| „A Call to Arms“ Principles of Responsible Credit as a Means to Cope with Overindebtedness - Paper presented at Panel 7 - Responsible Lending - of the Law & Society Associaton Congress Berlin July 27,2007 |
„A Call to Arms“– Principles of Responsible Credit as a Means to Cope with Overindebtedness (first draft July 23, 2007)
Overindebtedness is the effect unequal distribution of productive labour and other income resources have on individuals and families that with or without own fault are victims of market discrimination. It gradually replaces other forms of poverty like unemployment and homelessness. Coping with overindebtedness can defeat social discrimination. This paper tries to show the impact the development of principles may have.
Failed consumer credit relations are the basis for overindebtedness. Consumer credit gives access to additional resources to the customer calculated on the projection of his or her future liquidity. Although they in fact borrow the savings of others its extension, access and repayment are factually and legally organised as if consumers would borrow their own future income. Availability of this income as well as the way the repayment is legally defined are the two pillows that balance consumer credit relations. To prevent overindebtedness two streets can be taken: adapting debtors to the repayment needs of the creditors or adapting credit to the factual needs and capabilities of the debtor. Consumer protection should focus on the latter. This is what the European Coalition for Responsible Credit (ECRC) wants to achieve fighting for “productive credit”. This struggle has to target the supplier side. Development, distribution and servicing lies in the hands of lenders who will respond to these requests if such developments are either rewarded by the market through additional demand, lower cost or stable long term relations with their customers or if legal, moral or public pressure forces them to react.
In order to facilitate market pressure, orientation and the development of a legal frame for responsible credit ECRC has developed seven principles with three sub-principles each. They demand access, information and advice, responsibility and fairness, needs-orientation, effective consumer rights, the prevention of overindebtedness and institutionalised help.
Such principles are not without ambiguity. Principles have a long tradition of abstract ahistorical normative aspirations or assumptions which although of a political nature often claim moral or ethical values or even sanctity. Their lack of applicability and their offer to provide legitimacy to those who have sufficient power to define its contents keep them alive. This is why sometimes those who developed such principles saw themselves defeated with their own principles applied by their opponents.
The use of principles by financial services suppliers is increasing. While many of such sets of principles are used only internally for employees to build Corporate Identity sets of principles which as a marketing tool want to build sustainable customer and public relations become more numerous since 2000. They respond partly on growing public mistrust in the financial sector but they are mostly defensive describing their ordinary profit driven businesses only with different words in a normative and ethical language. The “invisible hand” is thus made “visible”. A third group of principles is introduced by new legislation on insider crime or responds to higher liability to investors which threaten the budget if their employees are not confronted with principles of ethical behaviour that could balance their system of incentives which point into the other direction. Globalization and deregulation has also opened the market to outsiders or foreign service providers unacquainted with national standards. Their success with modern forms of “easy credit” pushes sometimes traditional players like public savingsbanks, coop banks or traditional national banks to point to their value driven responsibility which not always represents a true value other then tradition.
Principles share abstraction and generality with legal norms. But unlike state law they derive legitimacy from religion, moral or ethics or the normative expectations of special interest, ethnic or otherwise defined subgroups in society. They generate collective social effects which are related to the use of law in out-of-court communication. Conflicting parties using legal terms outside the formal legal sector are rewarded with behavioural certainty, solidarity and group feelings as well as with a feeling of legitimacy. Law is community building. But legal rights are also burdened with the threat that the legal system will overtake, redefine or even reject their claims for legitimacy. In addition social actors feel less understood, served, and even burdened with additional cost by reduced chances to win. In so far principles that are “owned” by a social organisation are less threatening allowing more identification.
Another advantage is the moral purpose driven form. While law has to serve the requirements of the rule of law (Rechtssicherheit) it has to exclude teleological formulations which would open the law to direct political intervention. Thus legal forms are less receptive for political aspirations while economic or moral norms again hinder the creation of self certainty, legitimacy and collective behaviour. This is why social movements have always tried to bring their socio-political programmes closer to the law by developing political principles that at least looked like law in attendance providing a viable alternative to the ruling state law. But especially contract law including consumer issues has developed a certain form of immunity with regard to social issues. In consumer credit law such immunity has been carried so far that the meaningless exchange of money for money has become an end in itself while in fact consumers satisfy actual consumption needs by using their future labour. The true meaning of the transaction is obscured and renders the form immune for social intervention. The rather naïve assumption that a lack of money cannot be excused is challenged by the idea of responsible credit who makes discriminating against the poor a legal concern.
If consumers are seen as buyers or borrowers instead of hungry persons and indebted households, if those seeking access to a rent agreement are just potential tenants and not (if so) homeless and if those who lost their job are not only ex-parties of a contract but unemployed such problems will never employ legal thinking nor will it affect the legal principles which govern social action. Principles of responsible credit that want to introduce human needs into the flow of capital and social rights into formal contracts have to break the immunity the formal system has achieved by redefining reality as a purposeless play whose behaviour game theory could explain.
This contractual legal system leaves little space for the introduction of alternative principles. To attack the discriminatory implications of formal contract law and its impoverishing effects alternative principles have to be formulated with more concern for the underlying social reality. Not the liberal principles derived from freedom, equality and security combined with exclusive property rights are wrong but its application to a false perception of the problem of overindebtedness. It is through an ideological application that those who own more property get the freedom to exploit and discriminate, where each cent of an enormous fortune is treated equal to the cent of the poor and where the wealthy are guaranteed unlimited security to the detriment of their debtors and their property rights are protected just by garnishing, seizing or foreclosing on the property rights of the indebted, unemployed or poor consumers.
The new consumer credit directive in its 2002 version is based on a number of principles which are quite visible in its considerations. Markets will solve all problems. Consumers should get as much information as possible, time for reflection, and have free access to all products suppliers think to be appropriate at any price. They can expect responsible lending from a creditor who has to use all available information which the consumer has to provide.
If we compare these to our principles of responsible lending we find them all formally respected. But a second looks reveals that with this very same principles the CCD and the UK regulator will achieve just the opposite of what our principles intend. Giving access to bad credit to vulnerable consumers has not created consumer wealth, information overload instead of a comprehensive and inclusive APR deters consumers from using any information at all. Fairness by observing market rules only provides legitimacy for irresponsible behaviour. Access to justice will deter consumers into costly and useless procedures instead of pursuing their true interests not shaped by the law. The overspill of public institutions who share the religious believes into free markets and consequently hold bankrupt debtors responsible for their fate will produce bad advice for the debtor and unjustified excuses for the creditors. Financial education teaching notions, products and procedures as well as useless capacities to manage non-existing budgets will adapt consumers to the marketing needs of the industry. Learning credit language will impede the development of an own language that is able to express the needs and wishes of the consumers for its consideration within the money system.
Just formulating principles does not suffice. It is their application which counts. As long as the reality of overindebted consumers can be arbitrarily defined and explained by those who apply the principles such principles are able to legitimize the aggravation of the threat of overindebtedness. This is why such formal principles have to be confronted with social reality. Social research is the true weapon to attack the further development of overindebtedness. If social research can be done free of political and economic influence , if cases can be analysed without prejudice, if measures can be evaluated to their social effects even neo-liberal principles could be used to reform the given system of credit supply to the better.
Principles of responsible credit will therefore have to deepen its relation with social facts provoking the necessary empirical discussions on causes and mechanisms of overindebtedness for lawyers. This is why such principles have to be less focussed on procedures than on outcomes. Our principles refer to “credit” and not only to “lending”. It rejects the assumption that good credit relations are the mere result of a fair treatment when the credit was selected and granted. It also refers to instruments which historically have proven to be valuable tools to prevent usurious credit and overindebtedness like rate ceilings, rate caps in default, protection against forced early termination and acceleration. They ask for rehabilitating bankruptcy procedures which lead back to the main credit system providing a period of state organised repayments with advice and help. The second layer of sub-principles and the explanations prevent the misuse of principles for the justification of ideological free market rules. Such principles compete with the City of London on who will better fulfil the aspirations of individual freedom in the credit society. More concrete applications of the seven principles opens them up for more social and political contents. At the same time they challenge our existing view of debtors’ reality and provoke empirical research and debate.
In order to remedy the loss of legal formality the external links between law and such principles have to be deepened. This is especially possible in international law. Here the legal form and the form of political principles are less distinct. It has become daily business of judges of the European or international courts to apply such principles to concrete cases. They have learned to extract their legal implications.
Also the EU legislator has opened the doors for such form of law. Seeking a way to harmonise private law within so different systems as the English common law system or the Code Napoleon or the BGB system or finally the contract law system of Scandinavia it has opted for a non-legal economic form of regulation that favours principles over norms in its Directives. The enormous danger which such developments normally would produce for the rule of law has been tamed by two elements: first the EU has no own centralized executive power so that the interpretation of the EU law remains scattered over 27 states. Second most EU law has the form of Directives which need a second process for its transformation into national law. But although EU-Directives themselves resemble principles more than a law they have invented a second layer with its considerations passed by the council just as if it were part of the rules itself. Commission and the Council enter all kind of principles and deliberations as well as empirical assumptions into these considerations that should explain the consecutive regulation. This structure allow to directly compare the principles on responsible credit with the impact the Directive expressed in its considerations and articles. On the European level the principles challenge the law directly.
On the national level the principles can serve as a yard stick for legislation like where the Greek parliamentary opposition used it to measure government efforts in consumer credit legislation. This possibility will increase if the principles are further developed into more operational and concrete norms like it has been commenced within ECRC.
The principles get another chance with regard to general clauses in contract law. The principles of good faith, good morals, general customs, notinons like acceptability, Zumutbarkeit, adequateness (angemessen) have been called a gateway for social regard for the weak against the misuse of economic power in contract law by the German constitutional court especially in consumer credit. In France the ordre public and bons moeurs in America unconscionability and in the UK now fairness play such a role. If general principles of responsible credit signed by ever more social organisations and respected by an increasing number of financial institutions achieve the reputation some professional codes have in malpractice cases or the International Normalisation Standards have achieved the court system could use its power to transform such principles into general standards of law.
Principles of responsible credit can be an arm to combat overindebtedness. For this they have to be formulated in a purpose driven socio-economic language that challenges the ideological assumptions underlying formal legal principles on credit and debt. It thus should provoke empirical research and political discussion. This will create social cohesion between those who take part in the social advocacy like in ECRC activities. In its abstract general and political form it can serve as a yardstick for national legislation, as a basis for the development of consumers’ and debtors’ rights. Bringing them as close as possible to the law will develop its social function within consumer advocacy. As EU-law is already a principle based law to which ECRC principles directly relate just as UN principles or from other supranational organisations like ILO, OECD, Mercosur etc it has a direct international counterpart. To transform it into national law those provisions that make customs, habits, good faith, good morals and especially usury relevant to individual contracts are the gateways for its values. |
| ID: |
39957 |
| Author(s): |
UR |
| Publication date: |
27/07/07 |
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Created: 26/07/07. Last changed: 06/08/07.
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