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1 SENATE OF THE CZECH NATIONAL PARLIAMENT Loan Providers and Unfair Business Practice An international perspective 9 th April 2008.

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Presentation on theme: "1 SENATE OF THE CZECH NATIONAL PARLIAMENT Loan Providers and Unfair Business Practice An international perspective 9 th April 2008."— Presentation transcript:

1 1 SENATE OF THE CZECH NATIONAL PARLIAMENT Loan Providers and Unfair Business Practice An international perspective 9 th April 2008

2 2 Policis UK based economic and social researcher company Specialising in: Research to support Government policy formulation Credit and financial services markets Consumer protection issues, particularly for low-income and vulnerable consumers Have conducted number of research projects on the impact of regulation on national credit markets Have helped inform framing of consumer credit legislation for regulators in European, US, Asian and Australian markets

3 3 Regulators across the world face similar challenges in regulating credit markets Credit recognised as a force for economic growth and wealth creation But Governments concerned to ensure consumers are adequately protected Main concerns: Unfair lender practice Irresponsible lending High cost of credit for some borrowers Over-indebtedness Insolvency Impact of debt problems on individuals and families Cost to the state of financial breakdown

4 4 Different governments have adopted different approaches Increase consumer protection Prohibition of specific behaviours Broad duty to avoid unfair / bad practice Promote best lender practice Mandated compliance to specified formula Self regulation, codes of practice Encourage responsible lending Reduce cost of credit Promote competition Lending limits Make lenders bear risk of default on demonstrably irresponsible lending Broad duty to lend responsibly Promote efficient data sharing to support lenders decisions Price controls Transparency on pricing and contract terms Closely specified formulae Principles Control of presentation Light touchTight Aim Regulatory approaches

5 5 Regulatory regimes in USA and Japan USA US-wide market in banking & credit cards - sold across State borders Otherwise, regulatory control devolved to individual States - resulting in a diverse patchwork of different rules (some States with rate ceilings, others without) Recent regulations designed to address rapid growth of high cost payday lending: Trend has been to control and regulate rather than simply ban high cost lending Also rules to outlaw bad and unfair practice Japan Rate ceiling introduced in 1980s at 109% APR and progressively tightened since Further recent legislation to address over-indebtedness, bankruptcy, aggressive collection practices and debt-related suicides 2007 saw introduction of tightest regulatory regime in any advanced economy: Sharp tightening of rate ceiling Scope of rate ceiling widened to incorporate penalty charges for missed/late payments Introduction of cap on amount of credit an individual allowed to borrow Increased powers of supervision and enforcement for regulators

6 6 Regulatory regimes in the three largest credit markets in Europe France and Germany have long-established rate ceilings set at low levels Differences in emphasis and focus between Germany and France have produced very different outcomes for consumers and credit markets France focuses on price controls and the management of over-indebtedness Germany focuses on price transparency and the prevention of default French regime highly specified with delinquency and over-indebtedness regime managed directly by Banque de France UK and Germany rely on tradition of self regulation and principle-based approach to regulation UK has the most market-based approach to regulation in Europe: No rate ceiling Licensing system (lenders licensed as fit) No restrictions on lending models Requirement to lend responsibly and credit agreements subject to unfair credit test

7 7 Tight regulatory frameworks and price controls restrict credit supply and, ultimately, harm consumers Tight regulatory frameworks tend to result in: Restriction of credit supply – lenders withdraw from the market or serve only low risk market segments Credit exclusion – usually of lower-income and higher-risk borrowers Credit markets with narrow range of lending models Credit exclusion creates hardship, especially for those with no savings: Demand for credit (i.e. need to borrow) remarkably consistent across Europe Consumers unable to manage peaks of expenditure or cash flow difficulties Consumers unable to spread cost of major purchases The resulting vacuum tends be filled by unregulated lenders: Unregulated = illegal Very high cost Use of intimidation and violence Damaging for individuals and communities Often run by criminal networks The larger the vacuum the more attractive to organised crime

8 8 In Japan, introduction of tight regulatory regime has resulted in consumer lending falling by two thirds in two years Loan applications and new customer numbers Jan 06 – Nov 07 Loan acceptance ratio on consumer lending Jan 06 to Nov 07 Source: Big Four Consumer Finance houses: Acom, Promise, Aiful, Takefuji

9 9 Bankruptcies, which had been falling, have risen sharply as credit was withdrawn from high risk borrowers and small businesses in Japan Bankruptcy numbers for self-employed individuals Jan 06 – 07 0 20 40 60 80 100 120 140 160 180 200 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07Sep-07 Oct-07 Nov-07 Dec-07 '000 Money Lending Business Law introduces sharply reduced rate ceiling and lending limits Source: Teikoku Databank

10 10 Illegal lending has risen rapidly following the credit crunch in Japan; and is much higher in markets with rate caps (i.e. France and Germany) Incidence of illegal lending in France, Germany, UK among the credit impaired Incidence of illegal lending in France, Germany, UK among those experiencing credit refusals Nos of Illegal lending cases in Japan First six months 2006 and 2007 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% France GermanyUK 0% 2% 4% 6% 8% 10% 12% 14% FranceGermanyUK Base: Credit impaired Source: Taylor Nelson Research for Policis 2004 Base: Those who have been refused a loan Source: Taylor Nelson Research for Policis 2004 Source: Japanese National Police Agency 0 50 100 150 200 250 First six months of 2006 First six months of 2007

11 11 Price controls do not necessarily reduce the cost of credit for high- risk borrowers and may lead to higher total charges Lenders simply restructure products and pricing to get round ceilings: Cost of credit is transferred from up-front interest rates to add on service and default charges Outcome is less price transparency High risk borrowers: Are excluded from market or driven towards unsuitable products Will tend to pay more for credit overall (because they miss payments) Have greater exposure to lender sanctions and punitive debt recovery

12 12 Price controls do not prevent problem debt: they can make it worse Rate ceilings do not prevent over-indebtedness: In Germany, over-indebtedness has risen steadily over a decade despite low levels of credit default In France, problem debt has risen sharply in line with the expansion of revolving credit facilities; large numbers of borrowers shut out of the financial system In UK, serious problem debt is low and has trended downwards during a long period of credit market growth (albeit with sharp rise in recent months from a low base) The implications of problem debt are more serious in tightly-regulated markets: Lenders less sympathetic to difficulties and act more quickly to recover debt Credit problems more likely to lead to insolvency In markets with price controls, borrowers are more likely to prioritise debt repayments over other areas of spending: De-prioritise essentials such as food and clothing Creates fuel poverty Undermines security

13 13 In the UK, the indicators of problem debt have trended downwards over a long period UK over-indebtedness trends County Court Judgements and Money Claims UK over-indebtedness trends Mortgage arrears and repossession trends 0 0.5m 1m 1.5m 2m 2.5m 3m 3.5m 4m 198919901991199219931994199519961997199819992000200120022003200420052006 CCJs Money claims Source: Department for Constitutional Affairs, The Registry Trust Ltd

14 14 Aggressive debt-collection and resort to legal sanctions are more common in countries with price controls %of respondents agreeing that lenders are aggressive in recovering their debt % agreeing that lenders are supportive and understanding in the event of difficulties Source: Taylor Nelson Sofres Research for Policis 2004 Base: Low income borrowers with payment difficulties 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% FranceGermanyUK 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% FranceGermanyUK

15 15 To get the right balance, regulators need to understand the implications of different regulatory approaches Lighter-touch regulatory frameworks for credit markets result in: More vibrant and faster growing credit markets Increased consumer behaviour Stimulus to economic growth Higher GDP Increased competition associated with faster growing credit markets results in: Greater innovation and a more diverse range of lending models Most effective route to reduced prices

16 16 Lightly regulated, fast growing credit markets stimulate consumption and boost economic growth Credit Market Growth and Personal Prosperity Annualised growth rate consumer credit per head and gross national income per head, 1995 - 2006, France, Germany, UK 0% 2% 4% 6% 8% 10% 12% FranceGermanyUK Annualised growth in consumer credit per capita Annualised growth in gross national income per capita Source: Australian Reserve Bank, OECD, Central banks, Cofidis

17 17 Competition is the most effective way to reduce credit prices US $3,000 36 month loan for new automobile in 1971US $12,000 36 month loan for new automobile 2003 Source: National Commission on Consumer Finance 1971 Source: 2003 0% 5% 10% 15% 20% 25% Lowest 1011 to 2021 to 3031 to 40HighestNo ceiling Average APR pertaining in states Average rate ceiling in states 0% 5% 10% 15% 20% 25% 30% 35% 40% Lowest 1011 to 2021 to 3031 to 40No ceiling Average APR pertaining in states Average Ceiling in states

18 18 Significant social and economic risks associated with credit market regulation Debate around credit market regulation and consumer protection often high profile Vulnerable borrowers and low income consumers are most exposed to unfair practices; and tend to pay highest cost for credit High potential for regulatory interventions to cause unintended consequences in the market Appealing and populist solutions (such as rate ceilings) can harm the interests of the very consumers they are designed to protect Credit market regulation has a major impact beyond the credit market itself; and has role to play in influencing progress towards wider economic and social goals

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