positive data. Should such a positive data bank be introduced in France, the following questions and problems arise: the duration of the data, the proportionality of the data, the access to the data bank for other purposes than credit, mistakes, and updating of data. As Dr Dieter Korczak (Germany) further argued, besides risk-based pricing in credit, there are a growing number of European consumers that have absolutely no access to financial services, including bank accounts and credit. These are the first conclusions coming from a project run under the lead of the ASB Schuldnerberatungen GmbH (Austria) in co-operation with other European NGOs. The project reveals the necessity of a basic right for a bank account and for adequate financial services which would mean, among other things, the obligation of responsible lending for the financial sector. In relation to risk based pricing, Mr Korzak argued that this is not useful, as it is better to have rich people support the poorer ones through the one and only interest rate. In his analytical paper Harro Norder explained the history and future strategic direction of the Volkskredietbank in the Netherlands, of which he is the director. Through the historical context, the reason for establishing the bank, the type of organisation it is and its strategic analysis, the resulting position of the VKB shows it to be highly competitive. Lisa Dickinson, Responsible Lending Director of GE money, Consumer finance, a provider of consumer finance products globally, argued that risk based pricing allows lenders to offer loans to a wider group of consumers, including those that may not normally be able to access credit, and because they must make sure that they do not overburden consumers, risk-based pricing is absolutely dependant on accurate and reliable credit information. Therefore, such pricing works best in the more sophisticated markets. As well as sophisticated credit data, sophisticated technology is required by the lender to manage risk-based pricing effectively. Ms Dickinson emphasized that for risk based pricing to be effective to all involved, consumers & lenders need to ensure that the data is accurate. Consumers also need to understand how they impact their credit data and how they can improve or repair it. From the experience made though pilot projects, it is suggested that customers are not making decisions based on price and that there is a need for greater financial education. The presentations were followed by a vivid discussion. With regard to statistics supporting risk estimations, Udo Reifner argued, that statistical correlation leads to causality (flawed logic). Karen Gross, from New York Law School (USA) made the remark that in the USA non-relevant information is being added in the credit reports such as, for example, how many times one has changed work post or the level of education one has. She noted also that currently in the US the poor pay higher prices in banking products than in the past, and the rich pay lower prices although they are not the ones in most need of the credit. ID: 38862 Author(s): iff Publication date: 01/11/06     Introduction abstract by Melina Mouzouraki (10994 Bytes)

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