The Finnish Ministry of Justice is preparing changes to the laws concerning consumer finance, and has called together a working group to work on the changes. Suomen Pienlainayhdistys, an association representing the interests of short-term personal loan companies, is represented on the working group. Euroloan Consumer Finance Oyj, an independent public limited company offering short-term consumer credit, is not a member of the association or the working group. Thus Euroloan brings forward its views on the matter in this way as potential changes in legislation may have an effect on the operations of Euroloan Consumer Finance Oyj.
The purpose of this statement is to present Euroloan’s view of how a sustainable development in the Finnish consumer credit market could be achieved. Euroloan supports increased regulation for the consumer finance market, but is concerned that some proposed changes in legislation are not based on real facts. Also, we want to draw attention to the consequences of possible legislation reform. The terms payday loan, instant consumer credit and consumer finance are often confused; therefore we want to make a distinction between them and invite a discussion based on facts. Euroloan’s views on the issues are presented below. These views should not be taken out of context or considered as separate statements:
What is a payday loan? What is consumer credit?
Our view is that a loan with a credit capital of less than 250 euros and a repayment period of less than one month is a payday loan. Recent figures on short-term loan companies published by Statistics Finland show that the average short-term loan was 229 euros and the average repayment period was 32 days in the third quarter in 2011. When the credit capital and/or repayment period is greater, we consider this as consumer credit.
Why are payday loans needed and who takes them?
We believe that all creditworthy individuals should have an equal right to balance their personal income and spending at a reasonable cost and in balance with their financial standing, whether this is in the form of a payday loan or consumer credit. The majority of our customers are ordinary working people and over 35 years of age. They vast majority of customers take a consumer credit during working hours on a weekday, using the loan to cover everyday household needs.
Is an annual percentage rate of 1411% reasonable?
According to Statistics Finland, an average cost of 25 euros is paid for a 100 euro loan. The annual percentage rate defined by the Finnish Consumer Protection Act for a 100 euro loan with a repayment period of 30 days is no less than 1411%. We think that the actual cost, i.e. “25 euro” is a better and clearer way to inform consumers about the cost of the loan than “1411 per cent”. As the term itself suggests, the annual percentage rate is more appropriate for loans that are paid back over a period of many years. If we turn this around and look at a mortgage loan, we can see how biased the method is. A 100,000 euro loan with a 20-year repayment period at a 4% annual percentage rate builds up an interest cost of c. 45,000 euros. “Take a 100,000 euro loan – you’ll only pay back 145,500 euros”. In our opinion, the annual percentage rate defined by the Finnish Consumer Protection Act does not reflect the correct cost. Taking into consideration credit losses and the unstable operating environment with insufficient legislation and norms, we believe that the average cost for an instant consumer credit, as reported by Statistics Finland, is reasonable and justified.
Are payday loans the reason for people’s debt problems and for the congestion of the court system caused by debt recovery and foreclosure cases?
Our position is based on recent statistics published by Suomen Asiakastieto which indicates that:
- Only 5% of new payment default entries were a direct result of taking short-term loans.
- Only 1% of people who have payment default entries on their credit history have entries solely caused by taking short-term loans.
- An overwhelming majority of payment defaults result from something other than short-term loans, 95–99% depending on calculation method.
- Payday loans explain debt problems only very marginally. The increase in the total number of payday loans causes some congestion in our courts. Statistics Finland reports that, in the third quarter of 2011 alone, over 350,000 short-term loans were granted, which means an annual increase of 35%. Unfortunately, some loans cannot be recovered without court proceedings, which add to the congestion in courts. However, short-term loans do not explain why people run into debt or become marginalised in society as Mr. Heikki Koivula, director of Suomen Asiakastieto, explains in an online article for Talouselämä magazine published on 12 January 2012.
Is banning short-term loans or limiting the offering the best way to reduce payday loan related problems?
We believe there is a need for the working group set up by the Ministry of Justice and that measures should be taken to decrease debt-related problems. However, limiting the availability of payday loans does not eliminate the demand for these types of loans. Instead, it directs people towards larger and longer loans and also encourages seeking loans from the grey market or from foreign service providers that are outside domestic regulation. Rather than removing the problem, this would just make it worse.
Lender responsibilities
Lenders must always use their best effort to ascertain the creditworthiness of their customers. It is neither in the lender’s nor the borrower’s interest if the customer is struggling to pay the loan back. Criteria for assessing the customers’ creditworthiness should be sufficient and constantly monitored.
Solutions
- A general credit register. In Sweden, the use of more extensive credit information has significantly reduced the number of consumers running into debt. It has also significantly lowered credit losses for lenders and increased price competition.
- Increasing regulation and self-regulation and centralised market supervision under the Finnish Financial Supervisory Authority (Finanssivalvonta)
- Increasing competition i.e. ensuring a sufficient number of reliable operators
- Ensuring a stable regulatory and operating environment with clear norms. In an unpredictable environment prices stay at a premium. Reducing lenders’ risk will lower consumer prices through increased competition
In our opinion, responsible lending will reinforce the reputation and trust in the short-term loan and consumer credit market. Increased regulation and self-regulation will help establish a stable and predictable marketplace, where consumers can get credit safely and at a reasonable price. Decreasing credit risk and facilitating fair competition will lead to lower prices. It is essential to understand that a stable operating and legal environment reduces the operational risk for lenders and consequently reduces the price also for the consumer. In our opinion, the FSA (Finanssivalvonta) is the only authority that could monitor the consumer credit market, through a licensing procedure somewhat less rigorous than a banking licence. Market monitoring as currently operated by the Regional Administration Authority (Aluehallintovirasto) is focused on cosmetic details rather than real issues. Lenders should be required to have sufficient equity reserves and a continuous commitment to strict business standards.
According to Statistics Finland, nearly 300 million euros were granted in short-term loans during the previous four quarters. It is essential to understand that this demand will not disappear even if a minimum loan term or loan amount is introduced. A full ban would lead customers toward the grey market or foreign service providers that are not under even the nominal control of local Finnish authorities. Potential regulatory changes should ensure safe and reasonably priced loan services for consumers through domestic service providers as well as the entrepreneurial freedom granted by the Finnish constitution. This freedom does not mean a total freedom from responsibility, but rather a freedom to operate according to agreed norms for responsible lending. This would be in the best interests of all concerned.
On behalf of Euroloan Consumer Finance Oyj:
Tommi Lindfors
CEO
PL 211, (Hiilikatu 3 Technopolis Ruoholahti)
00181 Helsinki
+35810 2171 002
tommi.lindfors@euroloan.com
www.euroloan.com
Sources:
Asiakastieto (www.asiakastieto.fi/en)
Euroloan Consumer Finance Oyj ( www.euroloan.com)
Ministry of Justice, Finland (http://www.om.fi/Etusivu/Valmisteilla/Lakihankkeet/Velvoiteoikeusjakuluttajansuoja/1302674597491)
OP-Pohjola 19 January 2012 (http://www.op.fi/op/henkiloasiakkaat/lainat/lainalaskuri?id=20103&srcpl=8)
Talouselämä (http://www.talouselama.fi/uutiset/pikavipit+eivat+selita+suomalaisten+ylivelkaantumista/a754685)
Statistics Finland (http://www.stat.fi/til/lkan/2011/03/lkan_2011_03_2011-12-02_tau_004_fi.html)