The event, organised by Applica, one of the coordinators of the European Observatory on the Social Situation and Demography (an Observatory that consists of four multi-disciplinary networks of independent experts established for the European Commission in 2005, with the aim to analyse social and demographic trends and to assist the Commission in its duty to report on the social situation), held the seminar focussing on over-indebtedness on Friday 20 November 2009 in Brussels. The presentations of the seminar are available online. These can be viewed or download by going to the following address: http://www.socialsituation.eu/WebApp/Events.aspx (or by clicking the links in the text below. For any further questions concerning this seminar, please contact either Liesbeth Haagdorens or Nicole Fondeville from Applica.
Following some general observations and comments on the seminar discussions, a brief description of the talks and the programme is shown.
The 2008 EU sponsored research on a unified definition of over-indebtedness and its appearance in the member states was at the centre of the seminar. While this research conducted on behalf of DG Employment used a general definition of over-indebtedness in which "inclusion" into financial services was seen as a core element to overcome problems of over-indebtedness, the seminar debates revealed that the question was a bit more complicated than that.
Access to financial services has no merits for its own sake. Access to additional usurious mortgage loans offered by irresponsible lenders in the US and the UK (but also in Germany by banks like the now bankrupt Hypo Real Estate and its predecessors) has led to over-indebtedness and poverty. This was acknowledged by those attending the seminar in so far as they generally thought that the second part of the official definition of financial exclusion in the 2008 Commission report (below) needed additional thought.
"Financial exclusion refers to a process whereby people encounter difficulties accessing and/or using financial services and products in the mainstream market that are appropriate to their needs and enable them to lead a normal social life in the society in which they belong".
Source: Financial Services Provision and Prevention of Financial Exclusion: Summary Report p.4>
Located with other studies under http://ec.europa.eu/employment_social/spsi/studies_en.htm
Alas, most research to date has dealt only with the question of ‘who?’ and ‘how much?’ people have used the given offer of financial services. As laid down in the seven principles of responsible credit developed by the partners of ECRC, stakeholders have identified and promoted the realisation that good and adequate financial services are needed as oppose to financial services as such. The data provided by the aforementioned EU project instead tried to compare the use of certain financial services in general without regard to its quality. This is despite the already existing results from previous research conducted mostly in the 1980s and 1990s. These studies showed that over-indebtedness was to a large extend related to certain predatory products, attributable to the actions of a limited number of predatory lenders or lending practices, and evidence that suggests that it does not make too much sense to attribute problematic indebtedness only to unemployment or even carelessness of those affected, if in those groups, more than 90% show that they have been able to cope with their debts including through times of crisis.
Since 2000 there is an overall observable tendency of states to limit research on consumer behaviour and spare financial suppliers from scrutiny. Scientific and unbiased social research has been deeply restricted since the time of the great studies of David Caplovitz or Janet Ford and of all those which are presented in the 1992 volume on "Banking for People" or in the 2002 reports to DG SANCO on over-indebtedness. Since these times, research has taken place where the outcome ("Exclusion") has been predefined as a reason in order to justify political measures of "inclusion" like Microlending, Bankruptcy Procedures, Social Welfare, financial education and CSR. All of which, protect the banking system from more fundamental criticism of misbehaviour and social inadequacy of their products and marketing strategies.
In one example from the discussions in the seminar revolving around data on consumer payment arrears, conclusions from a recent study comparing arrears in different countries was criticised for being potentially grossly inaccurate seeing that experts are well aware that some banks replaced arrears by costly refinancing mechanisms, which in the form of flipping or chain credit has added to the misery of those who had problems with their debts instead of helping them.
Making sweeping statements on the back of aggregate data for credit systems in the EU is a dangerous enterprise. These credit systems differ by their degree of product quality, their degree of need for credit, distribution channels and social help in times of liquidity crises etc… and the danger includes the risk of opening the doors to model thinking and ideologically predefined phenomena which paid social research or a pure statistical approach at the EU level will then seem to detect in reality. This in actual fact would only follow the old problem of empirical research that there is a self-fulfilling prophecy between "interest and recognition".
Overall, the seminar gave an important overview on both what is being done in this area in Europe and especially also on what is not being done in Europe. If over-indebtedness is to receive the importance ranking it should be given based on poverty research, then one will need a clean start to be made where the fresh renewal begins by placing the old assumptions that have dominated past years, namely that markets and consumer information and education as well as self-help can be the core remedies to over-indebtedness, open to discussion and neutral assessment.
Mr Davydoff first presented the context behind rising over-indebtedness and interest paid to the phenomenon (expansion of access to credit, renewal of the financial services supply, focusing the public debate as background to the financial crisis) and admitted that as of yet, there is no standard definition of over-indebtedness nor a complete set of standardised statistics. From his involvement in the Study on finding a definition of over-indebtedness for the Commission, he listed key elements for an over-indebtedness definition (unit of measurement as the household, need for indicators to cover all financial commitments including bills and fiscal debt, acknowledging over-indebtedness as a persistent situation, inability to remedy the situation by recourse to assets, importance of quantifying minimum standard of living etc.
He also explained the different indicators available including: Arrears (3% of households for consumer credits and no correlation with actual prevalence and use of consumer credit); Numbers of debt settlements (with drawbacks such as lack of harmonisation between countries, that they measure more a policy or an action than the phenomenon itself, and that interpretation is conflictual); Subjective indicators (e.g. 8% of households considering that their consumer debt service is a heavy burden to them, and that limitations include indebtedness tolerance varies from a country to country and varies over time); Economic indicators (but these don’t exist in all countries, that definitions differ, frequency is insufficient) and Composite indicators (with examples given from Germany - Schufa linear combinations balanced with arrears - and the UK - percentage of households matching a number of criteria)
Also involved in the Commission’s project on finding a definition of over-indebtedness for, Ms Finney explained how over-indebtedness is defined in the UK and presented the findings of the Genworth Index of financial vulnerability. She highlighted a number of changes in financial vulnerability since 2008 such as an increase in vulnerability in countries like Poland and Ireland, little/no change in countries like France, Finland, Sweden, and Denmark, and improved situation in especially Portugal but also Italy, Germany, Spain and the UK.
She also outlined the consequences of financial shocks in 5 observations: Main risk factors see individuals attribute them to external causes but also money management, overspending and over-borrowing; Many features of the current recession reflect those of previous recessions (but that differences include pay cuts, credit constraint, low interest rates on savings); Picture across Europe differs greatly; Effect of recession in UK is not as great as previous recessions (because a wider group has been affected despite national over-borrowing); and that mostly, people are coping remarkably well (e.g. Arrears are still low and money management makes all the difference)
Moser presented European Consumer Debt Network’s membership and work, described what living in poverty meant, explained the causes of over-indebtedness in Austria and gave some statistics on the socio-economic profile of clients of Austrian debt advice centres. She then went on to give her recommendations (in 4 groups) regarding what needs to be done in the fight against poverty and over-indebtedness: 1) Responsible + adequate financial products, better access to money and debt advice across the EU, effective debt regulation sytems, and sustainable - high quality - financial education; 2) Adequate minimum income schemes, High quality social services and goods, Active and inclusive labour market policies, Respect for & particiation of people experiencing poverty (i.e. Active inclusion); 3) More and better data, more and better exchange of best practices, strong involvement of all relevant actors (e.g. continous cooperation and stakeholder-dialogue via ECRC and ECDN ensuring strong and ongoing networking and involvement of social society actors: practitioners and researchers); 4) Reference budgets for social inclusion (e.g. useful for budget information, poverty measurement, credit scores, combatting social and financial exclusion etc..)
Focusing her talk on material deprivation, she presented details on statistical collection and explained EU-SILC (European Union - Statistics on Income and Living Conditions) before discussing the New Zealand Index of Deprivation,the Pampalon and Raymond deprivation index, the Canadian Index of Wellbeing (CIW) and stressed the need for Research as a diagnosis and real follow-up activities to solve problems.
Prof Reifner first presented the following view on the theory of over-indebtedness, showed a graph showing the liquidity difficulties over time, before Knobloch then presented some data.
Over-indebtedness is a Symptom for a Mismatch between Income and Expenditure in Time
- Earning one‘s living means being able to have those liquid assets in time when they are necessary for expenditures to fulfill basic needs of consumption and reproduction.
- Since modern money society creates ever more unstable income streams (unemployment, third labour market, early retirement) on one side while on the other the increasing need to prefinance necessary consumption (transport, transport, household equipment, mass communication), privatised education, illness, accidents, mishaps and provide for old age the gap between the flow of income and expenditures in time has to be bridges by credit and savings.
- Professional financial services are productive if they manage to bridge this gap and make lifetime income available whenever it is needed.
- The rise of over-indebtedness in society reflects the decreasing ability of banks and other financial institutions to fulfill this task properly and provide for productive credit and productive savings.
To Cure Over-indebtedness requires Understanding of its Reasons
- Over-indebtedness is surrounded by a number of myths which are promoted to obscure the deficits of the existing system of credit and debt.
- Over-indebtedness is more than lack of money. This is why it cannot be cured by providing money but needs adaptation of income and expenditure in time (positive cash flow)
- Empirical research has shown that at least 80% of over-indebtedness is due to an unproductive provision of financial services while less than 20% to unproductive use of it.
- In the relatively few cases of unproductive use of credit most people affected have less lifetime income than expenditures. In these cases credit, worsened by the usurious exploitation of their fate as high risk, aggravates their situation.
- The false ideology that over-indebted people can be held responsible for their own fate is materialised by systems of seemingly functioning self-help and self regulation, especially: micro lending, financial education and ethical investment. All three of them have little proven effects on over-indebtedness in general but are the core solutions to a problem which is ignored.
Productive Credit requires Productive Use
- Credit viewed only from an investor’s instead of a user’s perspective is incapable to develop adequate means to cope with over-indebtedness. Markets do not care for those without money.
- The state has to provide rules, means, supervision and authority to guarantee the constant development of productive forms of credit.
- In this respect the development of small credit (Microcredit) for those with moderate means is an important educational laboratory.
- Financial education is necessary to enable consumers to use credit properly, to exercise political and market pressure for better supply and to reject usurious offers which exploit instead of overcome their weakness.
What we need?
- The State has to provide a frame like ECRC has given it with its Principles for Responsible Credit.
- Over-indebted families need a state supported credit market in which they can satisfy their basic needs for cash flow adaptation even where market forces discriminate against them.
- Past debt leading into over-indebtedness has to be integrated into future lives through responsible personal bankruptcy procedures (better called “debt rescheduling procedures”)
- Independent empirical research at a high scientific level should investigate equally the social conditions of the over-indebted people, the social effects of existing products and supplier behaviour and the effectiveness of legal, educational and self regulatory measures all on a statistical basis instead of using individual cases or model assumptions.
Knobloch then showed some charts on unemployment as the main trigger of over indebtedness in Germany, on payment protection insurance claims ratio, and asked the question of whether financial services actually help to overcome over-indebtedness (e.g. the effects of credit or current account cancellations), and whether the Government could help to overcome over-indebtedness by looking at statistics on affected households, bankruptcy proceedings and results of research showing the average duration of the over-indebtedness process.
Prof Ramsay, author and co-editor of a recent book on consumer bankruptcy, focused on debt adjustment and insolvency law, outlining the lessons from existing experience and contrasts in approaches. He nevertheless reminded that it was recognized that in the EU, prevention is also an important goal e.g. that advice and counselling, financial literacy, responsible credit practices and arrears handling, use of credit data.
He described the rise in debt adjustment laws over time including in the new EU member states, where some have stricter rules e.g. Poland only permits for social force majeure (e.g. illness, involuntary unemployment). He then went on to talk about the issues in evaluation and policy making stating that there is not much systematic analysis of debt adjustment processes (e.g. in terms of experiences of debtors, longitudinal impact) and that analysis needs to be done to say whether debtors are rehabilitated, reintegrated etc… He also mentioned the problems of comparative analysis and presented some data on consumer insolvency and explained the fears of undermining payment morality and how to evaluate Debt Adjustment Plans. Models of repayment plans include the German (”earned” fresh start through payment plan), Scandinavian (limit access to “permanently insolvent”, may be moral judgment, provide counseling), French (overindebtedness commissions). He finished by outlining the development of the “fast track”, role of public/private sector, protection for home and the different financing possibilities of the insolvency systems (debtors have limited funds, pressure on state resources (e.g. judges, debt counsellors), creditor funding—in England creditors effectively pay through IVA and the Belgian model).
Among the views and information presented, Gloukoviezoff summarised when the credit becomes the problem: Main lenders credit can be inappropriate (Credit limits are too high, interest rates are too high, when difficulties occur, fees are too high); Microcredit strengths can include: Amount lent is related to the need; When difficulties occur, personalised adaptation can be made; When repayment becomes impossible, guarantee fund reduces the debt. He also stressed the need for an urgent and R&D tool: To face appropriately financial needs in emergency; To highlight unsatisfied financial needs (Lenders: Better access to appropriate credit; Third sector: Better skilled social workers and volunteers in NGO; State: Better access to social welfare program); and Need for regulation (Microcredit is a complement to main lenders, Assessment in relation with financial inclusion goals, Incentive for stakeholder)
Social Situation Observatory –
Network on Income distribution and living conditions
Seminar – Over-indebtedness
Friday 20 November 2009
The House of Cities, Municipalities and Regions (Eurocities), Square de Meeûs 1 – 1000 Brussels
With the expansion of access to credit and the provision of new products in financial services, over-indebtedness has become a growing concern in today’s society. Combating over-indebtedness is a key element of the European policy against social exclusion, since the over-commitment of consumers can severely hinder their economic and social integration. The seminar aims to review the current state of research and knowledge on the impact and treatment of over-indebtedness by:
- assessing the current situation in the EU-27;
- linking recent financial market developments to over-indebtedness;
- addressing neglected aspects such as the social reality behind over-indebtedness.
This was the second of a series of biannual seminars organised by the Network on income distribution and living conditions which cover various aspects of the social situation. The network (which consists of Applica in Brussels, the European Centre for Social Welfare Policy and Research in Vienna, Tárki in Budapest and ISER at the University of Essex in the UK) is part of the Observatory on Demography and the Social Situation which was established by the European Commission in 2005.
09.30-10.00 Welcome and introduction (European Commission)
10.00-11.20 Session 1 – Over-indebtedness in the EU
10.00-10.20 Over-indebtedness in Europe
Mr Didier Davydoff, European Savings Institute
10.40-11.00 Causes of over-indebtedness and dimensions of the current economic climate
Ms Andrea Finney, University of Bristol
11.40-13.00 Session 2 – Social reality behind over-indebtedness
11.40-12.00 Over-indebted and poor: Interdependencies between poverty, social and financial exclusion
Ms Michaela Moser, European Consumer Debt Network
12.20-12.40 The costs of living in over-indebtedness
Ms Jarmila Tkacikova, University of Bratislava
14.00-16.00 Session 3 – Over-indebtedness and financial services
14.00-14.20 Theory and practice of over-indebtedness in Germany
Mr Udo Reifner and Mr Michael Knobloch, University of Hamburg
14.40-15.00 Approaches to the treatment of Over-Indebtedness in the EU
Mr Iain Ramsay, University of Kent
15.20-15.40 Over-indebtedness: what could we learn from microcredit?
Mr Georges Gloukoviezoff, University of Lyon
16.00-16.20 Conclusions (European Commission)
List of Speakers
Didier Davydoff (European Savings Institute) presides over the directory of IEM Finance and he is director of the European Savings Institute (Observatoire de l’Epargne Européenne). Previously, he was successively an Economist at Banque de France, Head of the Research and Market Regulation Department at the Commission des Opérations de Bourse (COB) and Director of Research and Strategy at the Bourse de Paris. The European Savings Institute prepared with the University of Bristol (PFRC) and CEPS in Brussels a report on household indebtedness in Europe for the European Commission (Directorate-General for Employment, Social Affairs and Equal Opportunities)
Andrea Finney (University of Bristol, UK) is Research Fellow at the University of Bristol. Her main research interests lie in furthering understanding of patterns of saving, borrowing, financial difficulties and decision-making. She is co-author of a report to the European Commission on the nature and causes of over-indebtedness, has analyzed the results of the baseline survey of consumer purchasing for the Financial Services Authority and, more recently, has been involved in analysis of the results from the Wealth and Assets Survey.
Georges Gloukoviezoff is a researcher specialised in financial inclusion and exclusion. He is doctor in economics and guest researcher at the IIIS Trinity College Dublin. He is also member of the National observatory of poverty and social exclusion in France and manages a research company “G2 Research”. Most of his work is accessible on line: www.gloukoviezoff.wordpress.com.
Michael Knobloch (University of Hamburg, Germany) is attorney in law (Banking and Capital Markets Law) and researcher at the IFF institut für finanzdienstleistungen e.V. (Hamburg) in the field of over indebtedness and poverty, statistical analysis of over indebted households.
Michaela Moser (European Consumer Debt Network) works for the Umbrella organisation of the officially recognized debt advice centres in Austria and is the coordinator of the European Consumer Debt Network (ECDN), which aims to bring together a broad range of actors in the fight against over-indebtedness and financial exclusion. She is also the vice-president of the European Anti-Poverty Network.
Iain Ramsay (University of Kent, UK) is Professor of Law at the University of Kent. His research interests are primarily in regulation of consumer markets at the national, regional and international level with a particular interest in issues of credit and insolvency. He is currently researching international approaches to credit regulation and UK and French regulation of consumer credit and over-indebtedness. His approach is interdisciplinary drawing on economic and socio-legal perspectives. He has published extensively on consumer law and policy.
Udo Reifner (University of Hamburg, Germany) is Director of the Institut Für Finanzdienstleistungen. He is professor for commercial law at the university of Hamburg, faculty economics and social sciences since 1981. His areas of expertise are Bank law, Financial services, Social Investment, Consumer law, Consumer protection.
Jarmila Tkacikova (University of Bratislava, Slovakia) is director of the Consumer Institute and researcher at the University of Bratislava. She has been a member of the Bank Account Expert Group (BAEG) set up by DG Internal Market and Services. Her main area of interest is consumer affairs, and she prepared several papers on the use of bank accounts over Europe and about credit unions. She is also involved in the EU project on Financial exclusion and Financial services provisions with DG EMPL.
Seminar manager: Nicole Fondeville, Applica Email: email@example.com
Registration: Liesbeth Haagdorens, Applica Email: firstname.lastname@example.org
Tel: +32 (0)2 736.1479 Fax: +32 (0)2 736.2389