After the storm can we still work together in Europe

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After the storm can we still work together in
Europe?

• Arianna Mellini Sforza
• Legal Adviser
• European Banking Federation
• Responsible Credit Conference
• London, 13-14 November 2008

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• In Europe, we have been experiencing the effects,
  more than the causes of the financial crisis
  which were rooted in the US
• In terms of existing responsible lending
  policies, the situation in Europe is rather
  different from the one in the US
• However, under the effects of the crisis,
  confidence from both sides, offer and demand, has
  been damaged.
• What to do to restore confidence? (I)?
• What measures are already in place? (II)
• Can Consumers and Lenders work together for it?
• Action vs Over-reaction! (III)?

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I. To restore confidence

• Consumers are currently more diffident about the
  behaviour of credit institutions
• Credit institutions are now in need of liquidity
  and less incline to lend funds to borrowers that
  risk to be defaulting
• Effects of the local financial crisis have
  expanded to become global and are now affecting
  the real economy ? direct consequences on the
  financial resources of households
• Thwarting the Panic effect stabilising the
  financial markets by contrasting the speculative
  behaviours damaging the real economy ? public
  authorities to ensure the necessary liquidity and
  stability of credit institutions in the EU.

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I. To restore confidence

• Europe is not the Far West of lending!
• To know better what is already in place (and
  there is a lot!)?
• To ensure the respect of the rules
• To increase consumers awareness and education
• To keep the dialogue between lenders and
  consumers open

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II. Measures in place Prudential control

• The credit institution shall not undertake
  business with a counterparty without assessing
  its creditworthiness
• Under the Capital Requirements Directive credit
  institutions are obliged to assess a borrowers
  creditworthiness and to grant credit based on
  well-defined criteria (Directive 2006/48/EC,
  Annex III, Part 6, 19).
• WHAT IF the supervisory rules are not respected
  by credit institutions?
• Penalties
• Prohibition of business
• License revocation
• Prudential control is also - indirectly - a
  guarantee of
• fair competition among credit institutions and
  protection of consumers

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II. Measures in place Creditworthiness
Assessment (1)?

• It is in the interest of both the lender and the
  borrower that a loan is granted based on a prior
  well assessed ability to repay
• Combination of several tools
• consultation of credit registers,
• information from the client,
• longstanding contractual relationship
  lender/client
• None of them should be taken in isolation, none
  of them should become mandatory per se
• Exception in Belgium and the Netherlands the
  consultation of the credit register before
  granting a loan is required by law!
• Reverse exception Luxembourg has no credit
  register in place!

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II. Measures in place Creditworthiness
Assessment (2)?

• In most of the EU countries regulatory
  provisions, codes of conduct or recommendations
  from the supervisory authority lead in any event
  credit institutions risk management policy
• in practice, credit institutions do consult
  credit registers before granting a loan
• ?BUT WHAT KIND of information should be gathered
  from the consultation of a credit register?
• ?WHAT IS REALLY NEEDED to assess the clients
  creditworthiness?
• The EU Commissions Expert Group on Credit
  Histories report expected by 1 May 2009

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II. Measures in place Creditworthiness
Assessment (3)?

• Other tools apply in the various local markets
• Limits to monthly loan instalments based on
  disposable income
• Obligation to refuse a loan if beyond the
  clients creditworthiness
• Loan-to-value (LTV) ratio limits to the loan
  amount based on the value of the collateral
  varying across the EU but in combination with
  other tools (supplementary insurance for higher
  rates) ? incentive for the client to lower the
  level of individual exposure
• Advice (recommendation based on analysis, beyond
  the provision of complete information) to be
  provided to the client as an additional service
• Innovation at EU level? A Model from the CCD

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II. Measures in place Creditworthiness
Assessment (4)?

• Directive 2008/48 on credit agreements for
  consumers (CCD) provides
• The obligation to assess the consumers
  creditworthiness prior to granting a credit
  Article 8.1
• The flexibility to use any tool for that (on the
  basis of sufficient information, where
  appropriate obtained from the consumer and, where
  necessary, on the basis of a consultation of the
  relevant database)?
• But also
• - A balanced approach implying a duty for both
  parties to act with prudence Recital 26
• A clarification the main responsibility for the
  final choice of the credit remains with the
  consumer Recital 26

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II. Measures in place Creditworthiness
Assessment (5)?

• Will the new CCD be revolutionary in the field of
  responsible lending?
• ?But EU credit institutions already lend
  responsibly!
• No or very limited evidence of mis-selling of
  (mortgage) credit in most of the EU countries no
  or very limited increase of default rate so far
  in EU countries
• On the other hand, risk of backfire a too
  cumbersome regulation and the risk of civil
  liability claims (damages actions, class actions)
  may induce lenders to refrain from granting
  credit
• ?reduction of resources available for households,
  risk of financial exclusion!!! Is there any room
  left for dialogue?

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II. Measures in placeInformation requirements

• The Code of Conduct on Home Loans and its
  European standardised Information Sheet (ESIS) is
  one example of good result coming out of a
  dialogue it provided a model that has been
  inspiring the EU and national legislators now
  applied also to other financial services
  (consumer credit SECCI Key Investor
  Information for UCITS)?
• Its value is largely on its standardised form and
  its voluntary nature more flexible than
  legislation
• OPTEM study (March 2008) consumers largely
  appreciated the ESIS content and format,
  although suggesting improvements
• Perspective of reviewing it to make it a binding
  measure might seem a way forward but.will kill
  the dialogue!!

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II. Measures in placeImproving financial
education

• Many fruitful experiences already in place in
  many Member States in the EU to increase the
  level of financial education of the population
• More needs to be done, and at a larger scale
• OECD recommendations of 2005-2008
• EU Commission Expert Group on Financial Education
  working until 2011 on providing knowledge of best
  practices
• ? BUT HOW TO DEAL with irrational behaviours?
• Are they affected by any increase of financial
  education or information requirements??

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III.Action vs Over-reaction!What to do

• Public authorities
• To ensure that the rules are in place in due time
  ? no delays in the implementation of the CCD
• To enforce the rules that exist
• To ensure the stability of the markets, avoid
  speculative behaviours and lack of liquidity
• To keep monitoring the development of the credit
  market, to be able to react promptly

• Lenders and borrowers
• To take responsibility in the contractual
  relationship so that no unbalance is produced
  with negative effects for parties (responsible
  lending borrowing go together)?
• To cooperate in improving financial education of
  consumers
• To identify the proportionate actions that may
  bring real benefit without unnecessary burden
  (e.g. voluntary update of ESIS)?

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III. Action vs Over-reaction!What to avoid

• Over-reaction must be avoided general, long
  standing rules cannot be shaped on a crisis
  scenario!
• Further legislation is not always the solution
  adopting more stringent obligations for lenders
  may be eventually producing an unwanted effect of
  refraining from lending
• Enforcement of existing legislation cannot be
  left to private sector (class actions), public
  authorities should play their role here
• Panic effect speculative behaviours should be
  thwarted
• Borrowers and lenders should be given a chance to
  keep the dialogue open

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Thank you for your attention!

• a.mellinisforza_at_ebf-fbe.eu
• www.ebf-fbe.eu