We welcome this study but hope that Consumers International (CI) will seek to incorporate the insights of the ECRC coalition with its emphasis on responsible credit. Our principles also stress that all lenders should seek to ensure that borrowers can repay their debts without suffering hardship and that the financial service sold is appropriate to the borrower’s needs and circumstances. The report says this implies an assessment of the affordability of the loan as well as responsible and appropriate product design, provision of accurate and clear information and marketing. The Coalition agrees but would like to strengthen these by incorporating aspects of its Principles of Responsible Credit (http://www.responsible-credit.net/index.php?id=2516). We look forward to further work together in this area.
Report: Responsible lending: An International Landscape (7 Nov 2013, Consumers International)
This report by CI Members takes a snapshot of some credit and debt issues in 14 countries to see what is really happening from the consumer perspective. It reveals a worrying picture of inadequate regulation and enforcement, questionable practices by some lenders and a lack of transparency. However, there are some good examples to learn from providing some cause for optimism. This report sets out a range of recommendations to government, regulators, providers and other players in the credit market to improve consumer protection and thereby reduce the vulnerability of consumers, which in turn increases the stability and sustainability of the market.
What's on offer:
- Evidence of common themes in credit and debt experienced by consumers across the world and across product ranges
- Understand the impact of ineffective regulation and questionable lending practices
- Solutions to a more stable and responsible lending market
Download the report: Responsible lending: An international landscape (English)
Extract of Summary:
Responsible lending: An international landscape
November 2013, Jami Hubbard-Solli, Editor
Responsible lending: An international landscape .................................................................................. 3
Consumers International: Recommendations on responsible lending .................................................. 8
Argentina: More than a decade of pain for the Argentine financial services consumer ...................... 13
The Australian Responsible Lending Act: The verdict is cautiously optimistic for the consumer ........ 16
An analysis of consumer credit legislation and its impact in Belgium .................................................. 20
The case of Fiji: Irresponsible lending practices in consumer credit markets ...................................... 25
A constitutional right to debt relief: The Greek approach to alleviating over-indebtedness ............... 36
Crisis of lending to the poor in India: Challenges and the possible way forward ................................ 39
The Italian status quo: Little access to credit on expensive and opaque terms ................................... 45
Responsible lending in Malaysia ........................................................................................................... 51
Consumer lending practices in Russia and its effects on Russia’s consumers ...................................... 58
Responsible lending in Slovenia ........................................................................................................... 65
Responsible lending policies and practices in South Africa .................................................................. 71
Responsible lending: The Uganda experience ...................................................................................... 80
High-cost credit in the UK ..................................................................................................................... 84
The US credit card reform ended many abusive industry practices but additional work remains …….. 89
Alleviating the student loan burden: How a few simple fixes could help consumers .......................... 96
Responsible lending: An international landscape
This report presents a picture of lending practices and policies around the world from the consumer perspective, drawing on the experience and knowledge of Consumers lnternational’s (CI) Member organisations.
In developing the report, we asked authors from CI Member organisations in 14 countries1 to choose an aspect of lending that is particularly relevant to consumers in their country and provide a consumer perspective on regulation and its implementation, as well as actual lending practices. CI’s role was advisory with regards to the content and general outline of each chapter, giving CI Member organisations the space and opportunity to have their voice heard, and to elaborate on issues of their choice as per importance for consumers in their countries.
In addition to these contributions, we have worked with our Members to develop a set of CI recommendations for responsible lending. These recommendations set out the policies and practices that we believe are needed to ensure that lending benefits consumers and minimises the risk of abusive practices and over-indebtedness.
Credit and debt are key issues for consumers around the world. Access to credit can help consumers to absorb the cost of an expensive item over time, or to cope with unexpected expenditures. However, if consumers cannot afford to make repayments, either because of a miscalculation in the affordability of the loan, or due to changed circumstances, then levels of debt can become unsustainable, causing anxiety and ultimately hardship as debt repayments usurp funds needed to purchase essentials and possessions are sold at reduced prices, or seized, to repay debts.
Both consumers and providers have responsibilities in relation to credit and debt. The consumer has to make a proper assessment of their ability to repay the loan, and must provide accurate information to the provider so that it can assess the suitability of the loan. Consumers also need to be clear that they have entered a contract that they should honour.
However, the provider also has serious responsibilities. At one level, these responsibilities can be summed up as policies and practices adopted by lenders that seek to ensure a borrower can repay a loan without suffering hardship. This should include an assessment of a borrower’s ability to repay the loan, but must also include transparent and fair fees, charges and contract terms, responsible marketing practices, and managing client relations with respect for consumer rights, including having systems in place to assist debtors in difficulty.
Too often though, what consumers face is aggressive, predatory selling practices pushing expensive, complex products that borrowers can ill afford and do not understand. Disclosures are either after the fact, or hidden in legal jargon in fine print in contracts which consumers are pressured to sign in haste. Rare is the institution that publishes its standard form agreements, clearly explains the terms and puts the pricing structure in the public forum. Therefore, it should not be a surprise that consumers are ill informed of their obligations, or the true cost of loans. In fact, in Russia for example there is no common manner for communicating cost. In other countries, product bundling, varying loan tenures, and opaque marketing practices make it impossible for the consumer to comparison shop. In quite a few countries, credit is also offered without the provider performing a proper assessment of the consumers’ ability to repay (eg, USA, Fiji, Russia); in others, unscrupulous providers offer more credit than the consumer actually needs or has asked for (eg, Belgium).
Internationally, there is increasing interest in the topic of responsible lending. At the request of the G20, the Financial Stability Board produced a report “Consumer finance protection with particular focus on credit” which includes the results of a survey of its membership on regulatory approaches to consumer credit. FinCoNet, the international network for financial consumer protection, has also included responsible lending in its work plan for 2013/2014. A number of other international initiatives that look more broadly at financial consumer protection also include recommendations highly relevant to credit. These include the G20 High Level Principles on Financial Consumer Protection (2011), the World Bank Good Practices for Financial Consumer Protection (2012)4 and initiatives such as the Smart Campaign Client Protection Principles.
A handful of countries have also passed legislative and regulatory guidelines on the topic (eg, Australia, Malaysia and South Africa). However, the challenge remains in the detail, the content of the measures and whether the will and resources are available to support enforcement. In both Australia and Malaysia, legislation is still too new to say for certain what the benefits for the consumer will be. In Australia, the regulations have been cautiously welcomed by CI Member Choice, though some concern has been expressed that over-simplistic interpretation could impair access to credit for some.
In Malaysia, in response to debt-laden consumers, the Central Bank limited amounts of credit to no more than double the consumer’s monthly income, and numbers of credit cards to two per consumer. It also mandated that the credit assessment should consider net vs. gross incomes when granting credit. Despite these interventions, consumer debt levels are still greater than 80% of GDP per capita; the highest in the region.
In South Africa, the National Credit Act has been in place since 2005, but implementation with regard to debt counseling procedures as a means to rehabilitate the over-indebted does not appear to be making a dent in the problem as some 47% of the credit active population remains credit-impaired (and by law unable to take on any more debt).
Even in countries where consumer credit legislation has been in place for many years, for example, in Belgium (legislation since 1991 and modified in 2010), the problem does not really seem to be the absence of legislation, but rather the lack of adequate enforcement. In particular, the Belgian consumer organisation, Test Achats, referenced inappropriate advertising and online sales not in compliance with the law.
Emerging common threads
All of our chapters identify abusive practices that should be of real concern to regulators, however, too often regulatory action has been late in coming or ineffective. A common theme in many of the chapters is the relative lack of concern that governments and regulators have for consumers, concentrating instead on macro-economic issues and prudential regulation. CI’s Members highlight cases where government policy appears to support increased borrowing despite burgeoning levels of consumer debt. Surprisingly, this is even the case in countries that have experienced a full-blown financial crisis. Argentina’s government, for example, openly encouraged consumers to buy appliances on credit ‘for the good of the economy’. Similarly, despite the US mortgage fiasco, the US government has encouraged consumers to spend (as opposed to saving) as a type of patriotic duty.
In several countries, the regulation of the financial sector is also concentrated on prudential regulation to the exclusion of consumer protection, even though weak consumer protection is now recognised as posing a significant risk to the sector and potentially to the economy as well. As CI’s Slovenian Member, ZPS, puts it, there is often supervision without consumer protection. In Uganda, Consumer Education Trust recounts how, according to the Bank of Uganda (BOU), the BOU serves a (much) higher purpose than protecting consumers, one of which is to fight inflation by keeping interest rates high. Therefore, BOU allowed commercial banks to retroactively raise interest rates on consumer loans already issued.
A similar situation occurred in Russia following the 2008 financial crisis. The government responded by freezing loan repayments for the unemployed, however several banks retroactively changed the terms of contracts and increased interest rates and it took two years for new legislation to be introduced to effectively stop the practice.
Recent reforms in the US and UK hold the promise of improved protection for financial consumers but CI’s members note continuing problems. CI’s US member Consumer Reports highlights the fact that it is still very difficult for US students to calculate the true cost of student loans and many are becoming heavily indebted. And in the UK, the growth of high interest ‘pay day loans’ has created much controversy. CI’s member in the UK, Which? has made a number of recommendations for how the new regulator can address the abuses and promote better alternatives for consumers.
Financial consumer dispute resolution also fails to receive enough attention in many countries. Only a few of the 14 countries that submitted papers have financial services ombudsmen. And, in some cases, like in India, the ombudsman has a restricted mandate because it is only available to customers of licensed banks (with the proposed new legislation, the ombudsmen may be available for microfinance clients as well). In most cases, however, consumers with complaints are left to their own devices – or forced to use the court system to resolve disputes, incurring more costs as is the case in Fiji, whereby heavily-indebted consumers weighted down with monthly instalments on appliances from hire-purchase agreements can ill afford to take matters to a court (and their goods and/or land may be seized and sold through collusive practices before they reach the court).
In this report, only two chapters note the dangers of a stalled market for credit. One example comes from the Indian state of Andhra Pradesh where a crisis in microfinance lending contributed to hundreds of over-indebted micro borrowers’ committing suicide. The government responded with interest rate caps, as well as applying burdensome restrictions on collection practices. Microfinance institutions (MFIs) must utilise the local authorities called the ‘panchayats’ to collect microloan payments on a weekly basis, adding a level of bureaucracy and cost such that many MFIs have stopped serving the poor. CI Member Consumer Unity and Trust Society appeals to the government of India to be cautious to not exclude millions of poor from the financial system.
In Italy the market for credit has stalled for other reasons, but government efforts to stimulate lending have had little impact. CI’s Italian Member Altroconsumo writes about how the Bank of Italy has tried to encourage banks to make home loan mortgages by establishing a 50m EUR guarantee fund for mortgages to young consumers who would otherwise not have adequate guarantees. It seems Italian banks either do not want to use the guarantee fund, or do not know of its existence, and consumers are no better off for this effort.
It must be noted that the context for many of these chapters is an economic situation in which consumers are under severe pressure with falling incomes and rising prices. Alarmingly, in several of the chapters submitted, consumer advocates note that consumers are using high-interest, short-term credit to pay for essentials like food (eg, Argentina, Russia and the UK). In such desperate circumstances, the potential for abuse of consumers is multiplied. In fact, in Argentina, the stores appear to reward this behaviour by offering discounts when consumers use their credit cards to food shop. But if the potential for abuse is multiplied, so too is the need for effective regulation.
The role of consumer organisations
On a positive note, the chapters do demonstrate the important role played by consumer advocates who independently and consistently represent the voice of the consumer. There are examples from many countries of the research, advocacy and services provided by consumer organisations that seek to protect and inform consumers and alleviate consumer suffering.
Often, CI Members’ activities are seeking to fill the gaps left by governments or regulators, without even a small portion of those entities’ budgets. Take, for example, the case of Greece, where personal bankruptcy legislation was passed in 2010, but due to unemployment and the accompanying EU austerity measures, over-indebted consumers are simply too poor to afford bankruptcy filing fees. Thus, the Greek consumer organisation, New Inka, has offered pro bono filings for consumers who desperately need help. ( A potential solution could be to mandate that banks contribute to the over-indebtedness fund based on their previous year’s write offs, which reflect their ‘contribution’ to the problem of over-indebtedness in society, as Belgium has done).
Consumer organisations around the globe are also effective monitors of industry behaviour. For instance, initial research by KonfOp in Russia suggests that none of the 20 leading banks posted mortgage annual percentage rate (APRs) on their websites (despite existing regulations requiring disclosure); or in Italy, AltroConsumo’s secret shopping research demonstrated that a guarantee fund for home loan mortgages for youth in precarious employment was under-utilised, and thus a waste of government resources.
In short, effective, well-funded consumer organisations have a fundamentally important role to play in supporting the development and adoption of effective consumer protection legislation; highlighting abusive practices and protecting the consumer from being the victim of predatory practices. This is a vital service for individual consumers, the economy and society as a whole.
Consumers International: Recommendations on responsible lending
All lenders should seek to ensure that borrowers can repay their debts without suffering hardship and that the financial service sold is appropriate to the borrower’s needs and circumstances. This implies an assessment of the affordability of the loan as well as responsible and appropriate product design, provision of accurate and clear information and marketing.
1. All lenders should be subject to oversight by an effective regulator
- All lenders should be licensed and regulated. In addition, they should meet all statutory obligations and codes of conduct relevant to their work.
- Regulators should have sufficient powers and resources to effectively regulate lenders’ market conduct.
- Regulators should monitor data about complaints and levels of consumer debt at the national level and, where applicable, state/regional level and use this information to develop regulation. The generic complaint data, including reports on individual companies, should be made available to the public.
- Regulators should have the power to apply a variety of sanctions appropriate to the degree of transgression, including withdrawal of licence for serious breaches.
Accessible dispute resolution
2. Consumers should have access to effective complaint mechanisms and dispute resolution
- Lenders should have effective internal procedures for handling consumer complaints in an appropriate and timely manner.
- Consumers should have access to independent advice if they are concerned that they may have not been treated fairly by a lender.
- Companies should make information readily available about their complaints procedure and independent sources of dispute resolution.
- In the event that consumers are not satisfied with a lender’s response, they should have access to expedient, inexpensive and efficient third-party mechanisms for dispute resolution.
3. All lenders should make a proper assessment of a borrower’s ability to repay
- Before giving credit, lenders should assess a borrower’s ability to repay the loan and the suitability of the product based on the consumers’ needs and circumstances.
- The assessment should be based on a credible, standard methodology such as Loan to Value or Debt to Income and include income and expenditure, assessing existing credit commitments and leaving sufficient flexibility to deal with unexpected cost.
- The assessment should not be based on a teaser rate or unreasonable assumptions (such as, in the case of long-term loans, unusually low interest rates or major increases in income).
- Regulators shall ensure that appraisers carrying out valuations of immovable property used as collateral are professionally competent and independent.
- Where possible, lenders should verify information that is given to them by the consumer regarding income, expenditure and credit history.
- A loan application should be rejected if the requested loan amount is deemed to be unaffordable, and lenders should detail: the specific reasons for rejection; the specific actions the consumer could take to address the reasons for rejection; and the amount the lender could offer the consumer on the same terms as the loan that they initially applied for.
- Lenders should avoid simplistic or crude assessments that might unfairly deny consumers credit.
- Failure by lenders to carry out due diligence (including credit checks) before lending should lead to loans being invalid.
4. Credit reporting has a key role to play in responsible lending and should be transparent, available and used to assess a borrower’s ability to repay
- All credit bureaus should be licensed and regulated.
- Lenders should be required to share credit data with all credit bureaus to facilitate accurate and consistent assessments of a consumer’s ability to repay.
- Credit bureaux should be required to publicly state the types of data that they do and do not hold.
- The regulator should widely publicise the cost and process of how consumers can obtain a credit report. Regulators should also provide or facilitate the compilation and public dissemination of independent comparison tables of the data held by all credit bureaux in their jurisdiction, so that consumers can see the different information used to determine their credit rating
- Lenders should provide consumers with the name of the credit bureau(x) used to assess their credit application and identify any gaps in the agency’s data.
- Lack of positive data should not disqualify a consumer from accessing credit.
- A consumer’s credit score should not be damaged as a result of a consumer making an enquiry.
- Sensitive consumer data must be protected and privacy issues respected. Relevant regional or international principles covering privacy should be applied.
- Credit bureaux should have quick, clear, and accessible mechanisms for consumers to check the data held about them, to correct errors and to resolve issues when there is a dispute.
- Credit bureau complaint data should be regularly monitored by the regulator. This evidence, and the insight derived from it, should be used to identify consumer detriment and inform changes to policy and practices to address those problems. The generic complaint data, including reports on individual bureaux, should be made publicly available.
Product and service
5. Product design and account management should facilitate responsible lending
- Consumers should give their informed consent and have a ‘cooling off period’ during which they can change their mind without incurring any cost before any long-term loan agreement takes effect regardless of the channel used to apply for the loan.
- Credit contracts shouldn’t require consumers to waive their basic consumer rights. Unfair contracts should be voidable.
- Where there is concern about high rates, competition authorities should investigate whether markets are competitive and, if required, take action to promote competition. If the market fails to keep rates at a reasonable level, regulators may consider the use of rate caps. Other fees and charges should be able to meet a ‘reasonableness test’.
- Consumers shouldn’t be encouraged to borrow more to maintain preferential rates or offered unsolicited increases in their credit limit.
- Consumers should not be inappropriately encouraged to rollover short-term loans in a way that is unsustainable, unaffordable or otherwise harmful.
- Lenders default position should be that repayments are allocated first to balances that attract the highest interest rate or are most effective in reducing overall costs.
- Products should meet a comprehensibility test, including a requirement that additional complexity delivers genuine consumer benefit.
- Lenders should train staff in how to identify and help consumers who are experiencing difficulty in making repayments and offer practical solutions, with clarity on any additional costs. Lenders should make information about independent debt counselling available.
- Tying should be banned: the consumer should always have the right to buy ancillary products from alternative providers and lenders should be required to clearly communicate this to the consumer.
- Regulators should take effective measures to protect consumers against the exchange rate risk of foreign currency loans. Informing consumers about the risks of foreign currency loans is not a sufficient measure to protect them.
- Consumers should always have the right of early repayment. Early repayment compensation, if any, should be calculated transparently and fairly. Consumers should be informed about their right to early repay and the amount of the expected compensation already at the pre-contractual stage.
6. Information should be provided in a manner to help the consumer make an informed choice
- All lenders should provide information that is clear, sufficient, reliable, comparable and timely for the consumer to compare different products and make an informed decision.
- Regulators should publish comparative tables with contract terms, interest rates and fees or support their publication by an independent body. Examples should be given to demonstrate how any charges and interest rates could vary over the course of the contract.
- All lenders should use standardised key information documents with comparable information on interest rates, such as monthly and annualised percentage rates (APRs), as well as illustrations of typical payments in cash terms over a given period.
- All lenders should use a standardised method for calculating APR.
- Loan agreements which have not respected the above terms should be voidable.
Staff targets and incentives
7. Lenders’ business practices should incentivise customer service not sales
- Remuneration of lenders and intermediaries should be product neutral. Instead, incentives should be linked to providing quality customer service. All inducements in kind to credit intermediaries should be banned.
- Lenders should be liable for the quality of the loans they make, even if the loans are sold to third parties.
- Regulators should ensure consumers who are miss-sold financial services are fully compensated and lenders face sufficient penalties to discourage further offences and that these penalties are made public.
8. Marketing and advertising should not encourage irresponsible borrowing
- All marketing and advertising of financial products and services should be accurate and truthful and consistent with relevant regulations. There should be a specific marketing code for financial products enforceable with sufficient penalties to deter abuse.
- The objective, tone, content and inference of marketing should be to encourage responsible borrowing.
- All advertising of credit should include a representative price that at least 51% of respondents could expect to get.
- Marketing shouldn’t be used to advocate solving debt through more borrowing.
9. Consumer education and advice should support responsible borrowing
- Basic budgeting skills should be taught as part of the national curriculum and reinforced through public education campaigns that are accessible to all consumers.
- Independently-produced information about what to consider and look out for when purchasing credit should be given to consumers at the point of sale.
- Independent advice should be available for consumers who want additional support in choosing a product.
10. Debt resolution should be available for consumers who have become over-indebted
- Regulators should define over-indebtedness for their jurisdiction.
- Should a consumer become over-indebted as a result of a change in circumstances, they should have access to a fair mechanism to agree a timetable of payments, a temporary break from repayments and interest accruing or a reduction in the loan so that they can reasonably expect to return to a manageable level of debt.
- Regulator should establish or support the establishment of independent debt counselling centres which also mediate on behalf of consumers.
- Lenders should not adopt coercive recovery methods and regulators should have monitoring in place to identify and punish violations.
- If the court considers that the totality of a relationship between lender and borrower is abusive then the terms of a loan should be invalid.
The editor of the CI report on responsible lending, Jami Hubbard Solli http://www.microfinancegateway.org/p/site/m/template.rc/1.9.52647/ has also made a blog entry in 2013 on the Inclusion website where she rightly stresses the need to explore in detail what happens at the moment of default and how providers act responsibly when their services are actually most needed. See the blog post: http://cfi-blog.org/2013/09/26/d-is-for-default/
D is for Default - Extracts:
“There has been industry research done on why clients default, as well as interesting work highlighting the gap between providers’ and borrowers’ perceptions and experiences related to over-indebtedness.¹ However, there is very little work done that details the actions taken by practitioners when a borrower doesn’t repay, nor on the experience for defaulting clients in the short-term, or over time. The knowledge gaps on default management include what providers actually do, as well as what influence (if any) legal and regulatory frameworks have on industry practices. For example, what guidelines or boundaries does a country’s legal framework offer on debt collection? Is there a prescribed manner in which MFIs can collect a past due debt, including how to go about the seizure, valuation, and the sale of collaterals? Is there a limit to the length of time which a borrower is legally responsible for a debt? What are MFI practices regarding collection post write-off? Are there any insolvency or personal bankruptcy provisions available to debtors, either by law, or through voluntary debt counseling centers? More importantly, if the legal framework does exist, is it enforced? Are MFIs aware and in compliance with requirements? And, lastly, there does not appear to have been any industry research on the consequences of default from the client perspective…… When collections procedures are triggered (for many, it coincides with the first missed payment), what form those collection efforts take (group pressure, taking individual or group savings, seizing collateral or guarantors’ assets, offering debt rescheduling/restructuring, or using the courts to collect overdue debts), and whether debt collection is outsourced (yes, in 29 percent of the respondent institutions). One somewhat surprising result was that 27 percent of respondents treat default as a strict liability offense, meaning those borrowers who have defaulted due to illness or natural disaster are treated the same as those with perhaps less sympathetic motives – for example, losing money at cards or fraud. Spanish-speaking respondents were more likely than their Francophone and Anglophone peers to distinguish based on reason for default. “
Offering restructuring options to clients who have defaulted includes taking the following into account:
- Steps for unintentional defaulters include giving more time, restructuring loans, granting bridge loans, and one MFI mentioned it may consider debt forgiveness;
- At what point this option is offered (for example, after savings, collateral, or guarantors’ assets are seized, or before?), whether rescheduling is discretionary, and if a standard operating procedure exists, is it incorporated into staff training manuals and is it explained to clients;
- What socio-economic impact does the default have on the debtor and her family over time — particularly when collaterals are lost or guarantors must pay? Is it possible to re-integrate a defaultor into the financial services sector? Are MFIs likely to re-lend to someone who has defaulted and if so, under what terms? Or, is microfinance as it is practiced now a one strike and you’re out game?
Also from CI recently:
£28m Sales Incentives fine for big British banks 11 Dec 2013
CI WEBINAR: International action on Financial Consumer Protection –what’s next? 04 Dec 2013 to 04 Dec 2013, London
In search of good practices in financial consumer protection, Jul 2013 (Analysis of best practice throughout the world)
Developing rights-based consumer protection advocacy strategies Jun 2013 (What can be done to ease the consumer protection legislation process?)
Report and webinar: Sustainable Business Model Survey Apr 2013 (Use this research to grow a sustainable consumer organisation).
Proposals for amendments to the UN Guidelines for Consumer Protection (02 Jul 2013) http://www.consumersinternational.org/news-and-media/resource-zone/un-guidelines-on-consumer-protection-briefings-and-reports/. Consumers International has been recognised by UNCTAD as a named stakeholder in the revision process of the UN Guidelines for Consumer Protection.
How to conduct effective research (29 Oct 2013)
The capacity of an organisation to acquire strength and influence will often depend on its ability to produce reliable data with optimal efficacy in its collection, analysis and interpretation.
Without good research a consumer group will be unable to take companies to courts, call credibly for legislation changes or advise the public about which best products to buy.
The research process can be divided into four stages:
- Select your research methods
- Collecting the data and information