COFACE position on preventing over-indebtedness, personal ...


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COFACE position on preventing over-indebtedness, personal ...

  1. 1. Confédération des Organisations Familiales de l’Union européenne Confederation of Family Organisations in the European Union COFACE position on preventing over-indebtedness, personal finance education and action against banking and financial exclusion Adopted by the Administrative Council of COFACE on 15-16 December 2008 Consumption drives growth, and is of the utmost importance to families’ lives, for consumption patterns change with family circumstances, children’s ages and household resources, not to say moral, ethical and other choices… So, parents and children may have differing views to air on some purchases. The family is a key force for all aspects of consumer education, particularly when it comes to developing a critical approach to advertising, borrowing, prices, etc. Also, faced with an expanding range of choice, families on increasingly tight budgets have to make decisions. It is not always easy to find a way through the maze, nor resist the many temptations on offer, especially that of easy credit with its attendant danger of building up unmanageable debt. Even where families are not already having financial difficulties, few of them are entirely free of money worries nowadays. It is a source of concern, and may even threaten the way they live. Some of these difficulties are caused by over-borrowing. A quarter of all cases of unmanageable debt in France are classed as active over-indebted. People may be plunged into debt by a life crisis (like unemployment, for example). Three-quarters of people battling unsuccessfully with debt are classed as passive over-indebted. Some of these financial troubles could be prevented if families were given the necessary information to objectively assess their position before committing themselves. This is the angle of attack needed to work for and with families. Families in financial difficulty must be able to benefit from assistance, schemes, rights that enable them to avoid exclusion (1.). Likewise, proactive steps must be taken from early childhood, in the family then at school, to provide preventive education on all the topics (budgeting, diet…) that will make each family responsible for what it consumes and its daily activities (2.). 1 COFACE aisbl – Rue de Londres 17, B-1050 Brussels +32 2 511 41 79 +32 2 514 47 73
  2. 2. 1. Tackling out-of-control debt, exclusion and insecurity in the most vulnerable families: There are two strands to this. a. Access to banking services for all: Money is a universally shared commodity. By definition, therefore, it cannot be anyone’s exclusive property. This means that everyone must be able to access it freely within the limits of what they possess. Banks are profit-driven private businesses, and have developed high value-added payment (cheque, transfer, credit/debit cards, etc), savings and loan services. These are commercial, paying services. In many countries, too, legislation –with every good intent– has regulated the means of payment and their distribution. In France, for example, consumers can only have their income paid into a bank account. Likewise, the only money accepted for any payment with a face value above €3 000 is bank money (cheques, bank transfers, etc.). In point of fact, the public authorities have put banking services into the category of what are known as “general interest” services. So, a universal banking service is a public service requirement to operate “normally” in society and the economy. It must have two key characteristics: Universal, not means-tested: The threshold mechanism which is inherent in means-testing not only carries a stigma, but also fails to take all those experiencing exclusion into account because banking exclusion is a complex phenomenon that affects people with very different profiles, irrespective of income level. No refusal: All consumers must be able to access the universal bank service directly on request. At present, banks have the power and unfettered right to exclude anyone they do not consider profitable from the banking system and hence from society. b. Access to credit to: Borrowers must be made more responsible, but must be given prudent access to credit. But while there can be no right to credit, some population groups are either completely excluded or cannot access it because of inordinately stringent conditions. Two particular groups of people are concerned here: … people who constitute a poor health risk: Borrowing – whether in the form of a personal, mortgage or business loan – is tied to taking out insurance to secure the loan. For this, finance companies generally propose a standard group insurance contract that is apt to cover most people. But, these standard contracts usually exclude people with a serious illness or a disability. Because they cannot get insurance, pay the premium surcharges applied to them, or find alternative forms of guarantee, these people face enormous problems in completing the necessary paperwork and therefore often find themselves denied access to credit. 2 COFACE aisbl – Rue de Londres 17, B-1050 Brussels +32 2 511 41 79 +32 2 514 47 73
  3. 3. More accessible borrowing must be promoted, in particular by socialization of risks, to enable people with health problems, transplant recipients, people with a disability, etc., to put their personal plans into practice. That means: Guaranteed access to borrowing for all (people with health problems, transplant recipients, people with a disability, etc.), Meaningful information to be accessible and consistently provided at bank counters, Reasons for refusal to be given in writing within acceptable times (people with or without health problems), A statutory recovery time to be set for certain curable serious illnesses, Part of the risk to be socialized so as to reduce insurance premium surcharges. … people who are trying to get back on their feet: A growing share of the population has no access to bank loans, leaving them no other choice but revolving credit with its risks of ending up in unmanageable debt. Family living conditions are constantly changing, and these demands should now be met. Family organizations must put fairer access to credit among their priorities. Personal microcredit addresses this demand. Microcredit is an emergency loan to pay for specific outgoings or strengthen family cohesion. It is granted on the basis of two criteria: An ability to repay which makes only reasonable inroads into the family budget, A life turnaround plan (in the broad sense). Microcredit is for people who can afford to pay but cannot access “traditional” bank credit. It is not for people living in acute poverty. Eligible borrowers may be struggling and unable to access credit because they do not have a steady job, experiencing exclusion because of their employment status, experiencing a life crisis that may put a heavy drain on their budget but does not leave them on the brink of poverty, or in-work poor. There are various ways of getting back on one’s feet: Into/back to work: purchase of means of transport, driving licence, etc. Finding/staying in housing: rent deposit, removal, etc. Mobility and inclusion: purchase of means of transport, driving licence, occupational training, etc. Family life: divorce, unemployment, health, funeral, etc. By contrast, there is only one way to tackle exclusion: through social support to enable those concerned to restore their confidence in themselves, and in the banking and financial system, so as to work out the best way for them to get back on their feet, to set their priorities in order… Would-be borrowers are therefore given support in working out their plans and giving effect to them through the credit, as well as mentoring and support in managing their budget, relations with the bank, etc. after the loan is granted and for its entire term. Family organizations also need to engage with the financing needs of those who are objectively over-committed. Many refusals of microcredit are due to applicants being listed in the “negative” (payment defaults) file. While there can certainly be no right to credit, the issue of “negative files” is a challenging one: people registered in the negative file with a repayment plan can be saved by microcredit. This is because a repayment plan that is going to schedule can be seriously upset, for example, if the family cannot take out a new loan to buy a car to get to work… There is no standard practice on this: banks that flatly refuse this, however, must not be over-zealous by denying what debt management committees authorize in some cases… 3 COFACE aisbl – Rue de Londres 17, B-1050 Brussels +32 2 511 41 79 +32 2 514 47 73
  4. 4. People trying to get into employment who are listed in the negative files should to be able to access microcredit and benefit from specific support, which may include help in (re) learning to manage their finances. 2. Tackling banking exclusion through education and prevention: Banking exclusion is about problems both accessing and using services. Personal finance education absolutely must be promoted for very young children on the same basis as literacy and numeracy skills. Likewise, informing and making lenders more responsible, and protecting consumers from themselves, are essential to keep people out of the debt trap. a. Personal finance education: Welfare workers and voluntary groups are seeing a growing number of young adults who are struggling with hardship and lack basic budgeting skills, often because they have not been educated in the basics of daily living at home. As a result, advertising and publicity are often their only sources of information. Young people are not learning how to handle money (which is increasingly virtual/electronic) and in most cases are suddenly faced with having to manage their finances at crucial points, such as their first job. But they have never been taught how, in some cases because the parents themselves are disorganized and bewildered, and in dire financial straits. Compulsory preventive education is needed as part of national curricula while young people are still in school. The information provided must be immediately useable and relevant. Action may be individual or collective, but above all preventive. Getting some types of young people together in a setting different from the norm – e.g., that of voluntary groups – adds this dimension. b. Positive files: Recent years have seen a rise in the numbers struggling with debt. In France, for example, 190 000 new files were submitted in 2004 - a 160% increase since 1994. At present, action to prevent indebtedness is mainly focused on consumer information. But more proactive action is needed to prevent people racking up debts, in particular by encouraging lenders not to grant loans to customers who cannot afford the repayments. Unmanageable debt brings with it high social costs: France’s debt management committees employ 3 000 full-time equivalent staff at a total cost of 180 million euros (which includes the cost of help for over-committed individuals: housing and energy solidarity funds, etc …). This is what makes it necessary to create a national list of non-business loans granted to individuals. This so-called “positive” (outstanding loans) file would be managed by a public agency like the central bank to prevent lenders canvassing for sales by identifying consumers who are still relatively debt-free and encouraging them to rack up more debts. 4 COFACE aisbl – Rue de Londres 17, B-1050 Brussels +32 2 511 41 79 +32 2 514 47 73
  5. 5. Such a file, existing in Belgium, is apt to make lenders more responsible. At present, lenders grant loans purely on a self-certification basis (no proof of credit-worthiness), so some consumers may “omit” to declare or be unaware of certain debts that they have. Advertising is often unclear, and some who take out revolving loans have been caught out because they are automatically extended each year unless cancelled … As to the apparent causes of unmanageable debt, 25% of cases are due to unwise use of credit, and the remaining 75% to life crises, where the “crisis” reveals rather than creates the debt problem. The main idea of consulting the list would be to give both parties - borrowers and lenders – more responsibility (the commercial risks would be taken with full knowledge of the facts or without having consulted the list). There are still some unresolved issues about access to banking services. COFACE will give an opinion on the matter in a few months’ time. Immediately, however, COFACE is calling for: • better access to borrowing to enable people with health problems, transplant recipients, disabled people, etc. to put their personal plans into practice. • a personal microcredit for people who cannot access “traditional” bank credit and who are trying to get back on their feet. • personal finance education for very young children on the same basis as literacy and numeracy skills. On the idea of a national credit register (see Annex), COFACE declares that: • a central credit database containing lists of all outstanding loans granted to a family could be a system of control of the overindebtdness of families; • the information in such a file pertains to privacy and must be under the control of the families concerned; • any such central database should contain only information on credit taken out or applied for, and no other debts; • the information should be managed by and shareable between public authorities in the Member States; • the information should be managed in real-time. 5 COFACE aisbl – Rue de Londres 17, B-1050 Brussels +32 2 511 41 79 +32 2 514 47 73
  6. 6. Annex Positive credit files Many European countries have central file systems holding information on borrowing by individuals. But there is also opposition to such types of file, some of it from quite powerful sources representing different interests: financial institutions (but not all), consumer organizations (but not all) and supervisory bodies: protection of privacy. I - Credit files The first thing to note is the sheer number of files that already exist giving a general picture of consumers’ financial behaviour. Official lists of bank accounts, NSF cheques, facilities withdrawn, payment defaults, but also the private files kept by financial institutions. See the site: The use of these files is probably regulated differently in each Member State. As a general rule, banks are not allowed to cross-check with one another the information they hold, but information on offences is allowed to be circulated. See, e.g., The common information that banks can use is that held in “negative” files, i.e., that relating to payment defaults. They should be disclosed only to financial institutions when a loan application is made or to the people concerned. Unfortunately, the files may contain inaccurate information and the wrongly listed individual then has to prove this, which can be difficult due to the presumption that they are acting in bad faith. A recent study financed by the European Commission reveals that consumers are in fact deeply concerned about the existence and use of files that banks have access to. II - Possible changes Private system Existing central credit databases established on the Italian or German model seem mainly to be credit rating systems designed to assess loan applicants’ abilities to repay. The Anglo-American tradition system is even more markedly a commercial product, i.e., a marketing tool to develop lending business. Public system The file established by the National Bank of Belgium, designed as an extension of the file listing payment defaults (containing both “negative” and “positive” information) arguably may constitute a good solution. The aim of this central database - to prevent over-indebtedness by stopping people taking out “one loan too many” - should enable those in a shaky position to be identified. The system was implemented through a broad consensus between professionals, consumers and government agencies. 6 COFACE aisbl – Rue de Londres 17, B-1050 Brussels +32 2 511 41 79 +32 2 514 47 73
  7. 7. COFACE’s position COFACE is not absolutely in favour of a file, which would obviously be a fairly bureaucratic way of dealing with what is as yet a relatively infrequent situation, albeit one deeply harmful to families that are facing difficulties from unmanageable debt. Our aim as a family organization is to act against over-indebtedness, not to make it even easier for people to get credit. A file would certainly be helpful in making considered decisions to grant useful, even essential, credit such as to acquire assets, for example. An offer of credit that is assessed as being within reason for a family that has the ability to repay it is very good means of development. The big potential benefit of a credit file is as a means of getting people to take responsibility. This applies to lenders, naturally, but also giving responsibility and protection to borrowers who run the risk of being drawn into the spiral of over-indebtedness. The fact that all the main European countries have a file system makes a case for having files that are compatible with one another and safeguard the interests of family consumers. An early draft of what became the EU Consumer Credit Directive expressly mentioned central databases of information on borrowers and provided a mechanism for exchanging it. Opposition to the idea of such files might be seen as disingenuous and protectionist of the commercial interests of national businesses. Disingenuous because financial institutions are a fairly concentrated industry and therefore have customer files already compiled by them that they can use for marketing purposes. But also protectionist, because these businesses would rather keep the information about their customers’ indebtedness - and hence ability to borrow further - to themselves than share it with businesses that have not had to make the effort of collecting that information. Overall, therefore, COFACE favours a system that will deliver safer use of credit by: - enabling credit to play its part in household consumption as a means of investment that also contributes to family saving by asset formation. - preventing credit from destroying families’ lives by racking up too much debt and having to continually borrow more to repay. The credit file is a means of bringing those involved face-to-face with their responsibilities. III - Options and problems Apart from being what they see as a means of distorting competition by giving access to valuable information to businesses that have not made the necessary investment themselves, consumer representatives see two big drawbacks to the file system. It is a marketing tool for new business development that does not address the real problem of over- indebtedness, but may infringe privacy. - The Belgian scheme, still in its early days, shows that customer information can be used by financial institutions to issue new credit by restructuring loans. Family and consumer organizations fear that such a policy may become the norm in Europe. The evidence is that even individuals identified as carrying too much debt either because they are missing repayments or even because they are in debt management procedures, continue to receive offers of loans, in a clear demonstration of the aggressive marketing tactics that sales departments are capable of. 7 COFACE aisbl – Rue de Londres 17, B-1050 Brussels +32 2 511 41 79 +32 2 514 47 73
  8. 8. - The causes of over-indebtedness are often to be looked for in what are known as life crises, i.e., unemployment, illness, death, divorce, etc. By definition, these crises are not planned for. They cannot therefore be forecast and included in the forward planning that use of the file allows. It is not necessarily the “one loan too many” that tips a family into over-indebtedness; it may be a sudden lack of income. COFACE is well aware that the credit file system alone will not solve the entire over-indebtedness problem. What information should the file include? We believe that the file should list information only on outstanding loans and credit applications. It should not contain information on people’s financial resources, nor operate as a credit refusal system based on a debt ratio artificially set at 30%, for example. The lender should retain the full right - and also responsibility - for granting the loan. There are, of course, many variables to be taken into account when making a loan, and the personal relations established between lender and borrower should give each a better chance of assessing the risks. Nor should the file contain information on other debts that the consumer may owe to others, like housing-related debts or telephone bills. How can commercial use of the file be controlled? Again in Belgium, consumer organizations are involved in the watchdog body that scrutinises how financial institutions make use of the file. This will never be an easy job, however, and in any event, institutions which can see that an individual has built up too much debt from different sources can always make an offer to restructure it that will generally benefit the consumer. Some people find themselves debt distressed, i.e., having taken out successive loans at exorbitant rates that have become unmanageable and out of control. Some may themselves apply for debt restructuring facilities which will often enable them to get on top of their payments and rediscover some peace of mind. Unfortunately, such arrangements are not always good for families who may find it a means of racking up still more debt. A real-time file? To be any use, the file must be able to be queried when the borrower makes the loan application. This means the lender, who must have a duty to consult the file, being informed not only about outstanding credit, but also credit that has been applied for and may be about to be granted. The file must therefore operate in real-time, and show all recent applications that have not been withdrawn. It must also show authorized overdraft or credit limits linked to a card, even if the cardholder does not use them, because these credit facilities play into the debt danger. Files are always complex systems, which may include wrong information and may infringe privacy. The operation of the files must therefore be very strictly controlled and the system obviously has a cost that cannot be disregarded. What was said earlier bears repeating here - there are many files already in existence. So it is not a question of creating new structures from scratch, but simply centralizing what is for the most part existing information. National banks manage files on the means of payment. So there are existing structures to which additional data can perfectly well be added without generating operating costs that are out of proportion to the service provided. 8 COFACE aisbl – Rue de Londres 17, B-1050 Brussels +32 2 511 41 79 +32 2 514 47 73
  9. 9. One further factor to be taken into account is e-systems The development of computer-based tools puts more and better information at our fingertips increasingly quickly. This progress should not work against consumers. A file containing information on a consumer is a management tool, and that consumer should be able to control its use by expressly authorizing a user to use it for a purpose which he or she approves. For more information, please contact the Secretariat of COFACE: +32 2 511 41 79 With the support of 9 COFACE aisbl – Rue de Londres 17, B-1050 Brussels +32 2 511 41 79 +32 2 514 47 73