Better consumer protection - Financial services - consumer credit and mortgage law




Yesterday I went to talk to the Althingi, Efnahags og Višskiptanefnd. 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 verštrygging 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 verštrygging 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 verštrygging, 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 Reykjavķk 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 Neytendalįn 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 verštrygging, 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 verštrygging 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.

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1 Smįmynd: Marinó G. Njįlsson

Takk fyrir žetta, Elvira.  Žś ert einfaldlega best!  Spurning er bara hvort fjįrmįlafyrirtękin nįi aš telja žingmönnum trś um annan sannleika, en žann sem žś segir, ž.e. žann sem hentar betur žeirra mįlsstaš.  Ef viš getum lęrt af reynslunni, žį er žaš žvķ mišur žannig aš žingmenn halda aš sannleikurinn komi bara frį SFF, SA eša Verslunarrįši.

Marinó G. Njįlsson, 19.2.2013 kl. 22:45

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