Here attached and as links are the Study on debt solutions produced by London Economics entitled “Study on means to protect consumers in financial difficulty: personal bankruptcy, datio in solutum of mortgages, and restrictions on debt collection abusive practices” and the FSUG Position Paper on it.
March 2013: FSUG position paper on the debt solutions research study
December 2012: Debt Solutions Report
(Extract of FSUG paper)
FSUG recommendations
Based on the findings of the research, the FSUG makes the following observations and recommendations to the European Commission: From its inception, the FSUG has recognised and recommended the importance of having robust measures at European Union level for the protection of consumers in financial difficulty. The Report confirms such views. Indeed, the Report shows that the current economic crisis has reinforced the value and need for every Member State having a regime for the protection of consumers in financial distress and for the treatment of the insolvency of natural persons. At the same time, it is clear from the Report that currently there are individual, but uncoordinated regimes or many initiatives under way in the various Member States, which expose the absence of common, harmonized and/or appropriately resourced strategies at EU level.
The FSUG believes and recommends that action on the subject is required at EU level under the competence attributed to it by Article 2(2), falling within the areas detailed in Article 4 TFEU of (a) internal market, (b) (c) social and economic policy and cohesion, and (f) consumer protection. In the approach for the legal treatment or solutions to the distressed condition of consumer debtors, the FSUG recommends that an appropriate legal regime should address all the stages that lead to their financial difficulty. It recognises that the financial distress of natural persons is intertwined with social, political, and cultural issues. Nonetheless, a number of areas and common principles may be identified.
An appropriate legal regime at EU level should address all stages of financial
difficulty:
1. Pre-emption: interventions to pre-empt problems and prevent people from getting into financial difficulties or over-indebtedness in first place;
2. Mitigation and early intervention: measures to prevent at the first signs of distress the deterioration of the financial position of people in objective difficulty, giving the opportunity to people to recover their financial position before it aggravates to a stage of proper insolvency;
3. Debt management, enforcement, and collection at the stage when people are clearly in financial difficulty and are unlikely to be able to recover their position in the short-medium term. Consumers need measures, such as independent debt advice and counselling, to help them manage the situation. They also need protection or some form of intermediation to prevent lenders taking advantage of their vulnerable position, and protection from lenders/agents enforcing debt collections. Robust protocols and consumer protection measures are needed to ensure fair treatment of borrowers - for example, in agreeing repayment plans under set conditions;
4. Cancellation/bankruptcy/restructuring/relief/adjustment/discharge: at this stage it is recognised that there is no 'way back' and the best option is to cancel/ write off the debt. People need protection through the use of robust protocols and consumer protection measures especially if lenders try to sell the debt onto third parties;
5. Recovery and rebuilding: if other measures are effective, people will need support, such as advice or counselling, to help them recover from their financial position and build financial resilience against future shocks;
6. Post restructuring and post-recovery: policymakers should be sensitive to the stigma attached by society to financial failure of individuals that may prevent the effective recovery and fresh start of debtors, putting them on equal footings with the other members of society. For example, insolvency or financial data, and other affecting information, should be cancelled and not retrieved in the economic or financial system, and public campaigns of education and awareness should support the whole insolvency/restructuring system re-habilitating the image of those who go through it, dissociating debt and debt relief from failure or assumptions of predictive future behaviour, thus paving the way for access to financial services.
The FSUG does not consider legal regimes for consumers in financial difficulty as a form of social assistance but rather a social insurance protecting individuals and society from ruin and degradation, as well as counterproductive and destructive debt management and enforcement practices. The FSUG also recognises that household over-indebtedness is a public concern and holds systemic consequences, as recognised only recently by the Financial Stability Board.
Therefore, the principles that would govern such regime should include:
1. Respect of dignity of individuals and fundamental rights: recognised fundamental rights and the dignity of human beings should be at the core of any insolvency/restructuring regime;
2. Recognition of the human element and sufferings of human beings, not just the economic element;
3. Fairness and equity: the resolution of any problem should be fair and equitable to the borrower. It should also be fair to the lender if the lender has demonstrated to have behaved fairly when making the loan and throughout its lifetime;
4. Debt relief and restructuring should be provided to those debtors objectively in need, such as in circumstances of unexpected life events or intervened objective mismatch between disposable income and debt service (such as those due to severe changes in the economy);
5. Functionality and practicality: it should be workable and effective;
6. Affordability and financing: it should protect the core income of borrowers and not leave the borrower worse off. Financing schemes should be provided to access the system, as absence of financial support may undermine the possibility of relief;
7. Accessibility: it should be easy to access, be visible, with early referral built into the system, with clear and objective entry requirements (see #4 above);
8. Intelligibility: it should be simple, transparent, and easy to understand for consumers;
9. Efficiency: it should allow borrowers and lenders to resolve problems efficiently to avoid prolonging problems and waste.
10. Promptness: the procedure should be brief and it should provide relief quickly, not gradually or over an extended period of time;
11. Innovative debt solutions: policymakers should begin to consider new solutions to old problems. For example, the Report shows that datio in solutum could be a beneficial measure worthy of exploration;
12. Independency: it should be operated and monitored by independent institutions;
13. Confidence and trust: borrowers should be able to trust the scheme, institutions (such as Courts or public officials in administrative systems), and intermediaries (for example debt advisors, counsellors, lawyers and accountants);
14. Enforceability: unenforceable or un-enforced laws are no law;
15. Access to justice: any regime should not compromise the ability of borrowers to take legal action.
Finally, the FSUG stresses that possible concerns for moral hazard of fraudulent exploitation of a debt solution regime should not discourage and put the EU legislator off. The implementation of a legal system properly designed for the protection of consumers, embracing the above stages and principle, does not necessarily offer improper incentives for debtors to act irresponsibly, either by taking excessive risks or behaving fraudulently. On the contrary, a just and properly designed system, implementing proper access requirements for entry and discharge, isolates and excludes debtors taking excessive risks and behaving irresponsibly, as demonstrated by the regimes currently in place or under way at national level mapped in the Report. Also, personal bankruptcy tourism may be eliminated and a level playing field be created.
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