23 September 2016
A recent study by the Consumer Ombudsman reveals that the problems of the payday loan market cannot be resolved unless legislation is amended. The Consumer Ombudsman has submitted a motion to the Ministry of Justice, proposing that the interest rate ceiling be expanded to apply to all consumer credit. At the moment, it only applies to credit under EUR 2,000. The effective annual interest rates of credit higher than EUR 2,000 are unreasonably high, often more than 100% or even considerably higher.
The Consumer Ombudsman has investigated the problems encountered in the payday loan market since a law amendment entered into force in 2013. Starting from June 2013, an cash credit under EUR 2,000 has been subject to an interest rate ceiling, where the maximum actual annual interest rate may be 50% + the currently valid reference interest rate. The purpose of this amendment was to reduce debt problems resulting from payday loans. It was assumed that on competitive credit markets, the interest rate of credit of EUR 2,000 or greater would also remain at a significantly lower level than the set interest rate ceiling.
Observations made over the last three years have nonetheless shown that this was not the case. Payday loan providers have mainly began granting loans above the ceiling, i.e. credits of EUR 2,000 or greater, with annual interest rates in excess of 100% or even much higher.
The Consumer Ombudsman believes that legislation should be reassessed urgently.
“Extensive interest rate ceiling provision will be the only sufficiently efficient solution to unreasonable credit costs. Unless legislation is amended, payday loan providers are able to continue to make a profit at the expense of vulnerable consumer groups, and increasing numbers of people run into repayment problems. We are happy to see that some Members of Parliament have also submitted a motion to address this problem,” says Consumer Ombudsman Päivi Hentunen.
Furthermore, consumer rights are currently not fully realised in courts. Most of the debt collection cases are settled in court by “summary procedure”, by which the court of law usually confirms the creditor's demand, unless the debtor him/herself actively demands mediation of unreasonably high credit costs after having been notified of the matter by a court summons.
The Consumer Ombudsman also believes that it is important to investigate whether at least larger credit sums could could be subjected to an interest rate ceiling lower than the current one. If interest rate ceiling provision is made stricter, it will be necessary to assess its impact on various consumer groups' ability to access credit. The ability of social credit to answer to some credit needs should also be assessed, among other things.
The Consumer Ombudsman's motion to the Ministry of Justice also includes several other issues concerning consumer credit legislation that need to be looked into. For example, legislative amendments should be considered for longer than 3-month interest-free and cost-free credit that is currently outside the scope of legal regulation. It is not justifiable that in cases of long-term credit – whose amount may be large as compared to the debtor's capacity to pay – legislation does not for example require that the consumer's creditworthiness be assessed nor secure the consumer's status sufficiently in cases of payment delays.
The Consumer Ombudsman's ability to address problems in the credit market is hampered by the fact that there are no sufficiently powerful penalties that would have preventive effects and enhance negotiations with businesses. A single company may repeatedly violate the legal status of consumers and break key consumer credit provisions without facing financial consequences. For example the Swedish consumer authorities have substantially better means to monitor the adherence to consumer credit provisions. A Ministry of Justice working group already proposed in a 2015 report that the selection of means available to the Consumer Ombudsman should be expanded.