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Reasonable credit costs – update from Finnish ECRC partner the Finnish Competition and Consumer Authority

Below is news from the latest newsletter.


Editorial: Towards reasonable credit costs

There have been problems associated with payday loans that can be applied for via the internet or text message since they entered the market in 2005. The problems have been addressed by means of gradually making the law stricter. The 2013 amendment aimed at reducing and preventing debt problems resulting from payday loans by imposing an interest rate ceiling on cash credit under EUR 2,000. After the interest rate ceiling on cash credits under EUR 2,000 entered into force, the maximum actual annual interest rate may not exceed the reference interest rate by an extra 50 per cent. With the current reference interest rate, the interest rate ceiling is 50.5 per cent.

After the interest rate ceiling was enacted, it was assumed that on competitive credit markets, the interest rate of credit of EUR 2,000 or greater would also fall to a significantly lower level than the set interest rate ceiling. In addition, when credit risk increases significantly relative to an increase in credit, it was assumed that credit providers would not start awarding noticeably greater credit than usual at that time, so as to avoid the constraints of the interest rate ceiling. In reality, both these assumptions have been proved faulty, and after the entry into force of the law amendment, payday loan providers have mainly began granting loans above the ceiling, i.e. credits of EUR 2,000 or greater with annual interest rates in excess of 100 per cent or even much higher.

However, a greater credit risk is not a justified ground for increasing the price of credit indefinitely. The law states that, before granting credit, the creditor has a duty to assess the consumer's creditworthiness, and if the credit risk is regarded too high, the credit should not be granted at all. Thus, the interest rates in excess of 100 per cent that are rather commonly applied by many credit provider companies cannot be justified by a great credit risk posed by the credit applicants.

There are strong indications that the interest rate ceiling imposed about three years ago has failed to address any of the problems associated with the provision of payday loans in a satisfactory manner. It seems likely that the matter needs to be readdressed by legislative means. It always takes time and requires a political decision for action be taken. Still, credits are continuously being granted to consumers at unreasonably high cost, and increasing numbers of people run into repayment problems.

Reasonableness through case law

The Finnish judicial system is traditionally based on the principle that, in order to claim his/her rights, a person who has undertaken an unreasonable contract must him/herself invoke the unfair terms and demand that the contents of the contract be adjusted to make it compliant with legislation. At first, the claim must be made with the contracting party. If that does not yield results, the case often proceeds to court. In case of credit agreements, legal action is usually taken by the creditor, who demands a payment decision on the debtor in accordance with the grounds for payment agreed in the original credit agreement.

Most of the debt collection cases are settled in court by “summary procedure”, by which the court of law usually confirms the creditor's demand without investigating the case any further, unless the debtor him/herself actively reacts to the matter after having been notified of the matter by a court summons. Last autumn, the Supreme Court rendered a decision which established a precedent (Case 2015:60), largely based on EU law, on the basis of which, in certain cases pertaining to consumer affairs, the court of law may make the interest rate of a credit reasonable ex officio, i.e. without a claim presented by the debtor. This opportunity does not apply to all cases, and the formation of the judicial procedure in this respect is still evolving. However, in its case law, the European Court of Justice seems to be putting increased emphasis on the initiative of the courts of law in securing consumer rights based on European Union legislation, and this will reflect upon Finnish judicial practice as well.

In its supervisory activities, the Consumer Ombudsman has addressed various practices applied after the interest rate ceiling was enacted, by which credit providers have tried to evade interest rate ceiling regulations. For example, we have obtained a Market Court decision according to which an artificial separate guarantee charge has to be taken into account when calculating the actual annual interest rate, and if the sum exceeds the interest rate ceiling, the part of the sum exceeding the ceiling must not be collected from the debtor.

The Consumer Ombudsman has decided to provide assistance in a few cases – where unreasonably high credit costs have been collected on such loans – that have proceeded to court in order to establish some case law on what kind of a price level can be considered reasonable on credit falling outside the scope of the interest rate ceiling. In some cases, an amicable solution has been found when the creditors have themselves made the credit expenses more reasonable, and some are still pending a court decision. We will provide information about these decisions in due course.

Consumer debtors may also take the question of whether the price agreed on their loan is reasonable to the Consumer Disputes Board for assessment, and that way get a recommendation for a solution as regards their credit agreement. Even though the role of courts of law as initiators in securing reasonableness of consumer agreements would seem to be getting bigger, the debtors’ own reaction to unreasonable contractual terms is still of great importance. In other words, it is worthwhile for debtors to require mediation of unreasonable contracts. The more case law there is assessing the reasonableness of interest rates, the better the chances of making the general interest rate level of loans offered to consumers more reasonable. The existence of case law also helps the legislator assess how to deal with pressures related to regulating the interest rate ceiling. Establishment of case law is slowed down by the fact that the debtors themselves should make the effort and be brave enough to demand that the interest rate is made more reasonable.

Päivi Hentunen

Consumer Ombudsman, Finland

Expert article: The Consumer’s financial security must be safeguarded also on the credit market. Finnish Consumer Ombudsman's Newsletter 6/2015.

Reasonableness of interest rate on the weighing scale. Finnish Consumer Ombudsman's Newsletter 6/2015.

Better access to financial services in the EU area

The comparison and acquisition of financial services, such as banking and insurance services, from other EU countries should be easier for consumers. This is the goal of the European Commission, whose Green Paper on retail financial services the Consumer Ombudsman has commented on. The Consumer Ombudsman considers it important that the goal in retail financial services is to establish a coherent regulatory framework. Regulatory coherence is ensured by increasing mutual cooperation between the Commission's various Directorate-Generals.

The Consumer Ombudsman called attention to the nature of financial services as services that require trust. Therefore, some consumers want to do business in their own language and some also miss the opportunity to personally attend to their business in a service location instead of by internet or telephone. This is not always possible when buying financial products or services from another country.

Sufficient account must be taken of sector- and product-specific differences in the financial market in particular. But, on the other hand, many key principles related to consumer protection must be taken into account in all regulation affecting the rights of consumers, regardless of the sector concerned. Harmonisation of regulation must not endanger the more advanced consumer protection regulations being applied in some Member States either.

As regards the Commission's short-term goals, it must be noted that the Commission has recently issued several regulations on financial matters that in many respects have not even been implemented yet. It is still too early to estimate the final effects of this regulation and the need for new regulations.

The Consumer Ombudsman commented on the Commission's Green Paper on retail financial services in winter 2016 as part of the Finnish Competition and Consumer Authority's (FCCA) statement to the Commerce Committee and responded to the Commission consultation. The Commission plans to publish its action plan concerning retail financial services in summer 2016.

Cooperation between consumer authorities will be developed

CPC (the Consumer Protection Cooperation) is a network of national authorities responsible for enforcing the EU consumer protection laws in the EU countries. As part of the
Digital Single Market Strategy published by the European Commission, the Commission will give its proposal for a new CPC regulation in May 2016. The exact content of the Commission's proposal is not known as yet. However, the proposal is expected to include regulations on the minimum powers of national authorities and improved cooperation in cross-border enforcement.

Even today, authorities may send an information request or an enforcement request to another EU Member State after having detected an infringement of consumer protection laws. The authority that has received the request has an obligation to take action requested by another Member State. However, the new regulation would probably improve cross-border cooperation even further, particularly in cases of widespread infringements, and would specify the Commission's role as coordinator of joint enforcement actions as well.

The regulation would also include sections on coordinated investigations between authorities (“sweeps”) and other supervision measures, and define the role of the Member State coordinating these measures on behalf of other members. The minimum powers of national authorities would probably include the right to order websites to be closed, the right to conduct inspections on the premises of traders, and the right to do “mystery shopping”. New provisions would also possibly be added to the regulation's scope of application, such as the non-discrimination article of the Services Directive and provisions on rail passenger and airline passenger rights.

If realised, the Consumer Ombudsman regards these potential proposals by the Commission as positive. For example, at the moment the Consumer Ombudsman is not entitled to order any websites to be closed, which can be considered a deficiency from the perspective of the Consumer Ombudsman's powers.

On the other hand, it must be noted that the enforcement actions fall within the powers of national authorities, not within the Commission, for example. It is also good if some leeway is allowed in terms of how the enforcement measures are implemented in practice and that the operating procedures are not rendered unnecessarily rigid. Possible inclusion of the non-discrimination article of the Services Directive in the regulation's scope of application will probably mean one step forward in ending unjustified, geographically-based restrictions on online shopping.

After the Commission's proposal has been published, its handling will begin in the EU Council and EU Parliament in accordance with the normal procedures.

CPC Regulation (EC) No 2006/2004 (EUR-Lex)

Car rental companies improve their practices in the EU – consumers will benefit.
FCCA press release 13 July 2015.

Consumer protection for mobile games taking a step forward. FCCA press release 22 December 2014.

ID: 48993
Publication date: 17/05/16

Link to Newsletters of the Consumer Ombudsman

Created: 17/05/16. Last changed: 17/05/16.
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