19.2.2013 | 13:12
Summary of legal opinion of Commission services on price-indexation (after analysis of real example of house loans) in Iceland
Indexation on consumer credit would not be directly prohibited per se but subject to strong requirements of European law on information, disclosure and method of calculation throughout the credit process.
It has to be assessed under the Consumer Credit Directive but also under European contract law on abusive clauses and misleading practices.
Indexation on mortgage credit is still under harmonisation process at European level.
1) Directive 2008/48/EC
Can indexation of principal and payments be treated as total amount of credit? No.
Is indexation of principal and/or payments to be treated as total cost of credit? Yes.
Can indexation operate and be calculated outside the framework of the Directive and its rules on disclosure and method of calculation (APRC) ? No
2) Directive 93/13/EC on Unfair Contract Terms and Directive 2005/29/EC on Unfair Commercial Practices
Indexation practices can be potential abusive clauses and/or misleading practices when requirements of European law have not been respected (information, calculation and disclosure of total amount of credit, total cost of credit and total amount to be paid by consumers).
3) Lawfulness of indexation as abusive clauses and/or misleading practices to be assessed by national courts/administrations taking account of real cases and circumstances in practice.
4) Consequences for consumers. To be determined by national authorities/courts in national contract law in the light of principles European consumer (credit) law determined by the Court of Justice of the European Union on its case-law ( nullity abusive clauses and effect of misleading practices).
EU law as part of the EEA Agreement. Icelandic current legislative framework
As Iceland has informed the European Union in the framework of EU accession negotations
Directive 2008/48/EEC has been incorporated into the EEA Agreement. Credit agreements are covered in existing legislation in Act No 121/1994 on Consumer Credit.
Directive 93/13/EC is a part of the EEA Agreement. Iceland has transposed Directive 93/12/EC with amendments made to Act No 7/1936, on Contracts, Agency and Void Legal Instruments,21 provided in Annex 28:3. The legislation is therefore fully transposed into Icelandic law.
Directive 2005/29/EC is a part of the EEA Agreement. Iceland has transposed Directive 2005/29/EC with Act No 57/2005, as amended, on Surveillance of Business Practices and Marketing. The legislation is therefore fully transposed into Icelandic law.
As for pre-contractual information to be given to consumers by lenders offering home loans (Commission Recommendation 2001/193/EC) which is not mentioned in the letter sent to the European Commission, Iceland has replied to the EU:
This is a non-binding Act that has been incorporated into the EEA Agreement. The Ministry of Trade and Commerce (later the Ministry of Business Affairs and now Ministry of Economic Affairs) introduced these principles to the relevant parties when this Act was incorporated in the EEA Agreement.
As Iceland has recognised in the INTERGOVERNMENTAL CONFERENCE ON THE ACCESSION OF ICELAND TO THE EUROPEAN UNION:
EU legislation in the field of consumer protection is covered by the EEA Agreement and transposed into the Icelandic legal order on an ongoing basis.
Icelandic legislation in the field of non-safety related issues provides the basis for protecting consumers’ economic interests and is aligned with the acquis. The following highlights key EU legislation in the field and implementing legislation in Iceland:
Directive 2008/48/EC (credit agreements for consumers) is partially transposed by Act No. 121/1994 on consumer credit. An amendment to Act No. 121/1994 in order to implement all the provisions of the Directive is foreseen in 2012.
Directive 93/13/EC (unfair terms in consumer contracts) is partially transposed by Act No. 7/1936 on contracts, agency and void legal instruments, as amended. An amendment to the Act in order to implement all the provisions of the Directive is foreseen in good time before the date of accession.
Directives 2006/114/EC (misleading and comparative advertising) and 2005/29/EC (unfair commercial practices) are transposed by Act No. 57/2005 on surveillance of business practices and marketing, as amended.
Iceland has introduced relevant principles of consumer protection as laid out in Commission recommendations such as 98/257/EC (out-of-court settlement of consumer disputes), 2001/310/EC (consensual resolution of consumer disputes) and 2001/193/EC (pre-contractual information on home loans).
 See assessment done by Icelandic authorities at pp. 22-24 http://www.vidraedur.is/media/esb_svor/28_-_Consumer_and_Health_Protection/Chapter_28_-_final.pdf
 Directive 87/102/EC as amended by Directive 98/7/EC was incorporated into Icelandic legal order through Act No. 121/1994 on consumer credit. See also Regulation 377/1993, as amended 491/1993 and 236/2000.
Article 5 of Directive 87/102/EEC provided for the introduction of a Community method or methods of calculating the annual percentage rate of charge. Annex II of Directive 87/102/EEC introduced a mathematical formula for the calculation of the annual percentage rate of charge and Article 1a(2) of that Directive provided for the charges to be excluded from the calculation of the 'total cost of credit to the consumer`. During a transitional period of three years from 1 January 1993, Member States which prior to 1 March 1990 applied laws which permitted the use of another mathematical formula for calculating the annual percentage rate of charge, were permitted to continue to apply such laws. The Commission submitted a Report to the Council which made it possible, in the light of experience, to apply a single Community mathematical formula for calculating the annual percentage rate of charge. Since no Member State has made use of Article 1a(3) of Directive 87/102/EEC by which certain costs were excluded from the calculation of the annual percentage rate of charge in certain Member States, it became obsolete. New Article 1a(1)(a) of Directive 87/102/EEC was amended as follows by Directive 98/7/EC:
'The annual percentage rate of charge which shall be that rate, on an annual basis which equalizes the present value of all commitments (loans, repayments and charges), future or existing, agreed by the creditor and the borrower, shall be calculated in accordance with the mathematical formula set out in Annex II.
 According to information on the negotiations between Iceland and the EU on consumer protection (Chapter 28), this is how Contract Law No 7/1936, as amended has incorporated Directive 93/13/EC on unfair terms in consumer contracts:
Art 36.a: Implements Art 2, 3(1)-(3) of the Directive, i.e standard contracts unfair if contrary to good faith or imbalance in obligations and sellers burden of proof that it is not a standard contract
Art 36. b: Implements Art 4(2), 5 of the Directive, i.e. Terms must always be drafted in plain, intelligible language and where there is doubt the most favourable interpretation to the consumer shall prevail (except when agencies safeguarding consumer interest apply this legislation)
Art 36. c: Implements Art 3(1) Art 4 (1) and 6(1) of the Directive, i.e. assessment of unfairness
Art. 36. d : Implements Art 6(2) of the Directive, i.e. regarding choice of law
Article 7 of the Directive is not implemented, since Act No 8/1993 has been repealed and the Consumer Agency has no legal powers to monitor contracts – Plans to remedy this by amending Act No 57/2005 entrusting the Consumer Agency to monitor contracts and ensure effective means to prevent continued use of unfair terms – proposal possibly 2011 or 2012
Consequences and impact of legal opinion of Commission Services for Iceland.
All the EU legislation has been incorporated into Icelandic legal order with the exception of some parts of Directive 2008/48/EC now discussed by the Parliament.
Directive 2008/48/EC on credit agreements for consumers has repealed Council Directive 87/102/EEC as amended by Directive 98/7/EC for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit. The principal element in the original Directive (as modified by Directive 90/88/EC) was the obligation to apply a single mathematical formula ("the EC formula") for the purpose of calculating the annual percentage rate of charge for consumer credit. This Directive 87/102/EEC was incorporated into the Act 121/1994 on consumer credit.
In my opinion, the Icelandic practice as it has been predominantly implemented by many institutions (ie. leaving inflation as 0% or ignoring future inflation in the precontractual and contractual stages) is an oxymoron, impossible contradiction in practice in the light of European law.
Information given in the credit process on total amount of credit to be paid by the consumer has to be exact and disclosed in advance. In practice, bank institutions should predict future inflation and its effects on total cost of contract informing about method of calculation and effect on the contract and payments. This means treating indexation as European banks deal with inflation: through variable interest or charge impossible to quantify at the time of contracting but subject to obligations of previous calculations and quantification. Information disclosure duties are strongly regulated in European law. All information on cost of credit and total amount to be paid by consumers has to be updated on a regular basis (according to contracts). It is not possible for financial institutions to claim higher payments without complying with these requirements of previous calculation/information.
Implementation of indexation in practice leads to most banking institutions in Iceland (also ILS) having signed contracts with potential abusive clauses and incurred in misleading information cases (since entry into force of Icelandic law extending similar protection to mortgage loans in December 2000).
Attention, the national assessment on the legality of abusive clauses must be done in the light of European law on consumer credit agreements. the Need to refer to case-law ECJ, especially case Pohotovost C-76/10 and Perenicová C453/10. Failure to mention APRC could mean that credit granted is deemed to be interest-free and free of charge (case C-76/10). Unfair terms can be void if that ensures better protection for consumers (case C-453/10). In both cases omission of decisive information from a credit agreement contrary to an express requirement of European Union law is assessed by ECJ. It does not matter whether we contemplate absence of an indication (APR) rather than an incorrect indication of cost of credit (see para. 119 Opinion Advocate General Trstenjak on case C-453/10).
19.2.2013 | 12:52
OPEN LETTER TO THE PARLIAMENT
ON PRICE-INDEXED LOANS (VERĐTRYGGING) AND THE NEED TO IMPROVE CONSUMER LAW IN THE AREA OF FINANCIAL SERVICES AND RECONSIDER PENSION SYSTEMS
Yesterday I went to talk to the Althingi, Efnahags og Viđskiptanefnd. I tried my best to explain to our elected representatives why I consider that the current trial to allow indexation as it is practiced in Iceland is illegal in the light of European law and why the current legislative proposal is doomed to fail. If we do not want to breach European consumer, contract and credit law, it is extremely important that the indexation is treated as European Directives establish. This is the system that 27 other countries follow in Europe.
The total cost of the credit has to be calculated, disclosed in advance according to the unique formula which the European Directive 2008/48/EC establishes. Furthermore, and this is very clear in the answer from the European Commission in its letter from 12.2.2012, financial institutions may not charge one króna more than it is disclosed, calculated and agreed by the consumers in the plan of payments as regularly revised and disclosed (ie. once a year). Otherwise they just engage in abusive practices which are illegal and invalid in European law. The European Court of Justice has already declared that banks have not the right for charging more than what it is disclosed in the contract. The case-law is very clear. Information disclosure duties are linked to prohibition of abusive clauses and misleading practices. These issues cannot be disconnected.Today a lawyer has made a very good point to me that it is very necessary to add to the discussion. If financial institutions do not implement verđtrygging properly, they are responsible towards consumers for the damage caused. If the legislative power mis-implements European law, there is a case for State liability towards individuals and economic operators. This is very important to remember because it shifts responsibility towards tax payers.
Unfortunately I am not sure my message is passing through. I still have to consider in peace and quiet the changes proposed by the majority of the Committee regarding the calculation and disclosure of verđtrygging which seem insatisfactory at first sight and too complicated for ordinary citizens to understand. However, I miss almost all the suggestions I put forward to the Parliament on June and November 2012.
As for the main alledged benefit of the price indexation which is access to credit and distribution of burden of cost through 25-30 years, let me clarify this. There are solutions to help those who have difficulties accessing credit, such as providing flexibility to extend the credit in time when interest rates go above a limit beyond their financial capabilities. Other solutions are used in Europe. Our current system gives way to a perverse dynamic since it leads to overindebtedness of families, promotes inflation which is tax on our savings and raises the price of properties encouraging a vicious cyrcle.
I hear often that, without the verđtrygging, interest rates would go up to 20% excluding most ordinary people from credit. This could be of course true in a short term because research in the area of consumer law proves otherwise mid-term. A good regulation of access to credit which encourages people to save have a beneficial effect. There is less money in circulation, less inflation and house properties keep prices down to earth, since people cannot afford expensive properties. I always give an example. When I moved to Iceland in 2001 there was not such a big credit supply as ILS provided a maximum amount of 20K. An ordinary apartment/house in Reykjavík costed 25. Only those having paid for the first house could afford to buy more expensive properties and go up the ladder-scale of properties. A more egalitarian society since most expensive houses costed 50K. The house of somebody with a very good income (ie. a Minister, a former judge) would be double size/prize/value than the house of a normal working family. Fair enough. More equality and less discrimination.
I also told the Committee why the current legislative proposal needed to be strenghened in many other ways as I had indicated to them in my written submission: better supervision, responsibility and liability, fines, remedies for citizens, etc. It is a paradox that some of these issues are present in the old Neytendalán 121/1994 but not in the new proposal.
With all respect, I firmly but politely repeat my requests this time in public.
I urge the Government and Parliament to improve consumer protection in financial services and discuss in depth all the points I brought forward regarding the proposal. A new Committee appointed by Prime Minister will deliver a general report in March but I worry it will be too late for this proposal on consumer credit law.
The price indexation debate involves discussing the pension fund systems as well.
I know that price-indexation is unnaturally linked in Iceland to the profitability of pension funds. We must clarify this point.
The indexation of pension benefits is not naturally and directly dependent on the indexation of house loans. Law is a social science, not immutable physics. We can decide to change that. In fact, no other country in Europe has this system where the sort of one category of actors (private pension funds and elderly people) is dependent on another category of people (debtors with price-indexed loans).
Please correct me if I am wrong. As I understand the system in Iceland, pension holders (citizens) do not receive indexed payments or pensions. Indexation works only directly for the general benefit of funds, not for the final holders of the rights.
In Iceland the pension fund system is organised mostly through a contributive system within a private law scheme (civil servants having a separate system). A complementary non-contributive system (almannatrygging - assistential system) is offered by the State for those most in need who have no private pension benefits.
In Spain the system is also mostly contributory, financed through contributions of workers and employers. Like in Iceland, there is a minimum assistential system (not based on individual contributions) for those most in need. However, the pension system is mostly organised through public law not private law. Social Security law but not Business law. It is a system based on the principle pay-as-you-go, where the current generation finances the expenses of those going into pension.
In Spain the opposite system works. House loans are not indexed but pension rights and payments are indexed. The ones needing the indexation are those who cannot increase their income to adapt to the cost of living because they are economically inactive. Pension holders have the right that their pensions are adjusted to inflation once a year. I repeat, their benefits must follow inflation. That is the law. The amount of public pensions is agreed once in a year by the Parliament when the general budget is approved and indexation and inflation taken into it. It is only in extraordinary circumstances - such as the ones that Spain is going through now - that indexation is not automatically given to pension holders reflecting real inflation.This is so because the general pension system is public and organised by the State. Private pension funds are optional for those who want to complement their future income and they have been promoted as alternative source of income in the last decade. In Spain, the duties towards the elderly (right to a decent pension) are taken by the whole society as a gratitute for their efforts. The tax system and the general budget is the tool used to provide for solidarity, education, health and social benefits.That means providing decent pensions both based on contributory and non-contributory systems of social protection.
My claim is not that we have to follow the Spanish way. It is just a comparison appropiate for discussion. My opinion is that this pension system which seems impossible to challenge in Iceland needs to be reconsidered as well. What are the costs? What are the benefits? How does it deliver compared to other systems? Is it sustainable? How can we possibly justify a private system and another for public employees guaranteed by the State?Should we consider a general public system?
I say so because in a democratic country, when a transfer of wealth must be done between one category of people to another, from one generation to another... for reasons of solidarity and the needs of the common good.... it is a duty for the whole society to think about these questions: what do we owe to the others? how much can we help taking accont of our resources?. The dignity of our elderly is a fundamental pillar of society. Precisely for this reason, it is for the democratically elected the Parliament to approve that transfer of wealth between the haves and the haves-not. It seems more natural to do this transfer through the budget of the State rather than through private pension funds. This is precisely the role of legislator. In short, it is unnatural and undemocratic to deal with solidarity towards our elderly (right to decent pensions) through a system of business principles, property law and the price-indexation of house loans.
To solve the problems of our pension funds in Iceland, some economists have suggested to change into a different system of pension rights, pay-as-you-go system. This is something we need to study better. In this sense, I encourage this discussion and a full comparison on pension systems taking into account the best standards and practices in Europe and in Scandinavia.
Returning to verđtrygging, consumer protection and financial services....this is what I have requested to Althingi. My petition is done on the basis of my research which refers in a general way the best practices in European and international comparative law. My intention is not to diminish the quality of life of pension holders but, on the contrary, to raise a discussion which guarantees a proper democratic debate on all issues interrelated and the adoption of the best legislation and policies possible.
I also urge our present and future Government and Parliament to reply to these questions, not to me but to all Icelanders. Why don´t we deserve a high standard of consumer protection as the G-20, World Bank and EU are promoting? The US has already reformed consumer credit law and protected consumers against abusive clauses and predatory practices? Why do you still believe that transparency alone can justify abusive clauses unbalanced and biased against consumers? Why responsibility on future inflation falls uniquely on consumer side while it should be shared between creditor and debtor? Why do you want to continue a system that promotes inflation and does not provide direct indexed benefits to pension holders?
Proposals sent to the Althingi on a better consumer credit and mortgage law
Outside European consumer and credit law regulating cost and disclosure of credit, prohibition of abusive practices and misleading commercial practices; European law has not harmonised these specific issues for which there legal autonomy for the Icelandic legislator (it is implicit that legislation will ameliorate position of consumers, not deteriorate their legal standing and substantive rights):
- Over-indebtness (the assumption is that ex-ante information will protect consumers from themselves but it is quite predictable that ex-post policy making will appear at European level because of the tragic consequences of the financial crisis on households and small companies in peripheral countries of Europe)
- Interest-ceilings (currently in force in countries such as France)
- Explicit usury prohibitions (regulating or prohibiting interest on interest or anatocism by compound interest)(although they fall in general consumer law under the prohibition of unfair clauses and unfair commercial practices)
- Cost of credit (where principal of the loan remains stable with some exceptions)
Based on the most recent literature on the topic , a good institutional and legal framework to protect consumers in the field of financial services would be based upon the following lines of public law:
- Regulation of their activities through licenses with supervision by Financial Services Authority and other public institutions (ie: Competition Surveillance Authorities).
- Responsible borrowing and lending through better legislation: this means reform at the crossroads of financial services and consumer law in order to guarantee financial stability and sustainable growth. Consumer credit law could become a sort of lex specialis in contract law, both at national and European level.
- Taking seriously and protecting consumer´s economic rights so that legislation is not biased towards financial institutions (ie: reform of law of guarantees, overindebtness and personal bankcrupcy which is fair towards consumers indebted in good faith which fall into trouble due to external circumstances such as financial crisis, loss of income, change of family status, loss of mental or physical health, etc.).
- Ombudsman for general supervision in the field of debt, credit, debt and over-indebtness and for signalling systemic problems which call for regulatory/legislative action
- Consumer Protection Authority with proper jurisdiction to resolve problems affecting consumers and financial institutions through Alternative Dispute Resolution (mediation, conciliation or arbitration mechanisms)
- Support for associations (NGOs) defending consumer rights and incorporating their input into regulatory/legislative agenda
- Consumer empowerment (improving education and information or financial literacy)
- Codes of conduct for the financial sector industry and ethical banking
Based on the same literature , another pillar would be built upon substantive private contract law with a system of remedies and enforcement before courts(procedural law) along these lines:
- Providing a defence and a test of unfair contracts and reversal of proof similar to the UK for all issues falling outside European directives
- Creating a remedy of invalidity redress with power of judges to intervene when test of fairness is violated or when a breach of European consumer law happens (ie: clause of interest non disclosed or disclosed with a mistake would lead to partial invalidity of contract and non-application of clause)
- Awarding possibility of financial damages or compensation for victims of abusive practices in the financial sector (and even criminal law sanction to prevent systemic abuse and fraud) and adapting enforcement to their own needs
- Making better use of current injunction system allowing consumer associations to challenge systemic abusive practices. The Administration should support this system sharing regulatory enforcement powers with private organisations previously accredited to defend consumer interests.
- Remedying the excessive reliance on individual litigation ex-post (when problems have arise) by focusing on prevention measures and allowing public interest litigation (solving problems between consumers and institutions before they escalate into gigantic debt is better in the long term)
- Iincreasing access to justice for collective interests (providing legal standing or procedural rights for consumer associations concerning problems affecting big numbers of consumers – collective actions)
- Promoting legal aid and legal advice for most vulnerable or for those in financial need in the field of consumer credit and debt.
As far as Icelandic problems in the field of financial services, these are my specific recommendations:
It would be very advisable for the Icelandic Parliament to legislate on the consequences of the lack of disclosure of the right information to the consumers (as it is the case with many contracts verđtrygging without ex-ante disclosure of risk and financial consequences of future inflation). The solution to leave it to the national judicature on the basis of contract law has created uncertainty so far. It should take a stand and declare that partial nullity or total nullity of the contract will follow – whatever is more favourable to consumers. At the end of the day it is consumers who should have the last choice when the right information about their financial obligations is not provided rightfully to them and their consent is vitiated.
A real effective institution with powers to protect and defend consumer interests with injunctions is necessary in Iceland. The legislative proposal mentions Neytendastofa as the institution that will represent consumers. Neytendastofa has been involved in the drafting of the legislation and is not neutral in this regard. Our experience since first consumer law was imported in this country from Europe shows how this institution 1) lacks the necessary regulatory powers and/or 2) decides not to use the powers being captured by other external interests. Specially after the financial crisis in 2008, Neytendastofa has miserably failed in their mission of protecting consumer interests in Iceland. One may wonder the effectiveness of such institution from the perspective of tax-payers. Why should we finance a failed institution? It seems better to start anew. The regulatory and supervision powers need to be improved dramatically. I suggest the creation of a true and new Consumer Agency in this country with the due budget and human resources and with a section specially dedicated to financial services, credit and debt.
As regard financial inclusion and access to credit by all sectors of population, other strategies can be followed. These include the promotion of ethical banking, cooperative-lending, interest-free money and loans for public purposes and common good. We need to take a much broad perspective in consumer credit and financial services and re-think our monetary policy.
2.1.2013 | 15:32
Ég hef stundum velt fyrir mig hver samdi ţessi neytdendalánfrumvarpiđ sem reynir ađ opna gat í Evropuneytendarétt fyrir okkar blessuđ verđtrygging.
Hérna er svariđ sýnist mér.
efnahags- og viđskiptanefndar á 140. löggjafarţingi
haldinn í Austurstrćti 8-10, miđvikudaginn 2. maí 2012 kl. 10:00
Eygló Harđardóttir (EyH), kl. 10:00
Guđlaugur Ţór Ţórđarson (GŢŢ), kl. 10:00
Lilja Rafney Magnúsdóttir (LRM), kl. 10:00
Lilja Mósesdóttir (LMós), kl. 10:00
Magnús M. Norđdahl (MN) fyrir MSch, kl. 10:00
Margrét Tryggvadóttir (MT), kl. 10:00
Tryggvi Ţór Herbertsson (TŢH), kl. 10:00
Nefndarritari: Eiríkur Áki Eggertsson
5.12.2012 | 09:31
In the year 2012 I got a grant from the University of Iceland to do research on this problem. I promised to clarify the legality of this practice in EU/EEA law, to write an article and to disclose the conclusions to the whole Icelandic society.
The whole amount of the grant is destinated to finance the doctoral studies of Irina Domurath, Ph.D. candidate at the University of Iceland and University of Copenhagen during 2012. She does research on the need of a new paradigm of consumer protection in the area of credit in European law under my supervision. Her doctoral research has been financed for the period 2012-2015 by the University of Iceland with another grant from Research Fund.
There is no other personal disclaimer to be done. I work independently on this problem following only my knowledge and convictions, I have received no financial compensation for this research from external associations/organisations and I do not have a vertryggt loan myself.
Conclusions of the research - academic article now being prepared for submission to an international journal in consumer law with peer-review procedure
Verđtrygging or the indexation of financial obligations to inflation is, in reality, real effective interest calculated a posteriori (instead of nominal interest predicted by financial institutions ex-ante).
In my opinion that it is illegal in the light of European law and Directive 20089/48/EC to indexate the principal of the loan and payments of interests to reflect inflation a posteriori (ex-post).
This is so because under Icelandic current framework and new legislative proposal on consumer credit this means in fact that the principal is left undeterminate and is unclear. The information and transparency paradigm on which the Directive is based fails completely. The information and plan of payments given to consumers is always wrong by definition as effective real inflation cannot be stated beforehand. The total cost of credit and the amount of the principal are therefore by definition inaccurate.
The European Directive works with the hypothesis, definition, methods and formula supposing we have a clear principal of a loan determinate. Consumers must know the total cost of the loan so that they can commit responsibly to their future financial obligations.
A European Form is obligatory for all financial institutions offering credit in EU/EEA Member States. The cost of credit must be calculated within the rules of Annual Percentage Rate of Charge, not outside. The method of calculation is harmonised at European level so that consumers can compare between offers of different providers of financial services competing between them.
Icelandic current practice of verđtrygging goes against responsible borrowing and lending as it encourages overindebtness seducing consumers by initial low payments and by hiding the real cost of credit over the life-spam of the loan. Furthermore banks have incentives to promote inflation because they benefit both from the creation of money/debt and from real inflation which put damages and consequences on the side of consumers.
See Directive and obligatory information which needs to be disclosed
Furthermore in Iceland consumers pay for the cost of credit twice: with nominative interest calculated and agreed before hand and with effective real inflation indexation ex-post. But not only, in most cases, interest on interest on interest is regularly consolidated into the principal giving way to an extreme form of anatocism which - in some European countries- would be forbidden as usury.In the light of European consumer law, this would qualify as an abusive clause which must be null and void according to the case-law of the Court of Justice of the European Union and European legislation prohibiting abusive clauses and abusive commercial practices.
To adjust to inflation, European considers two main options: the payment of nominal interest charges agreed beforehand (fix rates of interest) or revisable regularly (variable rates). European law does not work on the hypothesis of real interest charged a posteriori. A price-indexation scheme such as it is practiced in Iceland is not incidental but is the main feature of the total cost of credit for debtors. For this reason it cannot escape the scope of the methodology foreseen by the Directive.
Indexation of payments of interest (not the principal of the loan) could be in accordance with the Directive if the method is properly disclosed ex ante (pre-contractual and contractual stages) and it is done through the required technique of Annual Percentage Rate of Charge.
See Guidelines of the European Commission on calculation of cost of credit and Annual Percentage Rate of Charge
European legislation does not harmonise cost of credit itself as long as it respects the European framework on transparency, information and does not constitute abuse. Some countries such as Estonia have high interest rates fro credit while other such as Germany have low interest rates. My criticism refers therefore to the methodology applied for the cost of credit in Iceland, not to the fact that the ISK króna requires high interest rates due the problems of economic governance, to its instability and size which increase risk for creditors.
3.12.2012 | 11:42
1. What is happening in Spain? How is the crisis affecting my native country?
The tsunami of the financial crisis has arrived to the Spanish shore and the situation is very serious. Spain is facing this dilemma: to be rescued or not to ask for a rescue. The finances of the State have been stretched to the limit. There is a fiscal crisis, a sovereign-debt crisis, economic recession and 25% unemployment with a prediction of 27% for the next years. Young people face 50% unemployment. And there is a social fracture. Some people are loosing jobs, houses and fighting now for their dignity and hope while some sectors of the society are still travelling in first class protected by political affiliations, good pensions or other secured jobs. Put in simple terms, the social contract is broken for just too many. Like in Iceland many people think that a fatal link between bankers and politicians and the bet on easy money based on a construction bubble have now taken the country to a road with no exit. In this context there are some movements of protest that are trying to follow what they call the “Icelandic way”.
Most important on is the 15-M movement (15th May 2011) with strong support of public opinion that, however, fails to bring change through the current political system. Legislative elections in November 2011 did not renovate political arena. Three main slogans and claims:
1. “No nos representan“. Current politicians (and constitutional system) in Spain do not represent us. We are neglected as individuals, our voices are silenced and we are excluded. The time of transition after Franco is expired. There is a generational fracture.
2. “No tenemos miedo“. We are not afraid. We have hope.
3. “ Lo llaman democracia y no lo es“. Behind the mask of representation our voices are substituted by political actors who defend –in reality –other interests: those of political parties and big corporations or even trade unions.
But many other groups and protests:
Stop desahucios (Stop repossessions of property – overindebtness of families ) and Plataforma de Afectados por Hipoteca
Democracia real ya! (More democracy is needed)
Economistas indignados. Manifesto for economic alternatives. Strong criticism to the neoliberal ideology of the EU, the role of German Banks and Angela Merkel (Germany) in transferring the crisis to the sovereign-debt arena.
Debt is at the center of debate. Moral assessment of responsibility. Odious debt. New Marshall Plan for Europe recovery. EU reform. Social/ ethical banking.
Also ATTAC and groups inspired by the Social Forum (Puerto Alegre). But not only. Protest has been recently arrived to the most unexpected agents as even Judges and Police taking a moral stand and saying basta!!!! More recently, all Ombudsmen in Spain have made public a similar view as the Spanish Constitution promises a fundamental right for housing and obliges public authorities to fight against speculation in land use.
Social problems related to private debt and archaic legislation are so important that in November 2012 associations of judges and police trade unions announced they would seriously consider civil disobedience regarding the expulsion of families indebted in good faith who cannot pay mortages. The sparkling fire was a legal opinion (with just moral authority) of Advocate General Kokott (Court of Justice of the European Union) declaring Spanish civil procedural law incompatible with European consumer legislation on abusive clauses as it provides no opportunity of defense. You first loose the house, the debt follows you for life but there is a need to start a new procedure if an abuse has been committed. Some recent suicides from indebted have sparkled public discussions…
I am surprised but not completely. I was educated in legal philosophy by the Dean of the Faculty of Law of University Complutense (José Iturmendi Morales), with a strong focus on fighting legal positivism doctrines. A whole generation has been educated in that way. Our duty as lawyers would be to be always alert against abuses of law and to have the tools and competence to detect them and respond against them from/within the legal system.
As José Luis Sampedro puts it in a short way "the law is to be respected as long as it is respectable". This normative approach which limits the discretion of the legislative power is a response to the abuses of legality committed by public authorities along the Spanish legal history but it also applies in other countries such as Germany (ie. abuses of law under Nazi regime). José Luis Sampedro is a humanist writer and economist who has been given in 2010 the Prize Orden de las Artes y las Letras de Espańa and in 2011 got the National Prize of Humanities in Spain Premio Nacional de las Letras Espańolas
We learned therefore that civil disobedience is justified when one of the three necessary pillars of the law is not complied with: legality, ethics/fundamental rights and/or legitimacy. The main book on civil disobedience published by Maria José Falcón y Tella is done by a professor of the University Complutense, a disciple of the former dean (Martinus Nijhoff Publishers, 2004 - 487 síđur). The mere idea of civil disobedience is obviously a shocking thought for Icelandic lawyers and judges as Icelandic legal system does not consider legitimacy as a necessary dimension of law. For you if there is a revolution, this would be it.
But while the society is claiming for change, this is nevertheless very difficult:
Above all, movement calls for a new constitutional reform which would unfortunately open the Pandora box of nationalism/independentism and the nr. 1 taboo subject: is a Third Republic coming to Spain? Socialists and left wing parties are all republicans but accepted King Juan Carlos as a peace guarantor during democratic transition.
Is there any alternative to parliamentarism? A republic of the crowd is impossible in a 46 million country. Democracy is both Heaven and Hell. Can we reform our democracy from democracy? Within democracy? Can we re-orientate it to the common good of some essential social values and not to the market and economic profit? If so, which is the way ahead? How can we do it? That is why they need to know all about Iceland.
2. My book: The Icelandic revolution. A victory for citizens
The book summarizes and translates what has happened in Iceland in the period 2007-2012. In a recent congress I attended on critical political analysis in Spain, I could confirm how the process we go through is not new in history nor it is new in political science. As in Spain, the financial crisis brings forward a process of dismissal (proceso destituyente) and a process of reconstruction (proceso constituyente). Professor of political science and journalism Victor Sampedro who has visited Iceland two times has very kindly given his theoretical insights into this area. Both processes happen at the same time. This forces us to rethink our society and build a transitional framework. There is obviously a tension between Old concepts vs. New hopes which can last some decades. It is normal to feel lost, times of crisis are times where we need to think and search for new approaches, concepts, institutions to solve our problems. This is the main idea of the book inspired by philosopher Ortega y Gasset.
To the question what have we learned in Iceland? The answer for the time being is mostly of political nature as I do not think any economist would claim we have found the miracle to all our current problems and no legal changes are yet revolutionary. No matter how we build our future we are constrained by economic resources. We may also disagree on methodologies. At any case I claim that it is not possible to get out of the crisis without ethics and responsibility, critical and creative thinking and changing course.
In my view, the role of civic society is essential and I want to give them the merit ordinary men and women deserve. What I say is that citizens must help their societies and their leaders to go through this transition while claiming peacefully a new economic, monetary, legal and political order. A vote casted every 4 years is not enough. If there is an Icelandic revolution is this one: we all must assume our civic duties. The example of civic meetings (borgarafundur), more democracy through deliberation (ţjóđfundur) and the request of 24% of the electorate to vote on the nationalization of Icesave debt is a revolution for Spanish standards.
Politically the miracle is that citizens wake up to their duties and democracy. The claim that there is no parcel of power which escapes public scrutiny implies a change of mentality for all of us. It means we must prepare to educate ourselves. Change means thousands of hours that people have invested in studying and understanding difficult problems. In Spain to get people away from sofa, TV, sports, alcohol and other social events to read and to participate in politics is revolutionary. That is why the editor chose that title.
From a legal perspective I observe a trend of constitutional reform which is the same that arrived to continental Europe after IIWW: a model where popular sovereignty is affirmed vs. parliamentary representation. And, even more interesting, an imprecise claim put forward by citizens (Icesave) where the missing dimension of legitimacy (consent of the people – for the benefit of the people) is requested as a prerequisite to what is law (a posteriori though). This would mean that Icelandic citizens are reacting to legal positivism and agree more with the Spanish way of thinking about law (in terms of a triple legal test).
The constitutional reform process is also followed very closely and there is great admiration for us in this regard. Americans would call it “street law”. And I am proud I attended a training seminar abroad where they gave the honour of qualifying “street lawyer”, looking to the legal system from the perspective of the citizens.
But Attention: My title would have been Iceland: the revolution of the (im)posible because the changes that are needed to change course are so fundamental and radical that I wonder whether they can be achieved by our generation. In that way after reading the book one cannot decide for sure whether to be optimistic or pessimistic. As in life, things are not black and white. We move in grey areas trying to do our best. I give hope but I also cast light on the dark areas.
3. Most important ideas from the book which are interesting for Icelanders:
We must move from merely superficial concerns or distracting issues in order to address systemic issues which are behind present crisis. What other reforms will help us out to build a better just and decent society? Ideas abound. The road before us is long but it implies a change of many issues: a focus on the real economy, human, social and sustainable development and the renewal of democracy. There are alternative ways of thinking about economy and money but these ideas are put aside by the international financial governance elite who is not elected democratically.
See Stiglitz´s Report to the United Nations 2009 on the urgency of an ambitious financial reform to contribute to a better world in a context of crisis and unsustainable natural resources and energy.
See Martha Naussbam, recent winner of the prize Principe de Asturias 2012 in Spain who for decades has worked to prove that the economy should be oriented towards people and ethics and not against them.
See other proposals such as the recovery of American monetary reform program of 1939 after depression or parked economists thesis and silenced by conventional economic theory as Silvio Gesell.
Gesell is my favorite economist these days for some of his ideas. This precursor of economist Keynes proposed for over a hundred years the establishment of a free economic model, a free market system unbound from financial capitalism where the state recovers its essential role in the creation of money without interest (free money) and where the whole system is reversed. Only money which operates in real economy will keep its purchasing power. Money used for speculation should loose value year after year.
Our current system is based on well hidden fact. After the trauma of hyper-inflation in Germany in the period before the II WW a golden rule was created: central banks must be independent from governments, they must never, ever, in no circumstances issue public money to rescue treasures. The problem now is that we have gone to the other extreme. Not only central banks are dependent on banking but we have given up this sovereign power of creating money to banking and credit institutions. They are the ones which have created –through our deposits and with no regulatory limit- a black hole of the universe: an amount of private debt so huge that is threatening our societies, states, and even the fundamental pillars of our democracies and civilization.
Why do we accept that banks –which have the responsibility for the tsunami - get unlimited credit from the European Central Bank at sometimes 0% while they borrow this money to the States at a rate of 7-8%? In Spain the problem is so acute that 25% of the 2013 budget will go to pay the interest of the debt of the State. It is morally wrong to raise taxes to serve the interest of sovereign debt while education, public health and social services are sacrificed. Austerity for the sake of austerity is simply suicide: the president of Brasil has recently visited Spain and said so. Do not do the mistakes of South America. Learn from us.
The film director Costa Gavras has put it bluntly in his most recent film THE CAPITAL when the director of the bank says to the shareholders: Now the bastards say the truth. Our policy will be “Lets steal from the poor to give it the rich.“ And a big clap follows. The casino game will continue until the next financial crisis which is around the corner. There is no way a country can produce goods and services to serve the debt which –by the magic of the compound interest - grows to infinite.
You may think that these are utopias but there are serious people promoting alternatives to our current capitalist system. One of them is Professor Bern Senf in Germany who predicts repression, civil conflict and war unless we change course. And, more recently, two economists at the International Monetary Fund have confirmed the validity of the so-called Chicago Plan from 1939. This means a separation of monetary and credit functions of banks requiring 100% reserve for deposits.
In USA estimate that this system would provide greater control over the cycles, eliminate the panic run on deposits, reduce public debt and private debt would reduce by not requiring the debt-money creation. Furthermore promote productivity by 10% and reduced to zero inflation. Here in Iceland Frosti Sigurjónsson has introduced these ideas and I totally support him in this regard. We also have the Icelandic Financial Reform Initiative which I mention in my book (see http://www.ifri.is/).
Ethical banking is also growing in the world. Banks like Triodos in Spain and Holland or Ekobanken in Sweden which representative came to Iceland to this TV programme some weeks ago. Ekobanken only works on the basis of the deposits of the clients, they do not create extra money-debt on thin air and they deserve a compliment for its social goals. A small saving bank in Spain, Caja Ontanyen, has followed the same policy for more than 100 years and is one of the two saving banks which is left in Spain after the financial crisis. The Global Alliance for Banking on Values is an independent network of banks using finance to deliver sustainable development for unserved people, communities and the environment. http://www.gabv.org/
As you see there are many people working out there for alternatives. People like Martha Nussbaum who try their best to bring ethics to economy, to change the lens through which we see and interpret reality to stop concentrating on the Gross Domestic Product (GDP) and we look at human development, equality and distribution, progress as individuals and societies and even happiness.
People like Christian Felber who defends an alternative economic model explaining a necessary change of coordinates: from profit and competition to collaboration and search for common goods such as solidarity, social justice, respect for environment, transparency and democratic participation to name just a few. See his book The economy of the common good.
We might choose to be blind and deaf to new ideas but something is happening when even the research published by German bank Deutsche Bank is telling us that we will be not happier if we look just at the GDP.
Monetary and financial reform – Stiglitz Report to the United Nations 2009 – Conclusions as put by President of the United Nations
“The crisis is not just a once in a century accident, something that just happened to the economy, something that could not be anticipated, let alone avoided. We believe, to the contrary, the crisis is man-made: It was the results of mistakes by the private sector and misguided and failed policies of the public“
“The crisis demonstrates failure at many levels – of theory and philosophy, of institutions, policies and practices, and, less overtly, of ethics and accountability[...] Our multiple crises are not the result of a failure or failures of the system. Rather, the system itself [...] is the cause of many of these failures“.
4. Many problems still pending. Example: verđtrygging (price-indexation of loans/mortgages)
In the book I also mention some problems which are very difficult to resolve in Iceland. One of them is “verđtrygging” and the necessary restructuration of private debt.
I have very recently done research on this problem and I have informed both the Parliament and Minister Steingrímur J. of my conclusions in European law. I have no verđtryggt loan so I do not have any private interest to defend here. I do not work either for other companies or associations. Conclusions are four.
1) The price-indexation of capital where the principal of the loan is unclear and indeterminate and grows clashes frontally with European consumer legislation. 2) Furthermore, we all know it is an abusive practice where all the consequences and damages of inflation are directly passed to the debtor without any benefit. 3) Abusive practices such as those are simply null and void in European law. 4) And, no, transparency and information in the precontractual stage do not legitimize abuse.
Conclusions of my research
Verđtrygging or the indexation of financial obligations to inflation is, in reality, real interest calculated a posteriori (instead of nominal interest predicted by financial institutions).
In my opinion that it is illegal in the light of European law to indexate the principal of the loan to inflation a posteriori (ex-post).
This is so because under Icelandic legislative proposal this means that the principal is left undeterminate and is unclear. Plan of payments is always wrong by definition as nobody can predict inflation. The total cost of credit is wrong. The European Directive works with the hypothesis, definition, methods and formula supposing we have a clear principal of a loan determinate. Consumers must know the total cost of the loan in advance.
European law considers two main options: the payment of nominal interest charges agreed beforehand (fix rates of interest) or revisable regularly (variable rates). European law does not work on the hypothesis of charging real interest a posteriori.
Indexation of payments of interest (not the principal of the loan) could be ok if the method is properly disclosed ex ante (pre-contractual and contractual stages) and it is done through the technique of Annual Percentage Rate of Charge as the Directive requires.For these reasons, I have decided simply to write directly to the ESA and put before them 1-2 essential questions before the new consumer credit legislation is adopted by Icelandic Parliament.
And I can tell of you that, in this sense, the situation in Spain is helping a lot because Spanish judges are sending to the Court of Justice of the European Union essential questions in this regard to confirm that the nullity of consent for abusive practices or when the essential information about financial obligations is not given ex-ante. These questions that will be answered on consumer credit law will surely confirm what too many consumer advocates are now saying in Iceland which is the same that Spanish judges are doing in practice.
To conclude I only have two questions that I leave to all of you.
Why do Spanish people accept a level of unemployment that pushes their children into exile?
And why Icelandic consumers, companies and families accept such a regime as verđtrygging?
Those are for me the 1 million dollar questions. And regarding these problems there is no (r)evolution in sight.
Summary of the book
The Court of Justice has been alluding to 'abuse and abusive practices' for more than thirty years, but for a long time the significance of these references has been unclear. Few lawyers examined the case law, and those who did doubted whether it had led to the development of a legal principle. Within the last few years there has been a radical change of attitude, largely due to the development by the Court of an abuse test and its application within the field of taxation. In this book, academics and practitioners from all over Europe discuss the development of the Court's approach to abuse of law across the whole spectrum of European Union law, analysing the case-law from the 1970s to the present day and exploring the consequences of the introduction of the newly designated 'principle of prohibition of abuse of law' for the development of the laws of the EU and those of the Member States.
17.6.2011 | 00:43
Bill Drayton is awarded the Prince of Asturias Award for International Cooperation, the Spanish equivalent of the Nobel Prize. This prize recognises the role and importance of social entrepreneurs to change our world.
About the organisation Ashoka - Changemakers - About the changemakers´fast track
"Ashoka’s Changemakers® is the world’s fast track for social change. If your destination is changing the world, you will get there with Changemakers: charting your best route, learning detours to roadblocks, getting the fuel you need, and meeting fellow travelers who can help you. No matter where you are starting, where you are going, or how impatient you are to get there, this community of problem solvers, disruptors, and innovators has built a fast track for action that will support and guide you, every step of the way.
Changemakers is a global online community that supports everyone’s ability to be a changemaker by inspiring, mentoring, and collaborating with other members of the community at every level of changemaking. Changemakers hosts collaborative online competitions to identify and connect the best social innovators and implementers. Participants compete to surface the most promising solutions, and then collaborate to reﬁne, enrich, and implement them. Changemakers builds on Ashoka’s three-decade history of transforming the citizen sector by building the largest association of leading social entrepreneurs in the world."
See the changemakers´fast track here
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