The alliance of shadows in ECON has gone astray on CARRP – Directive on Credit Agreements Relating to Residential Property

In the coming weeks both the European Parliament and member state governments are expected to pave the way for Europe-wide mortgage rules for consumers buying or renovating a home. We call on EU Parliamentarians and national governments not to miss this unique chance to stop irresponsible lending practices and increase consumer protection.

On several occasions we have approached central persons in the alliance of shadows to the Directive on Credit Agreements Relating to Residential Property (CARRP) which is expected to be settled this summer in the EU parliament.

The alliance of shadows is Sven Giegold (the Greens), Alfredo Pallone (EPP) and Philippe De Backer (LibDems for Europe).

Together they have challenged the rapporteur on CARRP, Antolín Sánchez Presedo, on several consumer protective amendments and good consumer initiatives. When we confront the shadows on their stands, their response has been silence, and that is a democratic problem. They should come forward and express their opinions and meet our concerns with arguments. It is hard to understand why this motley crew advocates arrangements that imposes reduced transparency and hinder effective competition on Member States. It is especially disappointing that the alliance consists of one alleged consumer champ and national founder of Attac.

Our concerns are

– Compromise E on article 5.1 states that creditors and intermediaries should take “due account of the rights and interest of the consumers”. We really should expect that large, professional organisations – who’s practices are critical to society – should go beyond “taking due account” of their clients rights? We expect that MEPs in ECON would demand banks to respect and submit to clients statutory rights, and not settle for vague legal expressions such as “taking due account”. We urge MEPs to turn their back on the shadows posision on compromise E and assure that creditors and intermediaries are obligated by law to act in the best interest of consumers and respect consumer’s rights.

– In Compromise H the alliance of shadows propose another surprising disappointment. The alliance propose opening for tying practices. They seem to advocate tied products packages where mortgages also are combined with investments. Investments and savings are products consumers need when they have a financial surplus. Mortgages are products consumers need when they have financial deficits.

How could these products possibly be combined, even worse tied in a package, and at the same time serve consumers interest? Allowing illogical financial products packages would cause clients to sign on more debt that necessary. The cost of credit would increase immediately for the consumer. The final outcome could easily turn out to be overindebtness. An as for Annual Percentage Right of Charge (APRC), comparability can only be ensured when all costs directly or indirectly linked to the loan are included. MEPs in ECON must turn away from the alliance of shadows on this issue. Their proposal is hostile to consumers.

-The same goes for the enforced bundling practices on member states. On my domestic scene: no less than 25 banks are under investigations due to their bundled practices. Bundled practise causes consumers to engage in financial products they initially don’t need – to a higher price. This is made possible by incomprehensible complex pricing that is a natural consequence of bundling practices. MEPs must turn away from the alliance on the matter of bundled practices, preferable vote against permission of bundling practices or as a viable minimum vote in favour of the Rapporteurs amendment 490.

– In order to improve or moderate the alliance’s proposal of CARRP, we finally suggest that the part of compromise Q relating to Recital 31 should open for EBA to clarify how the suitability of credit product for consumers should be addressed. Doing so, CARRP would catch up with MiFID and provide EBA with the same tools and responsibilities in the mortgage market, as ESMA holds in securities market.

Other consensual opinions that the European Consumer Organisations (BEUC) is expressed today when we jointly calls on EU Parliamentarians and national governments  to

– Stop ‘locking in’ consumers to long and opaque contracts and make early repayment a right for every borrower. This would allow borrowers to profit from better offers when market conditions change;

– Ensure the Annual Percentage Rate of Charge (APRC) includes the cost of all additional services linked to the loan to fully inform the borrower about the real cost and allow easier mortgage comparison;

– Ban foreign currency loans

– Give a clear mandate to national regulators to stand up for consumers and more effectively punish malpractices such as misleading advertising, unfair commercial practices and superficial assessment of people’s financial means.

Bundled practices corrupts efficient competition, a call to MEPs in ECON voting on CARRP:

The treatment of bundled practices in the proposal for a directive on credit agreements relating to residential property (CARRP) came in the later stages of compromises and is found under Article 8a.

The proposed Article 8a is an important article and consumer organisations in Europe are strongly in favour of the proposed prohibitions of tying practices.

As a consumer organisation we have legitimate opinion and experience on how bundled practises work.  Bundled practices serve as an obstacle for transparency and effective competition. If member states should allow bundled practices, it must – as a minimum – be conditional.

Rapporteur Sanchez Presedo has proposed an amendment (#490) that deals with our concerns. The amendment opens for bundled practices as long as the bundled practices provide overall fiscal befits to the end-user which would not otherwise be available.

Bundled practices create a climate of opaque consumer contracts. It will make it difficult for consumers to recognise prices and conditions and by that hinder rational choices. 

In our domestic bank market, 46 percent of consumers are member of a customer program. At the same time only 5 percent of all consumers say they have changed bank last year.

Scarcity of migration of bank customers has traditionally been higher among consumers inside a customer programs compared to those outside.

The annual survey of the FNO tells us that only 21 percent of the members of customer program find any great benefits of their membership in the program. Knowing this, one should expect a massive withdrawal from these types of programs. But no. The proportion of consumers inside a customer program has only varied been between 50 percent and 46 percent for the past four years.

Figures above are provided by the annual survey of the FNO – the trade organisation for banks, insurance companies and other financial institutions in Norway.  

Customer programs are the prime example of bundled practices. Having several products bundled increases moving barriers.

This leads to a secondary argument for conditional acceptance of bundled practises. Bundled practices harm sound business development and the growth of new businesses and niche industry. The biggest challenge for newly established financial companies is obtaining a levelled playing field in competitions with well-established competitors. Various strategies are made in new establishments to obtain competitive advantage. The most desired strategy of consumers and society in general, is a strategy simply based on providing better products hopefully to a lower rate. Bundling practises puts pressure on new establishments to provide a broad range of products. This is of course more difficult and more capital intensive. The end result would probably be less industrial development.

Our national regulation on bundled practises is quite close to the proposed amendment to article 8a in CARRP. It showed its usefulness when the Financial Supervisory Authority of Norway decided to refuse DnBs sale of one of its most common customer program in the summer of 2011. DnB is probably best known among European Financial Supervisory Authorities for its push sale of unsuitable loan financed structural products in the Baltic region and in Scandinavia, which national authorities finally prohibited. DnBs ban on sale of the distinct customer program was announced as “a general principle and will also include all other parties”. Today, almost a year later, the Financial Supervisory Authority is pursuing no less than 25 banks due to the composition of their customer program. The extensive supervision measures were taken after initiative from the Norwegian Consumer Council.

Our experience could be useful for MEPs in ECON when voting on CARRP. Allowing bundled practises has a risk of consumer detriment as well as less effective markets. In order to minimise these risks, members of the European Parliament should vote in favour of the restricting amendment in article 8a. Voting against is incommensurable with consumer protection and improved bank market functionality.

In general when voting on draft on CARRP, MEPs should learn from the experience of past years and finally regulate the financial sector in a comprehensive way.

CARRP – Late call to MEPs in the ECON Committee

Consumer organizations throughout Europe are waiting with great expectation on the coming vote in the ECON committee on the credit agreements relating to residential property (CARRP). Scandinavian Consumer Organizations, such as the Norwegian Consumer Council is no exception.

We have joint our efforts and advocated on a wide range of topics earlier in fruitful dialog with several EU bodies, especially the rapporteur, shadow rapporteurs and designated Members of the European Parliament.

Even in these late stages we urge all members of the ECON committee in the European Parliament to support and contribute to improved consumer conditions and consumer aspects for the directive.

Focus on consumer interests must be in the midpoint when voting on Compromise E on Article 5(1). The final provision must include an independent professional responsibility to banks and intermediates to act in the best interests of their consumer client. It is not possible to combine consumer interests and at the same time vote in favour of amendments 353, 354, 355 and 358 to this article. We urge you to vote against them and vote in favour of amendment 73.

We strongly urge each MEP in ECON to support a conditional documentable end-user benefit as a criterion for sales of bundled product packages. The amendment 490, debated as Compromise H concerning Article 8a1, gives a viable solution.

It is with upmost importance to have consumer interest in mind also when voting on compromised amendment on Article 17 (Compromise Q). The outcome concerning standards of advisory services must commit providers to conduct credit and suitability assessment prior to his or hers recommendation. The outcome must also commit the providers to act in the best interests of the consumer when recommending credit agreements.

Responsible Banks and providers would have no problems with such provisions . It would not require alteration of their business conduct as their market behaviour is already in alignment to such a provision. On the other hand less responsible providers would be forced to alternate their practice.

To assure proper correction of unwanted market behaviour we acknowledge that sanctions must be dealt with. Such sanctions should be provided in Compromise E on Article 5(1) and include

“Member States shall ensure that in case of non compliance with these requirements, provisions are set to allow for compulsory adjustment of the contract in the interest of the affected consumer and at no charge for him or, at the choice of consumer, the ability to cancel the contract in a way that leaves no damages to him”

Finally we also urge you to vote in favour of amendment 635 concerning the right to use terms such as “advice”, “advisor”, «independent advice» or «independent advisor». We urge you to take a stand together with the consumer organizations on this issue when voting on Article 17 (Compromise Q). Doing so will contribute to more transparent and sincere presentation of roles where providers meets consumers.