Principles of Responsible Credit
Why we are concerned
For today’s consumers, consumer credit contracts now rank as high in importance as contracts for employment. But overindebtedness has also become a similar threat in modern times to unemployment in the last century. Sustainable development therefore requires access to responsible credit products and services.
At the present time many consumer credit agreements are far from transparent, and involve terms and conditions that are at best confusing and at worst, deliberately misleading to consumers. These agreements often involve multiple firms, and anticipate that consumers will pay additional fees for unforeseen contingencies; many also require the purchase of linked services such as insurance of unpaid balances. The consequences for consumers who are unwilling or unable to pay attention to these details can be devastating.
Consumer Credit makes potential future income available for current spending on items such as consumption, education, starting a business, and paying for health care. As such, consumer credit is a basic element of participation in the economic life of modern society. The benefits of access to credit are many, including developing national wealth and meeting basic consumer needs. However, there can also be a dark side to consumer credit — in some cases, it can destroy families, and lead to the loss of valuable assets including homes. The continued extension of credit at high cost to people on inadequate incomes only serves to deepen the levels of poverty that they experience.
In Europe, most consumer credit is provided by private-sector firms. If their activities are not tempered by moral institutions, public awareness, protective law and administrative supervision, firms might irresponsibly provide credit in the sole interest of gaining maximum profit. Borrowed money does not itself provide real wealth but only holds the potential to create that wealth. Vulnerable people can be harmed by greed, usury, exploitation and predatory lending, all leading to a lifelong entanglement in debt. This insight has become an integral part of the European legal tradition which bans usury, laesio enormis, extortionate credit, and the exploitation of need; this tradition goes on to require social responsibility and the exemption from seizure for some property and income.
Consumer credit is part of a cultural process of reproduction. Left unimpeded, market forces in the financial services sector tend to favour the rich and to discriminate against the poor. Trust in the “invisible hand” has never safeguarded the interests of the disadvantaged, — not with regard to poor countries and not with regard to poor people. Credit markets need rules that allow the benefits of credit provision to flow to all people and not just to the more fortunate, whilst rules are also required to protect those who are most vulnerable to exploitative lending practices. This balance, between providing access to credit whilst preventing the worst excesses of an unbridled market, is central to the concept of ‘responsible credit’.
The EU, in article 152 of the Maastricht treaty as well as in the proposed new constitution, acknowledges that the State must guarantee a high level of consumer protection and must actively oppose social discrimination. If the EU comes to see its primary goal as opening markets for the most influential (and sometimes also the most unscrupulous) lenders, without respect for national culture in credit regulation and morality, it will be seen as a threat to the idea of a unified Europe. Europe needs banking for, and not against, its people. Law and justice must therefore create a credit market that promotes the productive use of credit, including a consideration of social needs.
The current draft of the EU Consumer Credit Directive, which differs from previous versions, threatens consumers by allowing the sale, in all Member States, of financial services that will exploit the disadvantaged. The Directive includes virtually no consumer protections nor guarantees existing national protections, whilst it opens up the existing markets of all Member states to competition from lenders based in other countries. For this reason, the wider market for financial services threatens to undermine existing consumer protection laws in many Member States.
In order to uphold cultural diversity, to further social responsibility and “good morals,” and to keep up the bona fide principle of ius commune, the following requirements for a responsible European Consumer Credit Directive can be identified. The new proposal of a Consumer Credit Directive has been evaluated in the light of these principles. This evaluation shows that, at a minimum, the European Commission wants to apply significantly different principles to the European credit culture that have been in place thus far and we consider that to do so would be to the disadvantage of many consumers.
P1: Responsible and affordable credit must be provided for all.
- Credit is an essential for full participation in society.
- Banks should not discriminate and should provide real access.
- Credit to Consumers and Small Businesses must be supervised.
P2: Credit relations have to be transparent and understandable.
- Competitive transparency requires a standardized mathematically correct form of “one-price” disclosure (the Annual Percentage Rate of Charge or APRC).
- Social transparency requires a standardized pre-contractual payment plan.
- Consumers should be provided with adequate time for reflection and with access to independent advice.
- Consumers should have access to independent financial, credit and debt advice.
- Both parties in the credit markets have to take part in a mutually productive process of financial education.
P3: Lending has at all times to be cautious, responsible and fair.
- Credit and its servicing must be productive for the borrower.
- Responsible lending requires the provision of all necessary information and advice to consumers and liability for missing and incorrect information.
- No lender should be allowed to exploit the weakness, need or naivety of borrowers.
- Early repayment, without penalty, must be possible.
- The conditions under which consumers can refinance or reschedule their debt should be regulated.
P4: Adaptation should be preferred to credit cancellation and destruction.
- There is a need for effective protection against unfair credit cancellation.
- Default charges should be adequate to cover losses only.
P5: Protective legislation has to be effective.
- Credit regulation has to cover all non-commercial users.
- Credit regulation has to cover all commercial forms of credit provision.
- Credit regulation has to cover the whole process of credit extension as experienced by its users.
- Credit regulation has to encourage efficient social and economic effects of credit extension.
P6: Overindebtedness should be a public concern.
- Profit-driven systems cannot cope with over-indebtedness.
- Consumers should have a right to discharge.
- Bankruptcy procedures should lead to rehabilitation and not to retorsion.
P7: Borrowers must have adequate means to defend their rights and be free to voice their concerns.
- There should be adequate individual as well as collective legal procedures to enforce borrowers’ rights.
- Critical public awareness is crucial for the development a fair and responsible distribution of credit.