UPDATE ON DEVELOPMENTS IN FINLAND – ECRC’s Finnish partner Kuluttajavirasto (The Consumer Agency) concentrates the latest edition of its “Current Issues” Bulletin on the subject of financial services. Below is a link to these comments online, but we have also copied them here below. Our Finnish partner gives us all a clear example of the sort of activities and newsletters which we should all be trying to report make to each other. The Finnish Consumer Agency's Newsletter 3/2008 has the theme: Financial Services. The edition reports on: MARKETING: The importance of making sure that contractual terms are clear and advertising is straightforward, that compliance with consumer credit marketing rules is often sporadic with the example of Finnish lenders offering car credit letting their standards slip when not being scrutinised (which raises the question of why businesses aren’t always responsible by complying with regulations at their own initiative and over the long term), and that consumer credit ads often put too much emphasis on a no-interest, no-fee payment period which is wrong if the APRis not 0%. DEBT COLLECTION:.Technicalities can play a role especially because it is now more common for collection agencies to buy receivables as demonstrated by a Finnish example, and good debt collection practices involves giving consumers sufficient time to ascertain their rights and prepare for payment, as well as not systematically charging customers the maximum debt collection fees when the expenses incurred can reasonably be assessed as smaller. INSTANT LOANS: With half of the quick loans failing to disclose the APR, the Consumer Agency has established basic rules for SMS loans and a working group will produce something by the end of the year – should the APR be disclosed for these loans too? and how can certain security gaps like reliable identification of a loan applicant be solved? Ads should not urge taking out loans for no good reason (i.e. inappropriate to use discounts, prizes etc as incentives for entering into credit relations, and to urge young consumers to take out a loan on a whim by promising speedy service) and aggressive marketing, high interest rates and ambiguous contractual terms of quick loans are continually causing problems for consumers in the Nordic countries. EDUCATION OF BUYER AND SELLER: Because savings and investment products are complicated they may be imperfectly understood by both buyers and sellers and this could be an obstacle to careful deliberation. Finnish regulators have drafted a position on good practices for marketing life and pension insurance to individuals and the Consumer Agency has been involved in the process by: emphasizing the role of the seller and by reiterating that the packaging of information in itself is not enough; information must also reach the target audience (e.g. going through the checklist for selling lines of credit with the customer) SEPA: In terms of SEPA and the EU Payment Services Directive, we agree with the Consumer agency that it is unfortunate that often in the international usage of combined debit/credit cards, the credit option is made the “default” option when in fact many people would actually prefer to use the debit feature. Alongside the different timing of when these SEPA conform changes will individually be implemented by the banks, it is yet to be seen how the huge costs of the new system will be distributed and what the actual benefits to consumers will be relative to the costs (e..g. funds will be needed in the interim before the benefits of convenience and probable lower costs in the future) CCD: In November 2007 the Finnish Consumer Agency was involved in ECRC’s campaign to avert last minute changes suggested by the European Parliament, and which would have potentially removed the consumer's right to pay off a loan before the due date from the directive leaving consumers unprotected by EU-level regulations and leaving them completely dependent on national regulations. Also averted after the Parliament's second reading was the proposed dropping of the proposal for lending institutions to use a standardized form. CREDIT CARDS: Many bank cards can be combined with a credit card function and sometimes the lack of clarity can be costly to the consumer (consumer often unwillingly and unwittingly become a user of credit for which interest was charged). Questionable promotional methods are prevalent not only in Finland. Regardless of the credit type, consumer credit is a product for which marketing is held to higher standards than for other consumer products, and especially stricter when the target group is young people. Responsible lending and good lending practices require that a consumer be given plenty of time to consider taking out credit and to study the essential credit terms. A responsible lender does not use discounts, promotional games or other additional benefits to market consumer credit. It is especially inappropriate to offer an instant discount at the counter for those who fill out a credit card application on the spot. This kind of marketing is uncalled for and encourages people to take out credit without thinking it through. ----------------- FROM THE EDITOR: YOU SHOULDN'T NEED A PHD TO KEEP YOUR FINANCES IN ORDER In a study ordered by the Finnish Consumer Agency last summer, the market research company Taloustutkimus found that lenders and borrowers aren't always speaking the same language. One third of respondents were not familiar with the important concept of annual percentage rate of charge, for instance. Even those who knew of it could not necessarily explain how it is meant to be used. A low level of consumer financial knowledge revealed by a Danske Bank survey in the Nordic countries has also caused some consternation, and more consumer education and accountability has been called for. In order to navigate the world of financial services, a consumer needs information that does not simply come about through practice. Indeed, trial and error is too destructive an approach in the financial services sector, where the effect of choices made will be reflected throughout a consumer's life and in his or her ability to function in society. Along with consumer education and instruction, it should be kept in mind that businesses have the responsibility to market their services in a clear and transparent manner. Based on marketing, a consumer must be able to make a sensible decision, even without any specialized knowledge. Perhaps consumers aren't stupid, and financial services are in fact exceptionally difficult to understand. In that case, there should be special consideration of how social responsibility, the customer's point of view, and good practices can be integrated in business communications. The more complex the product, the greater the need for a straightforward approach. Financial advising and consumer education and instruction have their own important roles. Innovative tools are needed and financial services should not be mystified. While we wait for consumer education efforts to bear fruit, however, the problem cannot be ignored. The annual percentage rate and the standardization of information both provide good examples of ways to enhance not only consumer protection, but also smooth competition. Who will be at the forefront of making sure that contractual terms are clear and advertising is straightforward? Anja Peltonen Editor-in-Chief, Director of the Consumer Law Division --------------------- COMPLIANCE WITH CONSUMER CREDIT MARKETING RULES IS SPORADIC The same problems with marketing of consumer credit recur year after year. Some improvement is discernible from time to time, but doesn't stick. Over the past five years, the Finnish Consumer Agency and the State Provincial Offices have been organizing consumer credit surveillance campaigns, in which advertisements for home appliances, furniture, and vehicles are examined. A typical and frequently repeated mistake is that ads do not clearly indicate the cost of credit. Additionally, consumer credit ads often put too much emphasis on a no-interest, no-fee payment period. In order for credit to be advertised as free of interest or fees, the annual percentage rate of charge should be 0% and the credit should not generate any additional costs to the customer. In reality, however, credit often involves various kinds of account maintenance and campaign fees and therefore is not cost-free. Businesses singled out during surveillance campaigns over the years have been sent information about the rules concerning consumer credit marketing, and have been urged to correct deficiencies in their marketing. There are businesses in the field, however, that continue to side-step the law and the requirements of authorities despite being contacted numerous times. For example, the legally required information included in the advertisements of Maskun Kalustetalo, the furniture store, is still impossible to read. The company has also emphasized no-interest and no-fee payment periods in a misleading way. EFFORTS RUN OUT OF STEAM The results of surveillance campaigns vary depending upon what the Consumer Agency has focused on in a given year. In 2006, for instance, the Agency was negotiating with the automobile industry about shortcomings in car credit marketing. When a surveillance campaign was conducted that same year, the problems had clearly diminished. The situation looked bleaker in the area of home appliances and furniture, however. Based on these results, the Consumer Agency decided to concentrate on the marketing of credit for home appliances and furniture in 2007. Discussions took place with the Association of Finnish Furniture Retailers, the Finnish Association of Domestic Appliance Retailers, and the Federation of Finnish Financial Services. A surveillance campaign showed positive results from these discussions. For example, the credit cost clause was easy to read in most of the advertisements reviewed. The good news was dampened by the finding that lenders offering car credit, after shaping up the year before, had now been slipping again. The annual percentage rate of charge was left completely unmentioned in some ads, while in others, cars were nowhere to be seen and the credit interest rate was the main message instead. The Consumer Agency has called for lender responsibility on numerous different occasions. Businesses could show that they are responsible by complying with regulations at their own initiative and over the long term. Do they only make an effort as long as they are under the special scrutiny of the authorities? ------------------------- NEW AND IMPROVED GUIDELINES FOR CONSUMER CREDIT MARKETING Credit for furniture, home appliances, cars, and other major purchases isn't just offered at the shop counter anymore, but is conspicuous already at the advertising stage. New guidelines have been issued for marketing consumer credit and selling lines of credit. The Finnish Consumer Agency has revised its policy on consumer credit marketing. The guidelines include a detailed discussion of items that have to be mentioned in marketing. The distinctive features of lines of credit and lump-sum credit are reviewed, and special attention is given to the presentation of annual percentage rate of charge. Sample advertisements are used to demonstrate problems such as small print, overemphasis of a particular credit term, or omission of information required by law. The Consumer Agency, in collaboration with the Federation of Finnish Financial Services, has compiled a handy pocket guide for selling lines of credit. By referring to the six sections of the guide, a seller can ensure that all of the necessary information has been reviewed with the customer. ------------------- MORE TRANSPARENCY FOR BANK LOYALTY PROGRAMMES Rewarding loyal customers is a practice that has spread to financial services as well. Banks, investment firms and insurance companies with loyalty programmes need to take the Finnish Consumer Agency's policies on loyalty programme marketing into account. Furthermore, loyalty programmes often include insurance and other financial products. These products often have a greater impact on a consumer's finances than other products do. The Finnish Financial Supervision Authority (FIN-FSA) has seen it fit to formulate a policy on the uses of financial products in loyalty programmes, and it has asked the Consumer Agency to comment on the draft as well. According to FIN-FSA, bonuses granted by lending institutions cannot be used for purposes other than payments on financial products, i.e. banking, investment and insurance. An insurance company cannot promise benefits to loyal customers for purchasing an appliance from a certain store, for instance. An alternative would be for companies to pay customer benefits in cash. The scenario does work the other way around, however. A loyal customer of a home appliance store can accrue benefits by obtaining insurance from a company participating in the loyalty programme, for example. The Consumer Agency considers the FIN-FSA interpretation a good one in that it could help clarify lending institutions' loyalty programmes while also adding to market transparency. From the point of view of the consumer, however, it does not make much difference whether one gets a bonus for insurance or for a refrigerator. ADDITIONAL BENEFIT NEEDS TO STAY ON THE SIDELINES In many customer loyalty programmes, the customer gets more benefits the more purchases are centralized. A product offered as part of a loyalty programme is not necessarily the cheapest or best choice for a customer's needs. It is often easier for a customer to choose a product from a familiar loyalty programme, however, than to spend time on research and shopping around. The points emphasized in marketing are those essential to the consumer for the purposes of decision-making. The Consumer Agency's policy on loyalty programmes and loyalty programme marketing, published in 2007, states that advertisements may not place inappropriate emphasis on potential bonuses. A customer should have the opportunity to make choices based on the characteristics of a product or service, not on the lure of additional benefits promised. In certain loyalty programmes, a customer can accrue bonuses by paying for purchases with a charge card or credit card. The Consumer Agency reiterates that by using credit, a customer always postpones the actual payment and thus increases his or her risk of falling into debt. Bonuses promised for charge card or credit card payments, therefore, must not lure customers into using a card without due deliberation. ------------------------- SUPREME COURT ASKED TO HEAR APPEAL IN DEBT COLLECTION FEE DISPUTE A telecommunications company sold its receivables to a collection agency that collected overdue phone bills en masse from thousands of people. Disagreement arose over the collection fees charged. According to the Finnish Consumer Agency, the collection agency does not have the right to charge the fees that were demanded in the collection notices. The District Court and the Court of Appeal dismissed the Agency's claim. The Agency is now applying for an appeal to the Supreme Court. When the telecom company ACN Communications Finland Oy stopped operating in Finland, it sold its receivables, based on phone service sales, to the collection agency Alektum Perintä Oy. Alektum Perintä Oy sent approximately 16,000 collection letters to the company's former customers. The bills were for the years 2004–2005. The disagreement concerns the amount that can be charged as a collection fee. According to reports sent in by consumers, Alektum Perintä Oy is charging 21 euro for each collection letter. If the collection agency were collecting receivables on behalf of a client, it would send a demand for payment and charge the fee accordingly. In this case, however, it has purchased the receivables for itself, thus becoming an ordinary creditor who can charge a maximum of 5 euro to send a reminder notice about receivables owed to it. Under the Debt Collection Act, when a creditor is collecting its own receivables from consumers, it has the right to add interest on arrears and a charge of up to 5 euro to cover collection expenses. If the job has been given to a professional collection agency, however, the agency must send the debtor a standard demand for payment if it wishes to take legal action. When collecting receivables by the order of a client, a collection agency may charge up to 21 euro for a demand for payment if the amount due is less than 250 euro, or up to 45 euro if the amount due is more than 250 euro. The situation is different, however, if the collection agency has itself become the creditor. Alektum Perintä Oy brought the case to Helsinki District Court in May 2006 as a debt collection matter against a consumer. The Consumer Agency is assisting the consumer, who is the defendant. The District Court decided that the company does have the right to charge 21 euro for collection expenses. The collection agency was not exactly collecting its own receivables, according to the District Court, since the receivables had been purchased. On 19 March 2008, the Court of Appeal decided not to overturn the District Court's decision. The Consumer Agency is applying to the Supreme Court for leave to appeal the matter because it is important to set a precedent for application of the law to other, similar cases. The matter is financially significant for consumers because it is now more common for collection agencies to buy receivables than it was when the Debt Collection Act was enacted. More information: Sale of Receivables Led to Dispute Over Collection Charges (Current Issues on Consumer Law 4/2006) http://www.kuluttajavirasto.fi/Page/c938e937-4561-4fb0-b262-e09a623cef7f.aspx ------------------------- DEBT COLLECTION MUST BE FAIR A collection fee of five euro for an outstanding balance of twenty-five cents, maximum collection fees for automatically generated e-mail reminders, barely one week's time to make a payment. The Finnish Consumer Agency reviewed reports about debt collection from the past year and a half, and some of the shortcomings it found were of a serious nature. The Consumer Agency supervises debt collection practices. One aspect of good debt collection practices is giving consumers sufficient time to ascertain their rights and prepare for payment. Many of the reports about debt collection received by the Agency over the past year and a half concerned collection letters that arrived only just before the due date, sometimes even afterwards. This seems to be caused by letters not being mailed on the date that appears on them. COLLECTION FEES ALWAYS AT A MAXIMUM In May 2005, a legal amendment went into effect that provided for maximum debt collection fees. Many debt collection entities, however, seem to have interpreted the maximum amounts as standard amounts, forgetting that the law requires reasonable amounts to be charged. Expenses should always be assessed according to the size of the receivable itself, the labour involved in the collection process, and whether the chosen payment method is the most suitable one. For example, the Consumer Agency learned of one incident in which payment was demanded from a consumer for a balance of twenty-five cents, with a collection fee of five euro to top it off. In another incident, a collection agency charged more than twenty euro for an initial reminder about a bill of less than one euro, and ten euro or so for subsequent reminders as well. Demands of this sort are disproportionate both in terms of the small balances due and the amount of work required for collection.On other occasions, maximum collection fees were charged for each letter concerning the same matter, even though the bulk of the work involved, such as verifying and recording information, would have been done for the first letter, with later ones sent almost automatically.The maximum collection fee amounts are also exceeded occasionally, which is permissible only under special circumstances. Even then, the consumer must be separately informed of the excess amount, which must be itemized in cases like this so that the consumer can identify the collection fees claimed and figure out what procedures they are for. Some of the reports to the Consumer Agency showed that consumers have not always been told about excess fees and the reasons for them. WHO DOES THE COLLECTING? Sometimes consumers do not know who is really sending the bill for collecting debt and whether it is supposed to be a payment reminder from the creditor or a payment demand from a collection agency. Especially in cases where billing has already been transferred for a collection agency to take care of, particular attention should be paid to the clarity and legibility of bills, and good instructions should also be given for making a complaint. A consumer has the right to receive information about his or her debt, not only from the creditor, but also from any collection agency to which the matter has been transferred. Up-to-date information about debts should be provided no later than one month after it is requested. Last autumn, the Consumer Agency organized a conference about debt collection, reviewing problems that have emerged in the field with its representatives. ------------------- CONSUMERS STILL ON THIN ICE ON THE QUICK LOAN MARKET The Finnish Consumer Agency thoroughly examined the web pages for 60 different quick loans last autumn. For the most part, contract terms were not delivered to borrowers in person, and less than half of the quick loans complied with the recommendation of the Advisory Board on Finance Management to declare the loan's annual percentage rate of charge. SMS loans have created a lot of work for various authorities thus far and the loan operations have been assessed from many different angles. The Consumer Agency has established basic rules for SMS loans and has presented them at occasions such as a conference organized for the loan business last spring. Also, in early spring, the Agency took the quick loan company Atlas Invest to market court due to its unlawful contractual terms and deficient marketing. The company also failed to deliver the contractual terms of credit to its customers. At the end of last year, the Ministry of Justice established a working group to consider legislative reform concerning quick loans. The Consumer Agency is participating in the working group, which is expected to conclude its work by the end of this year. In particular, the working group is being asked to take a position on whether or not the declaration of annual percentage rate of charge should be required for small loans and on how to guarantee reliable identification of a loan applicant. THE CHALLENGE OF RELIABLE IDENTIFICATION One significant problem with quick loans has been loan applicant identification. The Consumer Agency issued instructions to quick loan companies about this as early as the summer of 2006. There are security gaps in the systems used by these companies, which heightens their liability in cases of wrongful use. A company should always initiate an investigation and suspend any debt collection activities if a consumer reports identity theft. The Data Protection Ombudsman has also issued instructions concerning identification issues. In connection with an instructional campaign, a company by the name of Tammi Rahoitus was taken to the Finnish Data Protection Board at the beginning of the year. When granting quick loans, Tammi Rahoitus had been checking only to see that the information filled in for a loan application on the company's website corresponded to that of the person who was registered for the phone number that would receive the text message confirmation. Verification was based on the assumption that a loan applicant with access to the personal data and address of a phone subscriber at the time of application must be the true phone owner and loan applicant. The Data Protection Board was of the opinion that Tammi Rahoitus was not taking sufficient precautions as required by the Personal Data Act, since it was possible for the wrong person to register as a loan applicant. The company was ordered to improve its identification procedures. ADS CONTINUE TO URGE TAKING OUT LOANS FOR NO GOOD REASON In recent years, the Consumer Agency has been trying to guide the marketing and contractual terms of companies that offer quick loans. Nevertheless, inappropriate efforts to attract business are still cropping up in this field, urging consumers to take out loans without due consideration. For example, Suomen Viestilaina Oy launched a campaign appealing to young people with a prize drawing for two three-day tickets to the midsummer music festival in Rauma, Finland. It is not appropriate to use discounts or other bonuses as incentives for entering into credit relations. The clear attempt to lure young people with the festival tickets was particularly reprehensible. After the Consumer Agency intervened, the company removed the campaign advertisement from its website. Risicum Capital Oy, on the other hand, emphasized how fast one could obtain a quick loan using the slogan "Order money at the Hakaniemi stop, and it's in your account by the time you get to the railway station" in bus advertisements. Its website stated "your money is deposited really quickly, sometimes in as little as five minutes." It is inappropriate to urge consumers to take out a loan on a whim by promising speedy service. The company removed the instigating language from its ads after it was cautioned by the Consumer Agency, and agreed not to use it in the future. A SHARED PROBLEM IN THE NORDIC COUNTRIES Quick loans ordered via mobile phone have become a problem throughout the Nordic region. The Consumer Ombudsmen of all the Nordic countries met at the beginning of the year and discussed the matter. They agreed that it is important to have microloans available on the market because low-income consumers also need loans to even out their household income and expenses. At the moment, however, the aggressive marketing, high interest rates and ambiguous contractual terms of quick loans are continually causing problems for consumers. The Consumer Ombudsman of Sweden reported one company to the Prosecutor General for profiteering. The report did not lead to criminal prosecution, however. In Finland, profiteering is investigated by the National Bureau of Investigation. More information: Company that offers quick loans is being taken to Market Court (Current Issues on Consumer Law 2/2008) http://www.kuluttajavirasto.fi/en-GB/020208_engl/ ---------------------------- THERE IS A NEED FOR SMALL LOANS, TOO REASONS FOR THE OVER-INDEBTEDNESS OF THE POOREST SEGMENTS OF SOCIETY WERE PONDERED AT AN INTERNATIONAL CONFERENCE ON RESPONSIBLE LENDING. THERE IS A NEED FOR REASONABLY PRICED MICROLOANS IN ALL COUNTRIES. Questions about lending are being discussed around the world. In September 2007, the European Coalition for Responsible Credit (ECRC), an informal body, organized the seventh international conference on the topic in Brussels. The conference title was "Regulation, Education & Cooperation in Responsible Financial Services", and special topics included over-indebtedness, credit card loans, financial education, credit ratings and microloans. These are familiar issues in Finland as well. CAN CREDIT AT REASONABLE RATES HELP PREVENT OVER-INDEBTEDNESS? Discussions about over-indebtedness and responsible lending emphasize appropriate marketing, estimating a borrower's ability to pay back a loan, and the importance of fair contractual terms and debt collection methods. The possibility to receive reasonably priced credit, however, is not yet widely discussed as a method for preventing over-indebtedness. One tenet of the ECRC is that reasonably priced credit on fair terms should be available for everyone. We live in a credit society, in which the possibility of getting credit is an important part of everyday life. Credit availability is important to help even out income and expenses and finance major purchases. Research is needed on how credit offerings correspond to the needs of the most financially disadvantaged consumers. Do people in a weaker position receive loans that have considerably higher interest rates? In Finland, according to a study of SMS loan users conducted by the Advisory Board on Finance Management, the majority of the credit recipients used quick loans to cover their everyday financial needs. Quick loans are available to poor people as well, whereas getting a bank loan usually requires a security, a guarantee or permanent employment. Based on the study, the major problem with quick loans is that they further impoverish the financially disadvantaged due to the high interest rates involved. Compared to the international situation, Finland's responsible lending situation is reasonably good. Our Consumer Protection Act provisions on stating the annual percentage rate of charge, fair contractual terms, and borrowers' right to pay back loans ahead of schedule without being charged a fee, as well as the Debt Collection Act, have helped prevent many cases of over-indebtedness. CREDIT CARD LOANS ARE CURRENTLY A PROBLEM IN MANY COUNTRIES There was discussion at the conference about the increasingly common use of credit cards in Europe. An increasing number of consumers use multiple credit cards simultaneously, which makes it difficult for them to manage payment schedules. To deal with overdue payments, older credit cards may be paid off by taking out a new one. Over-indebtedness can easily result. It is considered preferable for consumers to have one credit card, or perhaps a few. Overly aggressive marketing was seen as the culprit in creating this situation. Credit cards have been marketed especially to financially vulnerable consumers, for example. Notifications of raised credit limits have been sent to consumers who did not ask for them. A new factor also seen as an explanation is that instead of a high interest rate, credit costs may be hidden in various sorts of fees collected as part of the credit agreement and as overdue payment fees, which makes it difficult to assess credit expenses. In this respect also, the situation in Finland is fortunately a bit better than in many other countries, though the phenomena mentioned are not unknown to us. For example, the Finnish Consumer Agency in cooperation with the Federation of Finnish Financial Services just recently drew the attention of credit card providers to conducting sales appropriately. SEVEN PRINCIPLES OF RESPONSIBLE LENDING The ECRC has drafted seven principles of responsible credit. The principles are: • Responsible and affordable credit must be provided for all. • Credit relations have to be transparent and understandable. • Lending has at all times to be cautious, responsible and fair. • Adaptation should be preferred to credit cancellation/destruction. • Protective legislation has to be effective. • Over-indebtedness should be a public concern. • Borrowers must have adequate means to defend their rights and be free to voice their concerns. Participants in the responsible lending conference came from all of the EU member states, the USA, Brazil, South America, Japan, Canada and Albania. Finland was represented by the Consumer Agency. The chairman of the conference, and the driving force behind it, was Professor Udo Reifner of the Institut für Finanzdienstleistungen, Hamburg. The director of the Consumer Agency, Anja Peltonen, gave a presentation about the Finnish situation. ---------------------- STRONG KNOWLEDGE BASE NEEDED FOR PURCHASING SAVINGS AND INVESTMENT PRODUCTS SAVINGS AND INVESTMENT PRODUCTS ARE COMPLICATED, AND MAY BE IMPERFECTLY UNDERSTOOD BY BOTH BUYERS AND SELLERS. THIS MEANS THAT A DECISION WITH CONSIDERABLE IMPACT ON A CONSUMER'S FINANCES CAN BE MADE AT RANDOM RATHER THAN AS AN OUTCOME OF CAREFUL DELIBERATION. Pension insurance and mutual funds are products that are significantly more problematic than average purchases. They are complex and involve contracts full of foreign concepts and linkages with various laws. A consumer quite frequently may not be able to rank options according to how good they are, but is at the mercy of the seller's expertise and sales approach. On the other hand, a seller's level of understanding might not be adequate, either. Problems are compounded by the long-term nature of the contracts. It may take years for a customer to realize that a savings agreement, for example, does not live up to the promises that were made about it in marketing materials or at the time of sale. Then the customer can no longer point to what was said by the seller, however, only to what is written in the contract document. The Finnish Consumer Agency has long recognized the importance of trying to prevent choices based on superficial information and the problems that can arise as a result. The knowledge of both consumers and sellers about various savings products must be increased so that they don't go into a sales situation cold. The Finnish Financial Supervision Authority and the Insurance Supervisory Authority have worked towards this goal by drafting a position on good practices for marketing life and pension insurance to individuals. The Consumer Agency also had an opportunity to present its view on the matter in the early stages of preparation. A SELLER SHOULD BE EXPECTED TO BE RESPONSIBLE The Consumer Agency emphasizes the role of the seller when a purchase is made. A responsible seller understands that different customers have different needs, listens to these needs closely and guides the customer toward using his or her funds accordingly. The seller does not begin with an attempt to sell an individual product, but first gives the customer an overview of the investment and savings options that exist. According to the Consumer Agency, a unified model for all companies to follow could also be helpful in sales situations. If consumers could hear about the same issues in the same order from several different sellers, it would be easier for them to compare options. Furthermore, hearing the same considerations mentioned repeatedly could help raise customers' level of knowledge. The Consumer Agency reiterates that the packaging of information in itself is not enough; information must also reach the target audience. An example of this is the checklist for selling lines of credit, compiled by the Consumer Agency and member companies of the Federation of Finnish Financial Services. Using the pocket-size booklet in a sales situation, a seller can easily check that he or she has reviewed all the basic information about a line of credit with the customer. ------------------ PAYMENT CHANGES SHAKING UP CONSUMER ROUTINES As the Single Euro Payments Area (SEPA) takes form, consumers will be encountering changes in their everyday payment tasks. Smart cards with embedded microprocessors will be used for making payments, PIN codes will replace signatures, and account numbers will get longer. The implementation of SEPA began this spring. During the transitional period, planned to be three years, current Finnish payment methods will gradually be replaced by new European services. Changes always create some concerns. Making payments is an unavoidable, basic part of daily life that affects everyone. SEPA will change practices within Finland as well, affecting not just the people who make international payments. Becoming accustomed to new functions may be uncomfortable for consumers, and forgetting about how things used to work is often more difficult than learning how to do something completely new. SWITCHING TO SMART CARDS MEANS PAYMENT TERMINALS WILL BE OPERATED BY THE CONSUMER Smart cards with microprocessors are already in many consumers' wallets, and smart card terminals will increasingly be used in stores. The same PIN code will be used for payments as for cash withdrawals from automatic teller machines. The payment experience using a smart card terminal is different from just signing a receipt presented by a salesperson. Since the terminals are different, making payments will require more effort than usual at first. It is unfortunate that in the international usage of combined debit/credit cards, the credit option is the one that terminals display first, while people in Finland prefer to use the debit feature. The needs of special groups should also be kept in mind during the transition to smart cards: there should be contact between the business sector and associations for elderly and disabled persons, for example, to ensure that payments will be equally safe and easy for everyone and that the best practices for everyone involved will be adopted. A SYSTEM WITH A PRICE TAG Banks will have different solutions for adapting to SEPA. Even within Finland, each bank will independently choose the time at which changes will be implemented in its own systems. This could confuse consumers who have gotten used to the common models and practices that banks have shared until now. Pricing of payment services will also change; SEPA will make certain basic services uniform in all countries, but banks may offer various additional services to their customers as well. One of the most certain outcomes of SEPA at this point is that the creation of a new system on such a massive scale will cost a lot. The critical concern for consumers is how the costs will be distributed and what the actual benefits to consumers will be relative to the costs. Although the standardized payment processes are ultimately intended to be much more efficient and may lead to lower costs, this will take time and funds will be needed in the interim. PAYMENT SERVICES DIRECTIVE TAKES EFFECT IN MEMBER STATES The adoption of uniform SEPA services and terms in 31 countries (the EU countries, Iceland, Norway, Lichtenstein and Switzerland) requires a uniform legislative framework to support it. This will be provided by the EU Payment Services Directive, which is now being implemented in member states. Many of the anticipated benefits to consumers from SEPA, such as uniformity of bank transfers (no longer to be categorized as domestic, EU or SEPA transfers), will be achieved only when the legislation has taken effect. ------------------- CHARGE CARD STUMBLING BLOCKS Various types of charge cards have become a standard payment method for consumers. Every once in a while, however, there are problems with their use. Visa Electron took one cent extra The Finnish Consumer Agency contacted the Federation of Finnish Financial Services after receiving a report from a consumer about a Visa Electron card that charged more than the designated amount for filling up a car at a service station. The consumer was filling up at a Neste service station. Before purchasing petrol with a Visa Electron card, one must designate the amount to be charged, 60 euro, for example. This consumer's bank statement later showed a charge of 60.01 euro, however. According to Neste Oy, the extra cent was charged because the pumping mechanism sometimes releases a few additional drops at the end of filling up. The Consumer Agency urged both Neste Oy and the Federation of Finnish Financial Services to make sure that any such overcharges due to pumping equipment should come out of the company's pocket, not the consumer's. Consumer confused by bill for combination card Many bank cards can be combined with a credit card function. One consumer had a Visa combination card of this type from Sampo Bank. The bill that was issued for it was so unclear, however, that the consumer did not understand the remaining balance started to accrue interest if only the minimum payment was made. The consumer thus unwillingly and unwittingly became a user of credit for which interest was charged. The Finnish Consumer Agency intervened in Sampo Bank's billing practices. A bill must be clear enough for a consumer to easily understand that when he or she chooses the option to pay only part of the total accrued balance of debt, interest will be charged for the remainder. The company clarified its billing in this respect. Getting a new card did not require credit functionality to be added OP Bank announced to its customers that it was introducing new cards, the old "Kulta" bank cards would be discontinued, and customers should apply for a new OP Visa. One customer applying for the card asked if it was absolutely necessary to include credit functionality. The answer from the bank was that a credit limit should be established for the card even if it was only going to be used as a debit card. Later, it was revealed that the customer could have chosen to apply for an OP Visa Electron card instead, which would not function as a credit card. This alternative was indicated neither in the letter received by the customer nor when the customer mentioned not wanting to have a credit card. The Finnish Consumer Agency cautioned OP Bank, as well as the banking industry via the Federation of Finnish Financial Services, to ensure consumers will continue to have a genuine opportunity to choose. The need for transparent marketing will be heightened during the transition to smart cards. ------------------- A CHARGE CARD FOR BAR FLIES The Neocard charge card courting young party-goers was to be used in nightclubs and pubs. The deeper one sank into debt, the more benefits one was promised, such as free admission and skipping the queue into nightclubs. The Finnish Consumer Agency intervened in the inappropriate marketing for this product. This charge card, which targeted primarily young people, was causing some indignation several years ago and the Consumer Agency received numerous reports about it. It was generally frowned upon that, at a time of much concern from all quarters of society about drinking among young people, a product would be marketed that actually goads them into buying alcohol. The charge card could be used up to a certain limit in various nightclubs and pubs. The balance due was payable on the last day of the month as a direct debit. The card could also be combined with a credit card, allowing the credit limit to be increased. If account funds were insufficient for paying off the balance, the excess amount was charged to the credit card. Debt could be paid off with debt, in other words. The more one bought with the card, the more benefits one received. Once one spent a sufficient amount of money, one would get a card with a greater credit line and more benefits. QUESTIONABLE PROMOTIONAL METHODS The marketing of the card was not viewed favourably. Regardless of the credit type, consumer credit is a product for which marketing is held to higher standards than for other consumer products. In this case the evaluation was even more strict because of the target group, young people. It is not appropriate for credit marketing to emphasize drawings and prizes, such as the various VIP benefits in this case. The benefits drew the consumer's attention to irrelevant factors. This made it easy to ignore considerations such as whether one needs credit or will be able to pay it back, and to forget about comparing the product with other financial alternatives. In addition to the benefits offered, marketing for the Neocard included a drawing for a camera phone, which could only be entered by opening a charge account and paying the card fee. Another marketing ploy was to encourage word-of-mouth advertising: the more friends one could recruit to sign up for a card, the more benefits one would receive. This type of marketing campaign is especially unsuitable for credit because credit should be taken out only based on need and an evaluation of one's ability to pay. In this case, inappropriate means were used to entice young people. Furthermore, young people were encouraged to use inappropriate means of getting their friends to cooperate. PAYING FOR CREDIT WITH CREDIT The concept behind the card was that the more it was used, the more benefits would accrue. Responsible lending should take into account that young people are still developing financial management skills and gaining life experience. Lenders should avoid actions that are likely to lead to payment difficulties and over-indebtedness. The Neocard was recommended for combination with a credit card so one wouldn't have to worry about a balance limit, but could charge any excess amount to the credit card. Practices like these teach young people to be flippant about accruing debt and makes them more likely to develop an indifferent attitude towards living in debt. Neocard Oy, the company marketing the card, changed its marketing approach and the contractual terms for the card. It also extended the use of the card from pub venues to other products. ------------------- DISCOUNT USED AS INCENTIVE TO APPLY FOR A CREDIT CARD A consumer was shopping at a Hemtex store and wanted to make a cash purchase. The salesperson, however, suggested a billing option so that the consumer could receive a discount. After filling out the application papers, the consumer received a 10% discount on the purchase, only to discover later that this had meant becoming a line-of-credit customer of a financial services company called Ikano Rahoitus. A surcharge of two and a half euro was added to the bill sent by the company. Responsible lending and good lending practices require that a consumer be given plenty of time to consider taking out credit and to study the essential credit terms. A responsible lender does not use discounts, promotional games or other additional benefits to market consumer credit. It is especially inappropriate to offer an instant discount at the counter for those who fill out a credit card application on the spot. This kind of marketing is uncalled for and encourages people to take out credit without thinking it through. At the time a sale is made, if credit is being offered to pay for the purchase, a seller must always talk to the consumer about the type of credit that is being offered, the costs and fees associated with it, and the main credit terms. It is improper to bind a consumer to a credit agreement without his or her being aware of it. A consumer must be able to make an independent decision about whether or not to finance a purchase with credit and whether to commit to a credit card offer or an instalment plan. He or she must also be given sufficient time to think about taking out credit or paying with credit. ------------------- TO THE CONSUMER, DATE DUE MEANS DATE OF PAYMENT When should a bill be paid? On the due date, of course, the man on the street would say. The travel agency Tjäreborg and the credit card company American Express, however, thought that payments should be received by them on the due date, not just entered into some bank system. Consumers consider a bill to have been paid on time if the payment was made by the due date. This way of thinking is well-established and supported by the Consumer Protection Act. According to this view, the date of payment is the date on which a bank or post office accepted the payment order. Thus it is sufficient for a consumer to pay a bill on the due date, and a late fee will not be charged even if the creditor does not receive the money until after the due date. The payment terms of Tjäreborg and American Express required consumers to make payments so that they would be recorded in company systems on the due date. If a payment is made from a different bank group than the one where the recipient's bank is, a consumer cannot know with certainty how long it will take for the funds to show up in the recipient's account. Therefore, it is reasonable for all consumer contracts to define a timely payment as one that a consumer makes by the due date. The Finnish Consumer Agency discussed the matter with the two companies involved, and both agreed to change their terms so that the due date is the date by which the consumer must pay the bill. ------------------- EU PROGRESS ON CONSUMER CREDIT REGULATION The EU Consumer Credit Directive (CCD) has finally been passed. In November the Finnish Consumer Agency made another statement to the European Parliament on last-minute changes that had been proposed. The Agency was concerned, among other things, about the proposal to let the cost of credit repayment be determined at the national level. The consumer's right to pay off a loan before the due date was preserved in the directive. The removal of sections delineating a lender's right to compensation for expenses caused by early repayment had been proposed. If these sections had been removed, consumers would not have been protected by EU-level regulations, leaving them completely dependent on national regulations. After the Parliament's second reading, the proposal for lending institutions to use a standardized form was also at risk of being dropped out. A standard form for providing preliminary information about credit will help consumers make sense out of typically convoluted credit agreements. The same form for everyone will also make it considerably easier to compare different types of credit and credit offers. WHITE PAPER TO REGULATE HOUSING LOANS In January, the Consumer Agency was also heard regarding the EU White Paper on mortgage credit. The Agency observed that even though the new Consumer Credit Directive will not cover housing loans, there is no need in Finland for EU-level regulation. Housing loan markets in Finland are functioning quite well. If regulation arrives nonetheless, care must be taken to ensure that the position of Finnish consumers does not become weaker than it is today. The obligation to state annual percentage rate of charge, the right to early repayment of loans at no cost, and taking social circumstances into consideration in cases of late payment are some of the elements that need to be preserved. More information: Reform of the Consumer Credit Directive: Nine Important Points for Consumers (Current Issues on Consumer Law 4/2006) http://www.kuluttajavirasto.fi/Page/9db93655-0f7a-4c04-bd5f-e64dc83de8fe.aspx ID: 41224 Author(s): SCR Publication date: 28/04/08     URL(s): Link to Current Issues 3/2008 Theme: Financial Services (www.kuluttajavirasto.fi)

World Partner       EU-Partner

Created: 28/04/08. Last changed: 28/04/08.
Information concerning property and copy right of the content will be given by the Institut For Financial Services (IFF) on demand. A lack of explicit information on this web site does not imply any right for free usage of any content.