responsible credit - P1

P1: Responsible and affordable credit must be provided for all.

Credit is an essential for full participation in society.

In the industrialized society credit has become a service essential for full participation in society. By giving people access to their own future income, credit provides the opportunity to obtain the use of advanced goods and services that require capital investments like cars, household appliances, permanent education or homeownership. Access to credit makes it possible to bridge variations in income and expenditure and thus provide the flexibility that modern labour markets require.

While credit may not currently be available in all countries, the creation of small business and self employment requires capital everywhere. While individual capital is difficult to access, credit plays the role of seed capital in self-employment. Accordingly, providing access to credit realises a human right to use one’s own future resources properly. To this extent, credit has to be accessible for people in society irrespective of their social, biological, or cultural differences.

To realise this right requires the creation of banking facilities to be supported where no banking facilities are currently available, and needs people who are currently excluded from financial services to have access to banking facilities where they already exist or could be provided by the existing banking infrastructure. Regulation should under no pretext therefore prohibit access to the best and most affordable forms of credit under competitive conditions for all. This includes facilitating forms of Microlending and alternative credit institutions. But such alternative credit institutions which have lower technical and protective standards, and operate with less cost efficiency than existing banks should be used primarily as gateways to the general system of financial services provision.
Banks should not discriminate and should provide real access.

Banks have been trusted to administer the savings of their depositors and thus the monetary form of our wealth of nations. The public should monitor that they use this trust properly, without any discrimination, and that they reinvest it into our communities in ways that are ethical and which meet the needs of humanity across the world. Access to credit should empower communities, not leave them disenfranchised or open them to exploitation.

Developed banking systems under competitive market structures tend to exclude vulnerable consumers from their main business by providing direct or indirect services which do not meet their own standards. This is why markets require active state supervision and regulation to stir all providers of credit to accept poor or disfavoured consumers and communities by raising public awareness (e.g. through Community Reinvestment Legislation), creating obligations for inclusion (basic bank accounts, equal credit opportunities) or engaging in subsidies or support that can remove obstacles for these customers to be accepted. (rate subsidies in fair housing finance, free credit and debt counseling, state guarantees etc)
Credit to Consumers and Small Businesses must be supervised.

The non-commercial use of credit requires active supervision, comprehensive protective regulation and the strengthening of good morals in order to protect the borrower’s position in the market and from the market.

Consumer credit, housing finance and start-up credit is directly linked to the livelihood of families and their social well-being. Its use is not only a function of profitable calculations. Its users are often unskilled and have to manage unforeseeable events out of a weak individual market position. When they have to default, the rules of the market society alone cannot offer adequate answers. This is why from the very beginning of money societies debtors have been protected and modern legislation has enlarged these regulations in line with the extension of credit. Regulation does not replace consumer awareness and individual responsibility but has to strengthen it where this is required and needs to provide social solutions where the borrower is at a disadvantage in the marketplace.

P2: Credit relations have to be transparent and understandable.

Two types of transparency should be delivered to potential borrowers to allow market forces to operate as intended. Competitive transparency gives consumers a chance to choose the cheapest and best product. But social transparency, indicating the potential impacts of credit on future household liquidity, is also necessary.

Competitive transparency requires a standardized mathematically correct form of “one-price” disclosure (the Annual Percentage Rate of Charge or APRC).

The APRC should include all credit-related payments that will repay the borrowed capital. The calculation of the APRC must include all cost elements that will, in practice, burden household income in the future: payments on linked cross-selling products, endowments, brokerage fees, and fees associated with acquisition, risk coverage or debt collection. Such cost elements represent services for which alternatives exist and the existence of these alternatives should be disclosed in a form which makes comparison and exit easy. The lack of transparency on insurance costs also leads to a lack of price competition in this area and runs contrary to the aims of the Directive in opening up markets to deliver better outcomes through increased price competition.
Social transparency requires a standardized pre-contractual payment plan.

This pre-contractual plan should disclose the likely impact of future payments on consumers’ household liquidity and future purchasing power, impacts that can be predicted by statistical analysis of past experience with similar contracts. Pre-contractual plans that demonstrate an ability to repay are the cornerstone of responsible lending but they rely on full disclosure of outstanding liabilities. The extension of credit that occurs without proper attempts to discover full outstanding liabilities (for example through credit card balance transfers and the unilateral raising of credit limits without borrower agreement) is a particular problem that must be addressed.
Consumers should be provided with adequate time for reflection and with access to independent advice.

The right to cancel an agreement exists only once a binding offer has been made. This system provides little time for reflection by the consumer or for independent advice to be sought. Where the amounts of the agreement are large, there should be improved systems to allow for advice to be taken and there needs to be facilities to provide advice to people who are in a particularly weak bargaining position.
Consumers should have access to independent financial, credit and debt advice.

Consumers and small businesses have most need of advice and help when they are in difficult financial situations. This is the situation in which vulnerable consumers are most active information seekers and take the most disadvantageous decisions. In this situation they need to know about their legal rights, the economic and social consequences of their adjustments and help to cope with the effects of their problems on family, labour income and consumption. It is in this situation that the market cannot provide adequate services which require a consumer who has a free choice and adequate means to pay. Both is not available at this point. This is why credit and debt advice has to be provided at low cost by unselfish institutions monitored by society. To uphold such offers is a public task.
Both parties in the credit markets have to take part in a mutually productive process of financial education.

Consumers need to understand and use financial services properly with respect to their potential and risks. But they also have to learn that products and services can be changed and made more adequate if they are able to voice concern, evade credit, and engage in a collective process to develop better market conditions. Equally, the process of financial education includes learning on the part of the creditors about the needs and necessities of borrowers in order to adjust their profit driven offers to consumer requirements. Banks are not the teachers of consumers but they can provide answers to their questions.

P3: Lending has at all times to be cautious, responsible and fair.

Credit and its servicing must be productive for the borrower.

Not every access to credit is productive. Especially in Europe and the US, lack of access is no longer the core problem. Credit is now offered to all through damaging forms of credit that are used for unproductive investments, increase the dependency of consumers, and lead to exploitation and overindebtedness. This is why credit contracts have to be monitored and carefully regulated.
Responsible lending requires the provision of all necessary information and advice to consumers and liability for missing and incorrect information.

Advice links consumers’ needs with their future income and purchasing power and illuminates the impact that the provided services might have on the future lives of borrowers and their families. Responsible lending requires that lenders assume liability for misrepresentation, false advice or missing information as well as for the sale of services known to be inadequate, except where there has been a deliberate and malicious intent on the part of the borrower to defraud. Creditors must take all reasonable steps to validate information provided to them and must in particular share data on outstanding liabilities and repayment levels.
No lender should be allowed to exploit the weakness, need or naivety of borrowers.

If markets encourage exploitation and dependency by favouring the rich and discriminating against the poor, the law must set minimum standards for the operation of those markets. Effective rate ceilings are a starting point.

There needs to be a social guarantee that lenders will not abuse their position when the borrower’s circumstances worsen through no fault of their own. In these circumstances lenders should not be able to seek higher charges on default or to worsen the position of the borrower further. There also needs to be a more sophisticated understanding of risk and a proper consideration of risk across the credit portfolio rather than an attempt to identify an individual risk based price for each and every social group. The repayment of debts should be regulated so that early repayment is possible and so that refinancing conditions are closely regulated.
Early repayment, without penalty, must be possible.

Consumers should always have the right to repay their debts without penalty. It is unacceptable that profit-driven systems should be able to keep consumers indebted when economic efficiency suggests that debts can and should be repaid.
The conditions under which consumers can refinance or reschedule their debt should be regulated.

Refinancing is not the repayment of credit. It can often represent a deterioration of credit conditions at a time when the debtor is economically weak. Regulation should guarantee that this weakness is not exploited, and in particular limit the amortization of interest and other charges. “Solutions” where future expectations are traded off for temporary relief should be controlled.