Consumers International is the international federation of consumer organisations with more than 240 members in 120 countries around the world. Next month we will be releasing a new report in which CI members from fourteen countries* describe the lending practices in their country. In addition we will put forward our own recommendations for how countries can support more responsible lending.
Credit and debt are key issues for consumers around the world. Access to credit can help consumers to absorb the cost of an expensive item over time, or to cope with unexpected expenditures. However, if consumers cannot afford to make repayments, either because of a miscalculation in the affordability of the loan, or due to changed circumstances, then levels of debt can become unsustainable, ultimately resulting in hardship.
Currently many countries are struggling as a result of the ongoing economic situation and as a result consumers are particularly vulnerable to abusive lending practices. This makes the need for action to ensure lending is safe and fair all the more important.
Internationally, there is increasing interest in the topic of ‘responsible lending’. In 2010 the G20 asked the Financial Stability Board to develop “options for enhancing consumer protection” in relation to consumer finance (lending) and the recently agreed G20 High Level Principles on Financial Consumer Protection and the World Bank Good Practices on Financial Consumer Protection are also very relevant to the topic. There has also been activity in the micro finance sector where the SMART campaign has developed a set of Client Protection Principles. Working with our members CI has fed into all these reports and recommendations.
At the national level a handful of countries including Malaysia, Australia and South Africa have also passed legislation and regulatory guidelines on the topic. The challenge however remains in the details; the content of the regulations and whether the regulator has the will and resources to enforce the legislation and guidelines.
In both Australia and Malaysia regulation is very new and it is probably too early to say what the impact will be on consumers. In South Africa, the National Credit Act has been in place since 2005, but some 47% of the credit active population remains credit-impaired and therefore by law unable to take on any more debt. Even in countries where consumer credit legislation has been in place for many years, for example in Belgium, the problem does not seem to be the absence of legislation, but rather the lack of adequate enforcement. In particular, the Belgian consumer organization Test Achats has found irresponsible advertising and online sales that are not in compliance with the law.
CI’s new report suggests that too often consumers face aggressive, predatory selling practices pushing expensive, complex credit products that borrowers cannot afford and do not understand. Information about the product is either provided too late or is hidden in legal jargon and fine print in contracts which consumers are pressured to sign in haste.
Product bundling, varying loan tenures, and opaque marketing practices often make it impossible for the consumer to comparison shop. In a number of countries, credit is also offered without the provider performing a proper assessment of the consumers’ ability to repay, in others, unscrupulous providers offer more credit than the consumer actually needs or has asked for.
Surprisingly, even countries that have experienced a full-blown financial crisis do not appear much wiser for the experience. Argentina’s government, for example following its macro default and seizure of consumer bank accounts in 2001, continued to openly encourage consumers to buy appliances on credit ‘for the good of the economy.
And, in countries that now recognise that they have burgeoning levels of consumer debt; preventative efforts do not seem capable of stemming the tide of over indebted consumers.
Recent reforms in the US and UK hold the promise of improved protection for financial consumers but CI’s members note continuing problems. CI’s US member Consumer Reports highlights the fact that it is still very difficult for US students to calculate the true cost of student loans and many are becoming heavily indebted. And in the UK, the growth of high interest ‘pay day loans’ has created much controversy. CI’s member in the UK, Which? has made a number of recommendations for how the new regulator can address the abuses and promote better alternatives for consumers.
In Malaysia, in response to debt-laden consumers, the Central Bank limited the amount of credit to no more than double the consumer’s monthly income, and the number of credit cards to 2 per consumer. It also mandated that the credit assessment should consider net vs. gross incomes when granting credit. Despite these interventions, consumer debt levels are still greater than 80% of GDP per capita; the highest in the region.
A clearer focus on the consumer
As CI’s Slovenian member, ZPS puts it there is often supervision without consumer protection. This is often because regulators are more concerned about the stability of the banks than the quality of the service that the banks are providing to consumers. This is a dangerous position as weak consumer protection can also threaten the stability of banks and ultimately the wider economy.
In Uganda, Consumer Education Trust (CONSENT) recounts how one of the priorities for the Bank of Uganda (BOU) is to fight inflation by keeping interest rates high. Therefore the bank allowed commercial banks to retroactively raise interest rates on consumer loans already issued. A similar situation occurred in Russia following the 2008 financial crisis. It took two years for legislation to be introduced to stop banks unilaterally changing the terms of loan contracts and retroactively raising interest rates.
Financial consumer dispute resolution is also a neglected area. Relatively few countries have financial services ombudsmen. And, in some cases, like in India, the ombudsman has a restricted mandate because it is only available for customers of licensed banks (with the proposed new legislation the ombudsmen may be available for microfinance clients as well). In most cases, however, consumers with complaints are left to their own devices – or forced to use the court system to resolve disputes, incurring more costs. This is the case in an example from Fiji, where heavily indebted consumers weighed down with monthly instalments on appliances from hire-purchase agreements can ill afford to take matters to a court.
Finally an example from India reminds us of the dangers of acting too late and too severely. Following the Andra Pradesh crisis in microfinance lending whereby hundreds of over indebted micro borrowers committed suicide, the government responded with interest rate caps, as well as applying burdensome restrictions on collection practices. The reforms have added a level of bureaucracy and cost such that many MFIs have stopped serving the poor. CI member CUTS appeals to the Government of India to be cautious to not exclude millions of poor from the financial system.
A positive note that does come through the examples provided by CI’s members, is the important role that consumer organisations play in supporting the development and passing of effective regulations, monitoring the market to expose abuses and providing research and services to inform and support consumers. Only with a greater focus on consumers and their needs and experiences can countries prevent abusive lending and increasing indebtedness.
* In alphabetical order the countries are: Argentina, Australia, Belgium, Fiji, Greece, India, Italy, Malaysia, Russia, Slovenia, South Africa, Uganda, United Kingdom, and the US (submitting two chapters on diverse issues).
In developing the report we asked authors from CI member organisations in 14 countries to choose an aspect of lending that is particularly relevant to consumers in their country and provide a consumer perspective on regulation and its implementation, as well as actual lending practices. CI’s role was advisory with regards to the content and general outline of each chapter, giving CI member organisations the space and opportunity to have their voice heard, and to elaborate on issues of their choice as per importance for consumers in their countries.