Opinion of the European Economic and Social Committee on ‘Accessing consumer and household credit: abusive practices’ (own-initiative opinion)
Date: 2010-04-28
Institutions: European Economic and Social Committee
Subjects: consumer, credit, household consumption, unfair terms of contract








C_2011018EN.01002401.xml










19.1.2011   


EN


Official Journal of the European Union


C 18/24





Opinion of the European Economic and Social Committee on ‘Accessing consumer and household credit: abusive practices’ (own-initiative opinion)
2011/C 18/05
Rapporteur: Mr CAMPLI

On 16 July 2009 the European Economic and Social Committee, acting under Rule 29(2) of its Rules of Procedure, decided to draw up an own-initiative opinion on

Accessing consumer and household credit: abusive practices.
The Section for the Single Market, Production and Consumption, which was responsible for preparing the Committee’s work on the subject, adopted its opinion on 30 March 2010.
At its 462nd plenary session, held on 28-29 April 2010 (meeting of 28 April), the European Economic and Social Committee adopted the following opinion by 75 votes to one with one abstention.
1.   Conclusions and recommendations

1.1   The EESC believes that the creation of a single, transparent, complete regulatory framework for access to credit is essential.
1.2   The EESC calls on the Commission to look at the best way of removing the gaps in the current regulatory framework, particularly as regards credit products supplied, misleading advertising practices, transparency of conditions, credit intermediaries, information asymmetries and education of the parties concerned in financial matters.
1.3   The EESC calls on the Member States to establish supervisory authorities for unfair commercial practices with specific powers in the area of credit.
1.4   The EESC recommends extending the European rapid alert system (RAPEX) to placing of toxic products on the European financial and credit market.
1.5   The EESC calls on the Commission and the Member States to analyse the issue of illegal and/or criminal practices in the field of credit in greater depth, particularly as regards predatory and usurious practices and specific initiatives in the European Area of Justice.
1.6   The EESC recommends establishing a specific, comprehensive European rule governing the various types of credit intermediary, setting out definitions, requirements and behaviour obligations, irrespective of the product marketed and of whether the credit activity carried out is a primary or subsidiary activity.
1.7   The EESC recommends a specific rule for supervision of the activities, practices and actions of those whose intermediary business is ancillary to other businesses, part of a commercial activity.
1.8   The EESC calls for the requirements relating to registration of the various financial and credit intermediaries in a European network of national registers to be defined on the basis of European operating standards covering professionalism, observance of prudential rules and ethics; these should include Community rules for striking off those using abusive or illegal practices, whose behaviour is detrimental to the consumer.
1.9   The EESC believes it is important to look at the possibility of extending to financial and credit products, with appropriate amendments and adjustments, the Community rules on liability laid down by Directive 85/374/EEC, as subsequently amended.
1.10   The EESC recommends introducing on the European market appropriate ranges of ‘certified’ or ‘standardised’ credit products to supplement existing products, in order to promote greater transparency and fair competition in terms of both practices and credit products supplied to consumers.
1.11   The EESC feels that it is essential to launch a European information and training campaign that targets consumers, consumer associations and the professionals who assist them and covers consumers’ rights relating to credit and financial services. European networks for judicial and out-of-court dispute resolution mechanisms (Alternative Dispute Resolution – ADR) (1) must also be developed.
1.12   The EESC considers to be important the creation and promotion, in agreement with the public authorities, of civil society networks for analysis, assistance and supervision concerning situations of social exclusion and poverty associated with credit and over-indebtedness.
1.13   The EESC recommends, in particular, introducing common European procedures for dealing with situations of over-indebtedness, which must also serve as a basis for activation of public initiatives to support or help the people concerned.
1.14   The EESC recommends that the Commission carry out an official study to see whether and how comprehensive European provisions on usury could be introduced, and develop common basic elements and principles which can be used to establish a European range of rates defining a situation of usury.
1.15   The EESC recommends introducing common procedures to promote national systems for combating usury, coordinated under a European regulatory framework.
1.16   The EESC calls for issue of credit cards to be subject to stringent Community rules to prevent predatory behaviour encouraging overindebtedness, making agreements between credit card holders and providers on credit limits mandatory.
1.17   The Community rules must ensure total, transparent protection throughout the EU of the use of information provided by clients, particularly in dealings conducted over the Internet.
1.18   The EESC considers consumer information and education to be essential, with education methodology and practices applied from basic schooling onwards. It recommends promotion of and support for civil society initiatives to ensure clear, comprehensible information.
1.19   Lastly, the EESC recommends bringing forward review of the effectiveness of Directive 2008/48/EC (the first review is due to take place by 12 June 2013) and shortening the periods between reviews from five to three years.
2.   Introduction

2.1   In response to the global financial crisis, attention was focused first on how to restore the financial markets’ stability and liquidity and then on how to consolidate that stability and overhaul the regulatory framework, in order to avoid more market failures in the future.
2.2   While that process is underway and must be stepped up, the EESC firmly believes that every effort must now be made to restore the European public’s confidence in the financial system and ease their minds in respect of the various forms of access to credit.
2.3   The financial crisis led to an economic crisis which is now generating substantial losses in terms of jobs, businesses and individual and household income.
2.4   In this context, there is a rise in social and financial exclusion and poverty
 (2).
2.5   Credit is an important tool for consumers and families as it enables them to cope with expenditure which is essential for a normal, orderly life. In this sense, affordable access to credit is an essential factor in social inclusion.
2.6   However, credit must not be seen or held up as a replacement or supplement for consumer or household income.
2.7   The greatest challenge facing economic, fiscal and social policy is to ensure responsible access to credit without creating a situation of dependence.
2.8   To this end, a regulatory framework is needed which is aimed at avoiding irresponsible lending and borrowing practices and combating all forms of imbalanced information provision between lenders and consumers.
3.   Subject of the opinion

3.1   The opinion discusses abusive situations in the context of loans and illegal situations encountered by consumers which help to exacerbate social exclusion and poverty. It does not address specific issues which have already been dealt with by other EESC opinions.
3.2   The opinion therefore looks at the current regulatory framework, to identify the gaps which allow abusive situations to arise and to put possible solutions to the European and national public authorities. Moreover, it takes an initial look at illegal practices which lie outside this regulatory framework at present; these issues are little-known and difficult to resolve, closely related to abusive practices and often a result thereof. Lastly, the opinion sets out the potential roles civil society could play in resolving the issues identified.
3.3   The Commission said in a recent hearing (3): ‘The financial crisis has shown the damage that irresponsible lending and borrowing practices can do to consumers, lenders, the financial system and the economy at large. We are therefore determined to learn from possible mistakes to ensure that lending and borrowing take place in a responsible manner’ (Mr McCreevy, Commissioner for the Internal Market). At the same hearing, the Commission said: ‘It is our duty to open our eyes to the vicious mechanisms that have generated the irresponsible lending and borrowing that is now financially hurting a good number of our citizens’ (Ms Kuneva, Commissioner for Consumer Affairs).
3.4   The ultimate aim of the opinion is, therefore, also to help improve the operation of the Single Market, assessing what solutions can be proposed at Community level and what solutions could be provided at Member-State level while still part of a common framework. The EESC believes that supranational issues require solutions to be provided at this level to avoid fragmentation of the Single Market.
4.   The current regulatory framework: gaps and possible areas for action

4.1   As regards consumer credit agreements, the principal European legislation is Directive 2008/48/EC (CCD). The CCD provides for full harmonisation: in other words, Member States cannot continue to apply or introduce divergent national regulations, even if these regulations give consumers greater protection. The Directive sets out the general framework of consumer rights in the field of consumer credit, but does not apply to mortgage credit.
4.2   To supplement this framework, Directive 2005/29/EC on unfair business-to-consumer commercial practices lays down a general framework for definition and punishment of unfair commercial practices. Where ‘financial services’ are concerned, it provides for minimum harmonisation, allowing Member States to introduce more restrictive or stringent consumer protection rules.
4.3   There are no European rules on mortgage credit; national rules vary according to the different cultures and domestic markets. However, there is a European code of practice on the pre-contractual information to be provided to consumers and a standard consumer information sheet (ESIS). This code is, however, only voluntary and its scope is extremely limited.
4.4   The EESC acknowledges that the current rules provide a range of possible solutions for dealing with abusive lending practices. However, substantial gaps still need to be filled at EU level, and national and EU authorities still have a lot of work to do, including on implementation and penalty systems.
4.5   The EESC notes, moreover, that one reason why the financial crisis became so serious was the sales pressure on employees in the credit and financial sector. The pressure to achieve increasingly high sales targets irrespective of whether products tallied with consumers’ profiles led to the portfolios of businesses, consumers and, in some cases, municipal authorities being contaminated by the spread of toxic products.
4.6   The EESC believes that this was caused partly by the systems of incentives and bonuses for top managers, which in some cases increased their income out of all proportion: the point was reached where the CEO of a large financial institution was earning 400 times as much a year as an employee. Despite all the commitments and solemn promises made by EU Heads of State and Government, the EESC notes that tangible, effective measures have yet to be taken to address these issues.
4.7   First and foremost, the current regulatory framework for credit agreements does not include a requirement to gear supply to consumers’ needs. Article 8 of Directive 2008/48/EC establishes a welcome requirement to assess consumers’ solvency. Article 5(6) only stipulates that creditors must provide consumers with adequate explanations to enable them to assess whether the proposed credit is suitable, where appropriate by explaining the pre-contractual information, the essential characteristics of the products proposed and the specific effects they may have on consumer, and gives Member States a certain margin in practical application; it does not define rules on adapting products to needs.
4.8   This loophole has allowed abusive situations to arise where the products sold to consumers are sometimes unsuitable for their needs. This is the case where only one type of credit is available or credit/debit cards are provided indiscriminately for purchase of products in certain department stores (as part of a commercial activity).
4.9   In this connection, the EESC stresses the need to keep provision of credit cards quite separate from supply of commercial products or promotion practices related thereto.
4.10   With regard to advertising, the EESC notes that while the current rules include requirements on standard information needed to sign credit agreements (Directive 2008/48/EC, Article 4 et seq.), there are no specific requirements on practices which are misleading, aggressive or, in any case, likely to lead to indebtedness (4).
4.11   The EESC is aware that, in a market economy, it should be left to the market to strike the right quantitative and qualitative balance between supply and demand. However, when the market fails to come up with appropriate solutions, the public authorities have to intervene, and it is their responsibility to provide adequate responses to social needs.
4.12   The EESC feels that one possibility would be introducing on the European market appropriate ranges of ‘certified’ or ‘standardised’ credit products. These products could supplement existing products. This would make it easier for consumers to find a product which is more convenient and suited to their needs (5).
4.13   The EESC therefore believes it is necessary for the Commission to explore legal and procedural bases for making the European market more transparent, with ‘certified’ or ‘standardised’ credit products, and for putting in place a European rapid alert system, in order to monitor placing of toxic products on the European financial and credit market.
4.14   From another point of view, it is important to look more closely at credit suppliers’ liability, in order to limit the number of products which are not suited to consumers’ needs. To this end, common procedures need to be introduced at European level to address situations of over-indebtedness, with subsequent activation of initiatives to support and/or help people reduced to over-indebtedness by, inter alia, abusive lending practices.
4.15   Another situation which European legislation fails to cater for is usury. Usury is regulated in certain Member States (Spain, France, Italy, Portugal), but not in all.
4.16   Furthermore, recent research (6) shows that regulating usury could have a beneficial impact in terms of both combating social exclusion and poverty and combating abusive practices.
4.17   The EESC feels that the Commission should carry out an official study to see whether and how comprehensive European provisions on usury could be introduced. In particular, the EESC feels it would be useful to define in greater depth common basic elements and principles which could be used to establish a European range of rates defining a situation of usury.
4.18   In order to build on and exploit experience accumulated in a number of Member States over many years, the EESC feels it would be useful to establish a European regulatory framework for promotion of national systems to combat usury and assist victims thereof.
4.19   The EESC notes that most abusive credit practices take place in relations between credit intermediaries and consumers.
4.20   In this connection, the European Parliament has called (7) for a Community framework to clarify and harmonise the responsibilities and liabilities of credit intermediaries following the principle ‘same business, same risks, same rules’, in order to ensure consumer protection and avoid non-transparent sales practices and inappropriate forms of advertising which are particularly damaging to more vulnerable, less-informed groups of consumer. The EESC supports this and believes that such a framework would contribute to cleaning up the supply market and a stronger stand against abuse, irresponsible credit intermediaries and the illegal activities of loan sharks.
4.21   The EESC feels that establishing a register of credit intermediaries could ensure transparency, reliability and professionalism; there should be binding registration criteria, with monitoring by bodies made up of professional banking associations, financial intermediaries/brokers and consumer associations under the oversight of supervisory authorities, and specification of grounds for suspension, deletion and striking off and the existence of joint and several liability in the event of damages proved in a criminal court.
4.22   Practices such as text message loans targeting young people, ‘easy’ telephone loans, payday loans and indiscriminate supply of credit or debit cards are the backdrop to abusive practices. All possible means must be employed to combat them. With regard to these situations, Directive 2005/29/EC on unfair business-to-consumer commercial practices provides a number of possible solutions to problems of irresponsible lending which could be adapted and included in the rules on consumer credit agreements as well.
4.22.1   The EESC calls for credit card providers to be strictly regulated (promotions, overall indebtedness ceilings, age of the potential card holder, clarity of statements of account) to prevent predatory behaviour encouraging overindebtedness.
4.22.2   Credit card limits, in particular, should be set in agreement with the card holder. Any further increase in these limits should only occur following explicit agreement between the card provider and holder.
4.23   However, to be effective, the legislation must be applied more stringently (8). In view of the new situation created by the global financial crisis, the EESC stresses the need to bring forward review of the effectiveness of Directive 2008/48/EC (the first review is due to take place by 12 June 2013) and shorten the periods between reviews from five to three years. In the field of unfair commercial lending practices, in particular, the EESC feels that it is important for Member States to establish market regulators with appropriate, specific powers and technical resources in the field of credit.
4.23.1   In particular, the EESC calls for a stronger regulatory framework to ensure total, transparent protection in the use of information provided by clients, particularly via Internet or email.
4.24   In the case of mortgage credit, and subject to the precautions described in its previous opinions on this subject (9), the EESC feels it is appropriate to assess the option of making the ESIS and indications regarding interest rates binding for credit intermediaries as well, as per the Directive on credit agreements for consumers. This could bring about greater integration of the European mortgage credit market and comprehensive protection of consumers and households.
4.25   As regards consumer credit advice services, the EESC advocates support for civil society organisations, particularly consumer associations, to develop advice services which can provide those seeking credit with an objective, clear, professional opinion on the suitability of the products on offer to meet their specific needs.
4.26   The EESC stresses that provision of credit advice should be regulated in order to ensure, first and foremost, that both lenders and intermediaries display a high level of transparency and independence.
4.27   To address all these issues, the EESC believes that a coherent, homogeneous European Union single regulatory framework is needed, with principles and rules applying to all credit products.
5.   Abusive and/or illegal credit practices

5.1   The EESC believes that concurrently, the problems must be addressed of that vast world which is concealed behind bogus intermediary and financial services companies and which actually consists of predatory and usurious practices along with criminal practices in the area of interest rates and extortion. This applies, inter alia, to:






—


irregular loans to consumers and households who are in difficulties and have exceeded the debt tolerance threshold;










—


supply of loans with the aim of robbing clients, as in usury – typical of criminal organisations.




5.2   Irregular credit can take a number of forms:






—


provision of ‘unrecorded’ advances of money or other goods, capitalising as much as possible on an individual’s repayment capacity and extending these advances for as long as possible;










—


irregular financing where the lender makes profits by failing to respect codes of ethics, by applying misleading clauses or non-transparent conditions or applying pressure to push up the security requested;










—


loans typically consisting of abusive non-bank lending activities;










—


loans which are clearly usurious, taking various criminal forms and in particular contexts.




5.3   The EESC believes that the growth potential for irregular credit situations is based on the fact that many households and consumers are excluded from the legal credit market, sometimes as a result of irresponsible lending which has left them in a situation of dependence and extreme vulnerability.
5.4   The EESC realises that the problems associated with low household income and the various forms of consumer pressure – which are partly responsible for the fragility that draws consumers and households into illegal loans and parallel money markets – cannot be resolved solely by regulating the credit sector.
5.5   Moreover, abusive and/or illegal credit practices are often punishable under criminal law and should therefore be regulated by specific criminal-law initiatives in the context of the European Area of Justice, enforced by the police forces. Full EU-wide enforcement of national judgments regarding seizure of goods originating from usury or illegal extortion could contribute substantially to combating these practices (10).
5.6   The EESC notes that insufficient data are available in this field, taking all the EU Member States as a whole, to fully reveal the various aspects and extent of the issue on a European scale. It therefore recommends that the Commission, together with the Member States, analyse these situations in detail on the basis of comparable data.
6.   The role of civil society

6.1   Civil society, particularly consumer associations and charitable organisations, has a major role to play in identifying, analysing and overseeing issues related to abusive and/or illegal consumer and household lending practices.
6.2   The EESC therefore feels it is important to create and promote civil society networks, in agreement with the public authorities, to analyse, monitor and provide assistance in situations of social exclusion or poverty associated with borrowing or over-indebtedness. These networks have a key role to play in terms of exchange of information and good practice, including as part of a harmonised complaint system.
6.3   The EESC notes that good practice already exists in this area, such as ‘supported social credit’ or the European Financial Inclusion Network (EFIN), and that this good practice must be encouraged and extended throughout the EU.
6.4   The EESC believes that consumer information and education initiatives, applying education methodology and practices from basic schooling onwards, are something at which the Member States and civil society excel (11). These are important measures for developing financial education at European level throughout the EU.
6.5   The EESC feels that it is important to encourage and develop these activities but stresses that it is the responsibility of lenders to provide information on products and of public authorities to provide education. Moreover, the EESC believes that civil-society initiatives concerning clear, comprehensible information and education will only be effective if they supplement a single, all-embracing regulatory framework.
6.6   At the EESC public hearing held in Brussels on 28 January 2010, involving authoritative representatives of civil society at national and European levels, the need was stressed to bring abusive and/or illegal practices under European control as regards both regulation and support for victims, and education, training and information policies targeting all stakeholders.
6.7   In order to boost a social market economy in the area of credit, the EESC feels it is important to set up and develop social economy businesses such as cooperatives (12). The public authorities are also responsible for supporting and promoting the creation and operation of these kinds of business (13).

Brussels, 28 April 2010.


The President of the European Economic and Social Committee

Mario SEPI




(1)  FIN-NET (Financial Dispute Resolution Network).

(2)  See the Second joint assessment by the SPC and the European Commission of the social impact of the economic crisis and of policy responses - SPC/2009/11/13 FINAL; the Eurobarometer survey on poverty and social exclusion – 2010, European Year for Combating Poverty and Social Exclusion; and the Commission Communication - Joint Report on Social Protection and Social Inclusion at http://ec.europa.eu/social/main.jsp?catId=757&langId=en.

(3)  Public hearing on Responsible lending and borrowing, Brussels, 3.9.2009.

(4)  Good definitions of ‘misleading actions’ (Article 6) and ‘aggressive practices’ (Article 8) are provided, however, in Directive 2005/29/EC concerning unfair business-to-consumer commercial practices.

(5)  See, in this connection, ISO 22222 (Personal financial planning – 2005); UNI-ISO (Personal financial planning – 2008); AENOR-UNE 165001 (Etica. Requisitos de los productos financieros socialmente responsables); and also ECO/266 – Socially responsible financial products.

(6)  See Usury – final report of the Osservatorio socio-economico sulla criminalità (socio-economic crimewatch observatory), CNEL (National Economic and Labour Council) – Rome, 2008.

(7)  EP Resolution of 5.6.2008 - Sector inquiry on retail banking.

(8)  Member States have to comply with EU rules by 12 June 2010.

(9)  OJ C 27, 3.2.2009, page 18 and OJ C 65, 17.3.2006, page 13.

(10)  ‘Faced with what are now global phenomena, governments and institutions can go on feigning ignorance or confining themselves to national responses if they so choose. However, if only they would take note of the boost given to the search for fugitives by the introduction of the European arrest warrant, they would proceed systematically and with all speed to define common investigation and prosecution instruments and core criminal law provisions shared by all the Member States, starting with compensation for damages from crimes of mafia association.’ (See F. Forgione, Mafia export, 2009, Milan).

(11)  UNI (Draft standard on financial education of citizens – service requirements), January 2010.

(12)  See Resilience of the Cooperative Business Model in Times of Crisis, ILO, 2009.

(13)  See OJ C 318, 23.12.2009, p. 22.