Opinion of the European Economic and Social Committee on Credit and social exclusion in an affluent society
Date: 2007-10-25
Institutions: European Economic and Social Committee
Subjects: consumer credit, consumer protection, indebtedness, marginalisation

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Opinion of the European Economic and Social Committee on ‘Credit and social exclusion in an
affluent society’

(2008/C 44/19)

On 16 February 2007, the European Economic and Social Committee, under Rule 29 (2) of its Rules of
Procedure, decided to draft an opinion on Credit and social exclusion in an affluent society.

The Section for Employment, Social Affairs and Citizenship, which was responsible for preparing the
Committee's work on the subject, adopted its opinion on 2 October 2007. The rapporteur was Mr Pegado
Liz.

At its 439th plenary session, held on 24 and 25 October 2007 (meeting of 25 October 2007), the European
Economic and Social Committee adopted the following opinion by 59 votes to 0 with 1 abstentions.

1. Conclusions and recommendations

1.1
In the absence of any Community guidance in this area,
the various Member States have developed their own national
legal systems for preventing individuals and families from falling
into over-indebtedness, processing the cases of those who do,
helping them get out of debt and providing them with support.

1.2
Faced with the worrying growth of this phenomenon in
recent decades and taking particular account of the European
Union's enlargement and the recent deterioration in the situa-
tion globally, the EESC — which has been closely following
developments in this area for quite some time, as well as the
social consequences of over-indebtedness in terms of exclusion,
social
justice and obstacles to the completion of the internal
market — has decided to reopen public debate on this matter
with civil society and the other Community institutions. The
Committee's intention is to identify and implement Community
measures aimed at precisely defining, monitoring and dealing
with the problem in all its different aspects — social, economic
and legal.

1.3
The diversity of the systems established in the countries
that have developed them, not just in Europe but also in the
rest of the world, together with the fact that some countries do
not have any such systems, is encouraging the development of
‘unequal’ opportunities, creating social
injustice on the one
hand, and distortions in the move towards completion of the
internal market on the other; all of this warrants urgent, propor-
tionate action by the European Union, for which the necessary
legal basis exists in primary law.

1.4
This opinion reviews the main issues raised by the
phenomenon of over-indebtedness, weighs up the solutions
found at national
level, describes the difficulties encountered
and errors detected, assesses the overall scale of the problem
and reflects on gaps in knowledge and shortcomings in the
methods used. The opinion also seeks to identify approaches
and pinpoint areas for possible action at Community level.

1.5
The opinion even goes so far as to suggest that a Euro-
pean Indebtedness Observatory be set up to monitor develop-

ments in the phenomenon at European level, providing a forum
for dialogue between all the parties concerned, and proposing
and coordinating measures to prevent and limit it, then asses-
sing the impact thereof.

The Committee is aware, however,

1.6
that coordinating
steps of this nature and scope can only be achieved if the
Commission, European Parliament and Council — in close
dialogue with organised civil society, representing the bulk of
those concerned by the issue (families, workers, consumers,
financial institutions, etc.) — decide to make this a priority for
action.

1.7
Recent indications of the Commission's thinking on this
matter are therefore to be welcomed and it is strongly recom-
mended that the necessary follow-up be given in terms of basic
research, consultations and legislative and other relevant propo-
sals, starting with the publication of a Green Paper defining and
identifying the terms of the issue and giving a voice to all the
parties concerned, by means of extensive public consultation.

1.8
Furthermore, the EESC calls on the European Parliament
and the Council to take on board the major concerns that this
opinion attempts to address on behalf of civil society and make
them a priority in their respective political agendas.

2. Introduction

Credit has undeniably enabled people in Europe to
2.1
improve their quality of
life and access essential goods and
services which would otherwise have been beyond their reach
or only affordable after a considerable length of time, such as
their own homes or means of transport. Nevertheless,
if the
conditions under which credit is provided are not sustainable —
if serious employment problems arise, the monthly burden of
debt exceeds a reasonable proportion of available monthly
income, too many loans have been taken out or there are no
savings to help tide people over times when they have no
income — credit can lead to situations of over-indebtedness.

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2.2
In fact, the problem of over-indebtedness and its social
consequences is not new. Its origins might even be glimpsed as
far back as times of Classical Antiquity, more specifically the
agrarian crisis suffered by Greece in the VIth century BC and
Solon's measures (594/593 BC), first of all to write off the debts
of farming small-holders who had been reduced to slavery and
sold off, and then to free these people and reintegrate them into
Athenian society and productive life as free citizens (1).

2.3
However, there is no doubt that nowadays this phenom-
enon is becoming increasingly widespread and assuming
worrying proportions. People are becoming more aware of it as
a social problem in a society hallmarked by sharp contrasts,
where discrepancies continue to grow and solidarity is much
less in evidence.

2.4
It is against this background that the question of banking
exclusion is to be seen, denoting the marginalisation of those
who, for various reasons, are prevented from having access to
basic financial services (2).

2.5
This opinion seeks to pinpoint the main causes of this
problem, its scale, the remedies most frequently brought to bear
and the reasons for seeking a solution at Community level.

3. Scale of the problem

3.1 Social exclusion and banking exclusion

3.1.1
According to the Eurobarometer Report of February
2007 (3), around 25 % of Europeans feel that they are at risk of
sliding into poverty and 62 % believe that this is something that
could happen to anyone, at any time of life.

3.1.2
Data from the European Commission's 2007 Joint
Report on Social Protection and Social Inclusion indicate that in
2004, 16 % of the EU15 population lived below the poverty
line, which is set at 60 % of
the average income of each
country (4).

(1) As referred to by Aristotle in his treatise on the ‘Constitution of Athens’
(in part 6 in particular, which states: ‘As soon as he was at the head of
affairs, Solon liberated the people once and for all, by prohibiting all loans on
the security of the debtor's person: and in addition he made laws by which he
cancelled all debts, public and private. This measure is commonly called the
Seisachtheia, since thereby the people had their loads removed from
them’ [translated by Sir Frederick G. Kenyon] and whose ‘identity’ of
situations will have influenced the fascinating contribution by Udo
Reifner entitled ‘Renting a slave — European Contract Law in the Credit
Society’ at the conference on private law and the various cultures of
Europe, held at the University of Helsinki on 27 August 2006. Note
that imprisonment for debtors still applied in most European countries
until the XXth century.

(2) On this subject, see the recent contribution by Georges Gloukoviezoff
entitled ‘From Financial Exclusion to Overindebtedness: The Paradox of Diffi-
culties for People on Low Incomes?’ in ‘New Frontiers in Banking Services’,
Luisa Anferloni, Maria Debora Braga and Emanuele Maria Carluccio,
Springer.

(3) Cf. Special Eurobarometer 273, European Social Reality, 2007.
(4) 2007 Joint Report on Social Protection and Social Inclusion, adopted
by the Council on 22.2.2007 (COM(2007) 13 final of 19.1.2007).

3.1.3
In qualitative terms, poverty corresponds to a lack or
inadequacy of material resources for meeting the vital needs of
an individual; this is the most visible aspect of social exclusion,
which pushes the individual back out to the margins of society,
thus generating feelings of rejection and self-exclusion.

The extent and form of social exclusion depend,

3.1.4
in
each country, on a number of variables such as the social
security system, the way the labour market operates, the justice
system and informal solidarity networks.
Immigrants, ethnic
minorities,
the elderly, children under 15, people on low
incomes with few educational qualifications, people with disabil-
ities and the unemployed are the most vulnerable to poverty
and social exclusion.

3.1.5
In most European countries, consumer trends indicate
a relative fall in spending on foodstuffs, drink, tobacco, clothing
and footwear, and a relative rise in expenditure on housing,
transport and communication, health services, culture and other
goods and services such as health care, tourism and hotel and
catering services (5).

the term, which includes

3.1.5.1
This new distribution in household spending tends to
be reflected in the use of credit. Consumer credit in the broad
the purchase of both
sense of
consumer goods and housing,
is nowadays closely linked to
new patterns of consumption and closely follows the ups and
downs of developments in these patterns. Thus, the increased
share of spending on domestic utilities, transport and travel (6)
frequently involves payment by credit.

3.1.5.2
Another factor encouraging the increase in consumer
credit is the fact that a) the latter has lost its negative connota-
tions of poverty and guilt in respect of the way that people lead
their lives or manage their businesses, mainly in countries
where people are predominantly catholic, as compared to
protestant, in upbringing, and b) it has become quite common,
especially in the big cities. Pushy, systematic advertising by
financial bodies to attract new clients is encouraging more
people to take out loans. In addition, consumer credit confers
status and makes it easier to camouflage people's social back-
ground, allowing them to adopt a lifestyle characteristic of a
class higher than their own. For many families, credit is a
common way of managing a household budget (especially using
credit cards), where the risks are known; however not enough
information is provided on these risks or on the effective solu-
tions to the problem, and even the extent of the risks has not
yet been properly quantified.

(5) Cf. Eurostat — Les nouveaux consommateurs (The new consumers),

Larrousse 1998.

(6) Whilst not overlooking the considerable differences between these

three, even in terms of fundamental rights.

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3.1.6
These determining social and cultural factors are also
underpinned by economic and social ones such as the sharp
drop in interest rates over last decade, the fact that people have
a lower propensity to save and persistently low unemployment
rates, all combined with economic growth (despite the crisis of
the late nineties which nonetheless did not assume the same
proportions as previous such crises). On top of this has come
deregulation, which targeted the whole of the credit market
from the late seventies and early eighties onwards (7), triggering
a rapid expansion in the scale and number of credit providers,
including some not subject to monitoring and financial supervi-
sion, together with an increase in competition between them, all
leading to a depersonalisation of the bank-customer relation-
ship.

These factors together have all meant that European
3.1.7
society is becoming increasingly dependent on credit being
granted for people's key needs to be met. The growing extent of
indebtedness in most Member States clearly illustrates this
fact (8).

If credit is taken out on a sustainable basis — where
3.1.8
there are no serious employment problems, where the share of
monthly debt payments as part of monthly disposable income
is not excessive, where the number of loans taken out is not
high and where there are some savings to tide people over occa-
sional periods without income — it can help people improve
their quality of life and allow them access to essential goods and
services which they could not otherwise afford, or only after a
long time, such as housing and private cars.

3.1.9
Nevertheless, the prospect of something going wrong
in private or family life, causing financial commitments not to
is a risk run by everyone
be met at a particular moment,
signing a credit contract. Thus, normal, controlled indebtedness
can for a variety of reasons become uncontrolled over-indebted-
ness.

3.2 Concept and measure of over-indebtedness

Over-indebtedness refers to situations where the debtor
3.2.1
is unable to pay all his debts on a long-term basis, or where
there is a serious risk that this might be the case when the debts
fall due (9). Nevertheless, the precise terms of this concept vary

(7) This only occurred in the new accession countries in the 1990s.
(8) Cf. The data set out
December 2005. URL:
http://www.banque-france.fr/fr/publications/telechar/bulletin/
etu144_1.pdf;

in the Bank of France Bulletin No 144,

(9) The exemplary definition by Udo REIFNER states:

‘Over indebtedness
means being objectively unable to pay; more precisely, the relevant income after
deduction of living expenses is no longer sufficient to meet the repayment of
debts when they fall due’ (in ‘Consumer Lending and Over Indebtedness
among German Households’).

considerably from country to country in the EU, and its defini-
tion at European level is still lacking (10). The recent European
Commission initiative to commission a study on this subject is
therefore to be welcomed (11).

3.2.2
Not only is the concept in itself ambiguous and its defi-
nition not straightforward, there are also several different ways
to measure over-indebtedness. Thus, in a study commissioned
by the European Commission (12), there were three different
formulas or models devised for measuring over-indebtedness:
the administrative model (13), subjective model (14) and objective
model (15).

3.2.3
One of the main difficulties in assessing the scale of
over-indebtedness in Europe relates to the lack of reliable statis-
tics, and the fact that is impossible to draw comparisons with
existing data, given the different methods, concepts and time
periods applied. This is one area to which the Commission

(10) The concept of over-indebtedness underlying the highly diverse legisla-
tive initiatives is above all derived from the legal rules setting the
access conditions to any debt restructuring procedure, be it extrajudi-
cial or judicial. Thus, for example, French law allows access to debtors
acting in good faith who are clearly unable to meet the whole of their profes-
sional debts due or falling due (Article L.331-2 of the Code de la Consomma-
tion). Likewise, Finnish law (1993) considers debtors to be over-indebted or
insolvent when they are not in a position to pay their debts when they fall due,
where this is a permanent situation and not only accidental or temporary.
Other countries, however, limit their definition to a series of proce-
dural and personal requirements for access to schemes for dealing with
over-indebtedness, without risking a definition thereof. Such is the
situation in Belgian law (Law of 5 July 1998, amended by the Law of
19 April 2002) and North American law (Bankruptcy Code, revised in
2005).

(11) ‘Common operational European definition of over-indebtedness (Contract
No VC/2006/0308, of 19.12.2006)’,
financed by the European
Commission, DG Employment, Social Affairs and Equal Opportunities
and conducted by the European Savings Observatory.

(12) ‘Study of the Problem of Consumer Indebtedness: Statistical Aspects (contract
No B5-1000/00/000197)’, carried out by OCR Macro for DG SANCO.
(13) The administrative model: the measure of over-indebtedness is given by
official statistics referring to formal procedures for dealing with such
cases. This option leaves out a part of the actual situation, since not all
debtors in difficulty make use of official, legal proceedings. Moreover,
the variety of legal solutions in place in the different countries of
Europe make it impossible to draw exact comparisons between them.
(14) The subjective model is based on individuals' or families' perceptions of
their financial solvency. Families consider themselves to be over-
indebted when they state that they have major difficulties in paying all
their debts or are already unable to do so. The criterion in this model is
also difficult to apply in practice, compromising the comparability of
data. An increasing number of people are drawing attention to the fact
that people's judgement is clouded by overoptimism, underestimation of
risk and hyperbolic discount when assessing financial sustainability and
deciding about whether or not to use credit to make payments.

(15) The objective model uses the economic and financial situation of house-
holds as a measure of inability to pay, i.e. the relation between total
debt and net salary or between total debt and net salary and assets
together. This is the formula generally used by financial institutions
and also by some national legal systems. Although this is not without
its problems, such as knowing to what extent the debtor's behaviour,
honesty and good faith should have an influence on access to a system
for settling and writing off debts, this is one criterion which enables
comparisons to be drawn and which may provide a basis for devising a
common legal concept of over-indebtedness.

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should devote more attention, carrying out the studies needed
to obtain and process reliable, comparative data.

4. Main causes of over-indebtedness

in the
The numerous sociological studies carried out
4.1
various Member States have pinpointed the following main
causes of over-indebtedness:

a) unemployment and deteriorating work conditions;

b) changes in the structure of households as a consequence of,
for example, divorce, death of a spouse, unplanned child,
unexpected support needed for older people or invalids,
illness or accident;

c) failed attempt at self-employment, collapse of a small family
business for which personal guarantees have been put up;

d) advertising and marketing campaigns pushing people to
consume, offering easy credit and encouraging people to
gamble, play the stock market and boost their status;

e) higher interest rates, the negative effect of which is felt above

all in long-term loans, such as mortgages;

f) bad household budget management;

g) deliberate concealment by customers of

information that

would enable financial institutions to assess their solvency;

h) excessive use of credit cards, revolving credit and types of
personal credit extended by financial companies, with high
interest rates;

Sociological analysis of
the phenomenon thus indicates that
there is a predominance of passive causes, although it should be
pointed out that in some countries, bad financial management
the
has also been recognised as being at
problem (16). This suggests that individuals encounter difficulties
in managing their budgets in a careful, sustainable fashion (17).

root of

the

4.2
Financial exclusion is normally reflected in difficult or
denied access to the basic financial services market, namely for
opening a current account, using electronic means of payment,
being able to make bank transfers and taking out insurance for
credit protection.

Such financial exclusion includes, a fortiori, difficult or
4.3
denied access to low-cost loans enabling the purchase of essen-
tial goods and services for a family household (house, domestic
appliances,
self-employment
start-up, or the management of a small one-person or family
business.

education),

transport

and

a

4.4
Nowadays, access to a bank account, to certain forms of
credit and electronic transfers between accounts is an essential
pre-condition for accessing key goods and services. Employ-
ment, a small business, a house to live in, house fittings, trans-
port, information and even food, clothing and leisure all require
access to credit and banks — the latter thus bearing a special
social responsibility for providing something almost akin to a
public service.

It

is here that

the line becomes blurred between a
4.5
growing and increasingly impoverished middle class and those
who are definitively excluded, homeless, beggars, and those
dependent on charity. It is precisely at this threshold of poverty
that the prevention of over-indebtedness makes sense, together
with ways to deal with and recover from it, and also to prevent
those who are socially and economically surviving or recover-
able from falling irreparably into a cycle of poverty and social
exclusion.

i) credit obtained on the informal market, above all by people

with low incomes, at usurious interest rates;

j) credit used to pay for other loans, creating a snowball effect;

with it

5.1 Prevention

5. Prevention of over-indebtedness and ways of dealing

k) the fact that socially isolated disabled people and people
with limited cognitive skills can easily fall prey to aggressive
lenders;

l) The unwillingness of certain financial

institutions to rene-
gotiate debt repayment with less well-off consumers who
find themselves in financial difficulties.

In national systems, the emphasis tends to be on measures to
prevent over-indebtedness, including:

(16) Bank of France figures for 2004 estimate that 73 % of over-indebted-
ness files submitted to the Commissions for Over-indebtedness are
rooted in passive causes.

(17) On the factors affecting over-indebtedness, see the EESC Information
Report of 26.6.2000,
entitled ‘Household over-indebtedness’
(rapporteur: Mr Ataíde Ferreira) in which the subject was examined
extensively.

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a) More complete and widely available information on
financial services in general, their costs and the way in
which they operate.

by the public authorities, as an essential condition for
ensuring that those unable to access private pension funds
are not excluded from society (19).

b) Financial education, included from an early stage in school
curricula and other areas of education and training, such as
lifelong learning processes reflecting the needs and skills of the
individuals it aims to assist, which can be varied throughout
life cycles and in keeping with the culture, values system,
socio-demographic and economic characteristics, consumer
standards and indebtedness of those concerned. It is worth
highlighting the fact
the
‘media’ and in particular television, with its public service
remit, have — with the cooperation of consumers' associa-
tions and the financial institutions themselves — broadcast
programmes to raise awareness of the issues of credit and
indebtedness, often at peak viewing hours. Moreover, adult
education structures, like those provided in some countries
by family education centres, should be used.

in some Member States,

that

c) The creation or extension of financial advice networks
that help people to a) manage their budget in a balanced
way, b) choose the best options for financing their purchases
ensuring that the balance of
information is not skewed
towards the financial institutions and c) draw up sustainable
repayment plans by means of simulations before credit is
granted.

d) Incentives to save (such as tax breaks and social and
educational incentives), which would be a household's first
line of defence when faced with financial difficulties. Such
incentives could also act as a counterbalance to aggressive
publicity advertising credit.

e) The use of credit scoring systems, whether these are
credit institutions' own systems or contracted out to specia-
list companies, in order to assess clients' credit risks. This
enables the lender to gauge the risk of insolvency by asses-
sing a whole series of variables and setting objective limits
for individual and household debt (18).

f) The guarantee of proper pensions, early retirement provi-
sion and other social benefits for people outside the labour
market, incorporated into effective social security schemes

(18) Whilst this is an important risk-management instrument for financial
institutions, there is a need for greater transparency in the content of
scoring systems and for these to be combined with subjective means
of analysis so that an accurate, realistic assessment can be made of
debtors' ability to repay and so that decisions are not based solely on
automated models. There is also a need for the variables of the mathe-
matical model to be monitored by the relevant public authorities. In
addition, consideration should be given to the possibility of giving
debtors access to their credit reports, as happens in countries such as
the USA and the United Kingdom, so that individuals can see how to
improve their credit rating.

g) Access to basic insurance for securing credit as a means

of protecting against financial risk (20).

h) Social credit, microcredit and affordable credit

Schemes such as microcredit, credit unions, savings banks,
the German and Dutch social funds, post office banking and
social credit are, alongside other schemes starting up in the
Member States, examples to bear in mind for people at risk
of exclusion who are seeking affordable credit. Microcredit,
for example, has helped finance small businesses and
self-employment, enabling some of
the unemployed to
re-enter the labour market and start some economic activity
again.
institutions
provide specialist assistance (in management, accounting,
commerce, etc.) to help the beneficiaries of microcredit to
manage their activity, a practice already being adopted in a
number of cases (21).

is recommended that

the financial

It

i) Responsible lending, which requires credit institutions to
pay greater attention to the needs and situations of their
individual borrowers, to find the financial instrument most
appropriate to each one's circumstances, and even to deny
further credit where there is imminent risk of over-indebted-
ness (22).

(19) Furthermore, it is essential to prevent financial practices which seek to
misuse the pensions of the most dependent members of society by
using pensions as guarantees for loans that are disproportionately high
in relation to their means to repay them. In Brazil, for example, a type
of credit targeting the elderly, known as ‘crédito consignado’ [a loan
granted against income], was set up in 2004. This special type of credit
is deducted from pensions at source, up to a maximum of 30 % of the
pension's total value. The fact that the interest rates offered are lower
than those available on the market does enable pensioners to access
credit; however this appears to be causing financial difficulties for
people on the lowest pensions, causing them to default on other repay-
ments and depriving them of sufficient resources to meet their basic
needs.

(20) Insurance plays an ambivalent role in relation to social exclusion.
Compulsory life insurance can exclude people with health problems
from the credit market, but a life insurance policy can also prevent
someone who unexpectedly falls ill from losing their insured assets
and thus sliding into poverty and exclusion.

(21) In France and Belgium, consumer microcredit (known as social micro-
credit) is being used in an experimental scheme by a number of
banking networks, in partnership with relevant associations. To date,
the experiment has been reasonably successful but it is still too early to
be able to make a definitive assessment. To be highlighted in the case
of Belgium is the experience of Credal, a Belgian social credit coopera-
tive, created under a public/private partnership between the Walloon
Regional government and a number of financial institutions.

(22) See for example the ‘Protocollo sullo sviluppo sostensibile e compatibile del
system bancario’ signed on 16 June 2004 in Rome between the ‘Associa-
zione Bancaria Italiana’ and the ‘Federazione Autonoma Lavoratori del
Credito e del Risparmio Italiani (Falcri)’, the ‘Federazione Italiana
Bancari e Assicurativi (Fiba-Cisl)’, the ‘Federazione Italiana Sindacale
Lavoratori Assicurazioni e Credito (Fisac-Cgil)’, the ‘Uil Credito, Esatt-
orie e Assicurazioni (Uil C.A.)’.

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j) Credit history files

reduce distortions
promote social responsibility amongst credit institutions.

in competition on the market and

The use of databases containing either customers' entire
financial histories (positive credit history files) or just their
repayment problems (negative credit history files) helps
credit institutions ascertain customers' levels of indebtedness
and provide a sounder basis on which to grant loans. This is
in particular relating to
despite the acknowledged risks,
positive credit history files, in terms of privacy protection,
and the fact that such files provide no help where there is
passive indebtedness, a) since it is impossible to predict
what might cause similar situations in the future and
b) because they take no account of other, non-financial
debts (for example, debts relating to essential services and
the payment of taxes).

k) Self- and co-regulation,

leading to the establishment of
Codes of Conduct by financial bodies, specifically in part-
nership with consumer protection organisations, can help
prevent some abusive practices and instil a more socially
responsible approach on the part of credit institutions. This
type of measure is also useful for improving the monitoring
of debt collection agencies' activities, helping to regulate the
way in which debtors are dealt with, as a complement to a
rigorous, effectively implemented legislative framework.

l) Prevention of abusive credit practices

Some national authorities, consumer protection organisa-
tions, other NGOs and the credit institutions themselves
have agreed rules and procedures to prevent the use of a
number of predatory and usurious practices that threaten
the most disadvantaged members of society. These practices
include, for example, extremely high interest rates on credit
the telephone or mobile telephone, credit
granted over
contracts, of which the customer
tied to
contracts for a specific purchase, sale, or the provision of
to acquire stock market
services,
shares, sometimes involving shares issued by the same bank
as the one granting the loan, draconian penalty clauses,
credit cards and store cards providing easy access to credit,
the demand for surety and at the same time personal guar-
antees (collateral) for low-value consumer credit contracts,
incomplete or not fully accurate information and advertising
targeting young people. In addition to the beneficial aspects
of responsible credit provision, measures of this nature help

the granting of credit

is unaware,

m) Monitoring advertisements for credit

Although advertising is a legitimate strategy for promoting
financial products, the way in which these products are
advertised calls for close monitoring by the public authori-
ties. The content, vehicles and techniques of advertising
should be subject to strict, harmonised regulation that does
not leave consumers with the idea that credit is risk-free,
easily accessible and without cost. Schemes for self- and
co-regulation and good business practice should also be
encouraged in this
should give
field. These
borrowers complete clarity as to the conditions of the loan
and place a particular responsibility on lenders towards
impairment, are not in a
people who, because of mental
position to appreciate the consequences of entering into a
debt agreement.

schemes

5.2 Dealing with debtors and debt recovery

The two most common models of dealing with insolvent
debtors and of recovering debt are:

The fresh start model, which originated in North
5.2.1
America and has been adopted in some European countries, is
based on the principles of immediately liquidating a debtor's
non-exempt assets and writing off unpaid debts, except those
that cannot legally be written off. This model is based on the
concept of limited debtor liability, on sharing risk with the cred-
itors, on the need to return the debtor as quickly as possible to
economic activity and consumption, and on clearly not stigma-
tising the bankrupt individual (23).

5.2.2
The re-education model, used in some European
countries, is based on the idea that the debtor has failed and
should be helped, but not simply be exonerated of the duty to
fulfil his or her obligations (pacta sunt servanda). This model,
based on the idea of the ‘guilt’ of the bankrupt individual —
whether the failure results from a lack of foresight or from plain
negligence — centres on the renegotiation of debts with the
creditors, with the aim of securing agreement on a general
repayment plan. This plan can be negotiated through the courts
or extrajudicially; what is important is the role played by the
debt advisory and mediation services (24).

(23) For a detailed critical description of this model, see the work of Karen
Gross, who is well-known in Europe, in particular ‘Failure and Forgive-
ness. Rebalancing the bankruptcy system’, New Haven, Yale University
Press (1997).

(24) Some legal systems, such as those in France and Belgium, have
reformed their laws on managing the over-indebtedness of individuals
to incorporate alternative solutions based on asset liquidation. In the
most serious cases, where the repayment plan does not present a solu-
tion, liquidation is possible, followed by debt forgiveness. Nevertheless,
unlike in US law, debt forgiveness is never immediate. The debtor must
complete a probationary period, during which he must set aside part
of his income to pay off the outstanding debt. Only then, and only if
the debtor has demonstrated honest behaviour and good faith, can the
debt be written off. Exceptionally, in France, a debt can be written off
as soon as court proceedings begin, if the judge considers that there is
no hope of the individual's situation improving, even though this
procedure has been little used to date.

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6. Why a Community-level approach is needed

6.1 Background

6.1.1
This is not the first time that the issue of over-indebtedness has been addressed at Community level
or even from a Community perspective, within the EU institutions. On 13 July 1992, in its resolution on
future priorities for the development of a consumer protection policy, the Council considered studying
over-indebtedness as a priority for the first time. Since then, however, although the phenomenon of
over-indebtedness has been becoming increasingly serious in the various Member States, resulting in most of
them adopting specific legislative and administrative measures to deal with it, the question of a Commu-
nity-level approach has been all but forgotten.

In May 1999, the EESC decided to reopen the debate on the issue, first drawing up an information report
on ‘Household over-indebtedness’, followed by an own-initiative opinion on the same subject in 2002; the
reader is referred to the comments and recommendations contained therein (25).

In fact, while the Committee was drawing up these documents, the Luxembourg Consumer Affairs
6.1.2
Council of 13 April 2000 took a fresh look at the issue and drew the Commission's and Member States'
attention to the need for Community harmonisation in this field. Following this, the Council adopted its
Resolution on consumer credit and indebtedness (26), in which, noting the rapid growth of the phenomenon,
it urged the Commission to take steps to plug the gaps in information on the real extent of over-indebted-
ness in Europe and to examine thoroughly the possibility of harmonising measures to prevent and deal with
cases of over-indebtedness (27).

6.1.3
It should be pointed out that the Commission has not to date fulfilled its brief from the Council. It
only mentioned the issue of responsible credit provision (28) briefly in its initial proposal to review the
Consumer Credit Directive (2002) (29). These references disappeared, however,
from its final version
(2005) (30), confirmed under the German presidency (31). This situation suggests that
in the field of
consumer credit, it will be difficult for the Commission ever to adopt any new measures to prevent or even
deal with over-indebtedness (32).

(25) These papers were both drawn up by the former Committee member Manuel Ataide Ferreira.
(26) Resolution of 26 November 2001, in OJ C 364, 20 December 2001.
(27) The minutes of this Consumer Affairs Council of 26 November 2001 state that Ministers considered, amongst other
observations and recommendations, that ‘divergences as regards both the preventive and the social, legal and economic treatment of
over-indebtedness in the Member States could therefore give rise to considerable disparities both between European consumers and
between credit-providers’ and thus that ‘(…) consideration could be given at Community level to complementing the measures to
promote the development of cross-frontier credit with measures to prevent over-indebtedness throughout the one credit cycle’.

(28) In terms that are highly debateable, as the EESC stated in its opinion on that proposal (CES 918/2003, 17 July 2003):
rapporteur, Mr Pegado Liz. See also ‘La prevención del sobreendeudamiento en la propuesta de directiva sobre el credito e los consu-
midores’ [‘Preventing overindebtedness in the proposed directive on credit and consumers’] by Manuel Angel, López Sánchez, in
‘Liber Amicorum Jean Calais Auloy’, p. 62.

(29) COM(2002) 443 final, 11 September 2002.
(30) COM(2005) 483 final/2, 23 November 2005.
(31) It is, however, worth highlighting some initiatives for public debate promoted by different Community institutions,
including the Commission, on the issue. These include: a public hearing held in Stockholm with the support of the
Swedish presidency on 18 June 2000; a major conference held on 2 July 2001 in cooperation with the Consiglio Nazionale
dei Consumatori e degli Utenti [Italian National Council for Consumers and Users] (CNCU) on ‘Competition rules in the EU and
banking systems in conflict’, at which the Director at the Financial Services Directorate, DG SANCO, presented the
approaches adopted in the proposal for the new consumer credit directive and over-indebtedness problems at Community
level; on 4 July 2001, DG SANCO organised a hearing of government experts in Brussels to discuss proposed changes to
the consumer credit directive, at which various aspects of preventing over-indebtedness were highlighted; during the
Belgian presidency a major seminar was held in Charleroi on 13 and 14 November 2001 on the theme of ‘Consumer credit
and Community harmonisation’, at which the Belgian Minister for the Economy and Scientific Research in particular raised
the social and economic aspects of the issue, stressing the link with the development of financial services and cross-border
trade in the internal market. A European Commission expert also gave a presentation on the broad guidelines for the
review of the consumer credit directive, in which certain concerns about consumer information relate to preventing over-
indebtedness; and the ‘Conference on consumer over-indebtedness: protection mechanisms in Europe’, promoted by the PSOE
[Spanish Socialist Workers' Party] and by the Socialist Group in the EP, in Madrid on 29 November 2002.

(32) Curiously, in other texts such as the Commission Proposal on the SEPA (Single Euro Payments Area), a number of concerns

are expressed with regard to preventing over-indebtedness.

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6.1.4
Recent references in some Commission documents, albeit few and far between, and even in state-
ments by the Commission President, do appear, however, to express a possible shift towards paying closer
attention to the phenomenon (33).

6.1.5
In view of its importance, particular reference should be made to the Council of Europe Resolution
adopted by European Ministers of Justice on 8 April 2005, on ‘seeking legal solutions to debt problems in a
credit society’ (34), which, whilst expressing concern at the ‘easy access to credit that can in some cases result in the
over-indebtedness of households creating social exclusion of individuals and their families’, clearly opens the way to
preparing ‘an appropriate instrument defining legislative and administrative measures, and proposing practical reme-
dies’ (35).

Furthermore, renewed awareness of

6.1.6
the problem appears to have been stimulated by recent
academic studies (36) and others specifically requested by the Commission (37), having been the subject of
recent public remarks by certain Heads of State and ministers from some Member States (38).

6.2 The possibilities, need and opportunity for Community-level action

6.2.1
only possible and desirable, but is actually necessary and even urgent.

The EESC has long argued and is now again stating that Community-level action in this field is not

6.2.2
The EESC is not unaware that, under the terms of the Treaty and following the failure to adopt the
constitutional text (39), the purely social aspects of over-indebtedness as a cause of social exclusion do not
fall within the EU's specific remit.

6.2.2.1
Nevertheless, various provisions of the Treaties on European Union and establishing the European
Community stipulate both shared powers and actions and measures to back up and encourage Member
States' policies in this area (40), which it is up to the Commission to secure and develop.

6.2.2.2
the third pillar, coming under cooperation in judicial matters (41).

It should be added that some areas for potential action at Community level are now covered by

(33) See in particular, the Eurobarometer survey published late 2006, the Communication entitled ‘A Citizens' agenda’ adopted
by the Council in July 2006 and the Commission Communication on the Joint Report on Social Protection and Social
Inclusion 2007 (COM(2007) 13 final, of 19 January 2007).

(34) Adopted at the Council of Europe's 26th Conference of European Ministers of Justice, held in Helsinki on 7 and 8 April

2005.

(35) As a follow-up to the well-drafted ‘Report on Legal Solutions to Debt Problems in Credit Societies’ by the Council of Europe's

Bureau of the European Committee on Legal Co-operation, of 11 October 2005 (CDCJ-BU(2005) 11 rev.).

(36) The academic world appears to be particularly interested in the issue of consumer credit and over-indebtedness, as demon-
strated by the recent scientific meeting held in Berlin from 25 to 28 July by the Law and Society Association, which was
attended by a group of researchers from Europe, America (both North and South), Asia and Australia, who discussed, in
the course of 8 sessions, various aspects relating to these matters.

(37) See ‘Consumer Over-indebtedness and Consumer Law in the European Union’, Udo Reifner, Johanna Kiesilainen, Nic Huls
and Helga Springener (Contract No. B5-1000/02/000353, for DG SANCO Sept. 2003);
‘Study of the problem of
Consumer Indebtedness: Statistical Aspects’, ORC Macro (Contract No B5-1000/00/000197, for DG SANCO, 2001);
‘Credit Consumption and Debt Accumulation among Low Income Consumers: Key consequences and Intervention Strate-
gies’ Deirdre O'Loughlin (Nov. 2006);
‘Exclusion and its links to finance: banking exclusion of individuals’ Report
produced by the Centre Walras, Georges Gloukoviezoff; ‘EC Consumer Law Compendium: Comparative Analysis’, 2006,
(contract No 17.020100/04/389299) drawn up by Hans Schulte-Nölke, of the University of Bielefeld for the European
Commission; ‘Financial education & better access to adequate financial services’, carried out by ASB Schuldnerberatungen
(Austria), in cooperation with the GP-Forschungsgruppe: Institut für Grundlagen-und Programmforschung (Germany),
the Association for the Promotion of Financial Education SKEF (Poland) and L' Observatoire du Crédit et de l'Endettement
(Belgium) — the project was co-financed by DG Employment and Social Affairs (September 2005-September 2007).

(38) See, for example, recent speeches by Tony Blair, Stephen Timms and Ruth Kelly in September 2006.
(39) In fact, Article I(3) of the draft Constitutional Treaty states that one of the Union's aims shall be to ‘combat social exclusion

and discrimination, and … promote social justice and protection …’.

(40) Particular emphasis should be placed on the concepts set out in Articles 2 and 34 of the EU Treaty and Articles 2, 3, 136,
137 and 153 of the Treaty of Rome, as amended by the Treaty of Amsterdam. Attention should also be paid to the inte-
grated open method of coordination (OMC) introduced in 2006, aimed at enhancing the EU's capacity to support
Member States' efforts to ensure greater social cohesion in Europe.

(41) See Articles 65 and 67 of the Treaty and the already extensive role of measures adopted to define a European judicial area.

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Lastly,

6.2.2.3
it is the completion of the internal market
itself, now unequivocally geared to the general public and
consumers (42), which requires and warrants the harmonisation
of certain aspects relating to over-indebtedness, and its social
repercussions, prevention and management at Community level,
as a means of preventing distortions in competition and obsta-
cles to the smooth operation of the market.

6.3 Main areas of activity at Community level

6.3.1 A single concept of over-indebtedness

6.3.1.1
Steps to achieve harmonisation should primarily
involve defining the concept and qualitative and quantitative
parameters of the phenomenon in order to secure full informa-
tion and proper observation of the underlying social circum-
stances,
in identical terms throughout Europe — and ideally,
throughout the world — based on the compilation and proces-
sing of comparable statistical data, which will help define an
economic framework for quantifying this data.

b) joint

in

provision,

responsibility

on
credit
i) acceptance by the applicant of the obligation to inform
the credit provider truthfully about his/her situation and
ii) acceptance by the provider of the obligation to do every-
thing within his/her power to compile an accurate assess-
ment and give the applicant sound advice (44);

based

c) the possibility of cost-free credit transfers;

d) the monitoring of advertising, marketing and commercial

communications on consumer credit;

e) ‘credit scoring’ parameters and a ban on entirely automated

decisions;

f) the guarantee of a basic banking service and that bank
accounts will be universal and transferable and that accounts
will be accessible via electronic means (debit cards);

g) the definition of parameters for microcredit and other types
of social credit and the promotion of ‘alternative’ financial
institutions geared specifically to these sectors;

6.3.1.2
On the basis of this conceptual and methodological
definition, the Commission should sponsor a study covering the
entire Community area, contributing to an assessment of the
economic and social aspects of over-indebtedness (43).

h) identification and sanctioning of unfair commercial practices
and of abusive clauses relating specifically to credit provi-
sion;

i) the right to withdraw from a contract;

6.3.2 Prevention and containment

j) delimitation of the requirement for collateral personal guar-

6.3.2.1
The Commission should also draw up independent,
harmonised legislation for measures that plan for, prevent and
limit the impact of this phenomenon.

There should, in particular, be laws on:

a) exhaustive pre-contractual and contractual information and

after-sales follow-up;

(42) Clearly demonstrated in the excellent Interim report to the 2007
Spring European Council, the Commission communication entitled
‘A single market for citizens’ (COM(2007) 60 final, 21 February 2007),
and in various speeches and interviews given recently by the Commis-
sion President himself.

(43) Data on the situation in Europe are somewhat out of date, referring to
the study published in 2001 by OCR Macro, as mentioned above.
Nevertheless, several Member States acknowledge that the number of
families affected by over-indebtedness has increased significantly in
recent years. Data on the situation in Germany indicate that in 1989,
only 3,5 % of families experienced serious financial difficulties, whilst
in 2005, 8,1 % of German households were over-indebted (In France,
the number of cases brought before the French Commissions for
Over-indebtedness increased at a rate of 6 % per year between 2002
and 2006, when 866 213 cases were heard. In Scotland, also in 2004,
more than 3 000 cases of insolvency were declared. In Sweden,
despite the fact that the annual economic growth rate is one of the
highest in the EU, the number of over-indebtedness cases rose in 2005
by 13,6 % compared to 2004 and by 30,7 % compared to 2003. The
exception would appear to be Belgium, where a well-designed,
well-implemented system appears to be yielding results, with the assis-
tance of recent changes to legislation (the Law and Royal Decree of
1 April 2007, amending the Law of 24 March 2003 and the Royal
Decree of 7 September 2003, on basic banking services). In the USA in
2005, more than 1 600 000 cases of bankruptcy were declared. In
Australia, 81 % of the bankruptcy cases brought before the courts in
2005/2006 concerned individuals. In 2006, 106 629 cases of bank-
ruptcy (either liquidation or proposals) were heard by Canadian
courts.

antees;

k) rules on commissions;

l) regulations governing credit brokers;

m) strengthening the powers and supervisory measures avail-
able to the national authorities responsible for financial
services in this area; and

n) establishing parameters for defining what constitutes usury;

o) adding a provision to the Consumer Credit Directive obli-
ging banks to reply to complaints by a specified deadline.

In addition, in the long term, laws should be drawn up on the
following aspects:

a) a standard social insurance scheme;

b) the guarantee of sustainable pensions schemes and their
standard use in all Member States (possible definition of a
‘28th scheme’);

c) the definition of a system of single credit history files which
fully respects personal data protection requirements and
stipulates who can access the file and the purpose for which
the information is intended (limited to the granting of
credit).

(44) Good examples of this include Sections 79 to 81 of South Africa's

National Credit Act No 34/2005.

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6.3.2.2
At the same time, the Commission should encourage
good practice in this field, promoting the adoption of European
Codes of Conduct, in a system of self- or co-regulation, as part
of a well-defined, effectively implemented coercive legal system.

— solutions favouring consensus and the conclusion of volun-
tary out-of-court payment agreements which make it easier
for debtors to hold on, wherever possible, to assets essential
to their family's wellbeing, such as the home;

6.3.2.3
The Commission should also, at its own initiative or
in cooperation with the Member States, set up specific informa-
tion programmes, educational measures focusing on the prac-
tical aspects of credit use and projects for providing support
and advice in this area, making use of ‘pilot project’ instruments
that have yielded such positive results in other areas (45).

6.3.2.4
Lastly, the EESC suggests that a European Indebted-
ness Observatory be set up to work together with existing
national bodies and others established in the Member States, to
provide a forum for dialogue between all parties concerned,
analyse developments in the phenomenon at European level and
propose and provide back-up for the most appropriate preven-
tion initiatives, subsequently assessing the impact thereof. The
EESC here and now offers to house this observatory within its
own institutional framework, at least until it becomes an inde-
pendent body.

6.3.3 Dealing with debtors and recover y of assets

6.3.3.1
Given the diversity of systems set up at national level,
which have varying origins, principles and methods (46), the
Commission's efforts should primarily focus not on attempts to
secure harmonisation, but rather on defining a reference frame-
work and a set of fundamental principles that should be guaran-
teed by all procedural
law systems covering prosecution for
unpaid debt or debt recovery from individuals, encouraging the
adoption of these principles and enforcing recognition thereof.

6.3.3.2
are:

The most important of these fundamental principles

— rapid solutions accessible to the parties concerned at little or
no cost, which do not hinder access to credit or stigmatise
debtors and their families;

— measures which take account of creditors' legitimate inter-
ests, but also of their responsibilities as regards household
indebtedness;

Brussels, 25 October 2007.

— flexible measures enabling debtors to opt,

in the most
serious cases, to liquidate their attachable assets, with the
forgiveness of unpaid debts taking due account of the situa-
third parties who have stood guarantee for the
tion of
debtors;

— specialist monitoring of debtors throughout the process of
implementing post-bankruptcy payment plans, in order to
prevent the same problems re-occurring and help debtors
change their patterns of consumption and indebtedness, so
that they can make a genuinely fresh start.

6.3.3.3
All of this work should, however, be opened up to
involve the stakeholders and their representatives. It is suggested,
therefore, that prior public consultation be held by means of
the publication of a Green Paper defining the terms of the
matter in hand, quantifying it at European level, analysing the
different means and systems for preventing, monitoring and
remedying situations of over-indebtedness and concluding with
an outline for integrated action at Community level between the
various Directorates-General concerned and also involving the
authorities and civil society organisations in the various Member
States and at Community level (47).

7. Public hearing

7.1
On 25 July 2007, the EESC held a public hearing on the
subject of this opinion, attended by a number of guest partici-
pants who are specialists in this field.

On the basis of

the opinions expressed at a very
7.2
well-attended session which produced a number of extremely
useful papers, there was clearly considerable support for the
aims of this opinion, which takes on board many of the sugges-
tions made at the event.

The President

of the European Economic and Social Committee

Dimitris DIMITRIADIS

(45) There are, for example, cases of mediation and extrajudicial consumer
dispute settlement projects which paved the way for the different
networks currently in place in Europe; one of the most relevant of
these to the matter in hand is ‘Consumer DebtNet’, established in 1994
and currently being redesigned under the name ‘European Consumer
Debt Net (ECDN)’.

(46) Moreover, some Member States, such as Portugal, still have no appro-

priate system for this purpose.

(47) In fact, the 2000 EESC information report referred to above concluded
by recommending that the Commission ‘make an initial move in this
direction by immediately preparing a Green Paper on Household Over-indebt-
edness in Europe, incorporating available research into the issue, providing an
up-to-date picture of legal arrangements and statistical data from the Member
States and the applicant countries, working towards a single definition of
over-indebtedness, and defining its preferred approach to achieve the objectives
identified in the present information report’.