International Responses to Issues of Credit and Over-indebtedness in the Wake of Crisis

Therese Wilson

• Publisher: Routledge
• Year: 2016
• Print ISBN: 9781409455226
• eBook ISBN: 9781317113737
• Edition: 1
• Topic: Law
• Subtopic: Commercial Law
• Index: Law

This book explores the political, economic and regulatory context in which credit regulation is taking place following the global financial crisis. It suggests that current neoliberal economic policies favour multi-national corporations rather than consumers and examines regulatory responses to the internationalization of consumer finance protection. Detailing how EU consumers have been affected by national economic conditions, the book also analyses the lending regimes of Europe, Australia, the US and South Africa and offers suggestions for responsible lending to avoid over-indebtedness and corrupt mortgage-lending. Finally, new approaches and directions for consumer credit regulations are outlined, such as protection for small businesses, protection against risky credit products, reorganization of mortgage securitization and the possibility of a partnership model to address financial exclusion. The book includes contributions from leading names in the field of consumer law and will be invaluable to those interested in banking, business and commercial law.

PART I
Introduction

Chapter 1
Credit and Over-indebtedness: Current Context, Regulatory Responses and Future Possibilities

Therese Wilson

1 Introduction

The global financial crisis occurred in a context of relaxed financial regulation, which enabled market conduct such as the spreading of risk through secondary trading, including trading in residential mortgage-backed securities.¹ This context, which might be described as a neoliberal, economic consumerist context, has persisted in Western liberal democracies since the crisis and has influenced the regulatory responses to it.

Neoliberalism might be described as economic liberalism – a political philosophy which ostensibly favours free markets and limited regulatory intervention in the operation of those markets.² Two aspects of the assertion that the current political and economic context is neoliberal should be highlighted here: first is the argument that neoliberalism is not in fact concerned with free markets and limited regulation, but is actually concerned with ‘giant firms’ and regulating in their interests;³ and the second is that a neoliberal environment tends to be supportive of protecting economic consumer interests, as opposed to consumer protection interests and producer interests.⁴

Crouch argues that when neoliberals refer to markets, they really mean corporations – that ‘markets’ are really large, multinational firms that wield significant economic and political power, and accordingly enjoy the allegiance of state governments.⁵ In the wake of the global financial crisis, their power and influence – including the power and influence of giant financial firms whose conduct caused the crisis – continues. Crouch explains that ‘[t]he combination of economic and political forces behind this agenda is too powerful for it to be fundamentally dislodged from its predominance’.⁶

In terms of the protection of economic consumer interests within the neoliberal paradigm, this assertion draws on Whitman’s comparative law thesis regarding ‘consumerism versus producerism’.⁷ Whitman describes a twentieth-century move away from a producerist legal order towards a consumerist legal order, particularly in the US. The producerist legal order is one that focuses on the rights and interests of producers of goods, such as workers and competitors, while the consumerist legal order focuses on the rights and interests of consumers of those goods. An important distinction is made, however, between the economic rights and interests of consumers within a consumerist legal order and consumer protection rights. Economic consumerism is concerned with ensuring that consumers can access goods at competitive prices. It embraces the free competitive market and the primacy of consumer choice. The consumer protection interest is more closely aligned with the producer interest, in that it is more paternalistic and welfarist. The consumer protection interest is also said to be compatible with the producer interest, whereas the economic consumer interest is not. A legal order concerned with the consumer protection interest may well limit choice and give rise to higher prices, through seeking to eliminate harmful products from the market. A legal order concerned with the producer interest may, not inconsistently, seek to eliminate unfair competition in the market (for example, through large firms producing cheap but inferior and possibly harmful goods) and to protect the rights of workers involved in production. The economic consumerist legal order may well overlook the consumer protection interest and the producer interest in the quest for choice and low prices.⁸ Applying these concepts to consumer credit, it is argued that the dominant neoliberal, economic consumerist legal order would be concerned with facilitating easy access to credit and consumer choice, such as through mortgage securitization models, whereas a legal order concerned with consumer protection would seek to remove harmful credit products from the market, including predatory mortgage loans made possible through the separation of risk from the mortgage transaction under the mortgage securitization model.

There remains a reluctance to interfere with consumer choice in the interests of consumer protection. One suggestion that has been made to overcome the regulatory inability to intervene too radically in speculative financial services has been a two-tiered regulatory system, where the consumer protection interest at least has influence on the regulation of financial intermediaries entrusted with ‘ordinary’ consumers’ savings and investments. Under this system, those firms entrusted with deposits and investments of ‘ordinary’ people would be heavily regulated, while a lightly regulated, high-risk financial sector would continue to exist, for those consumers who ‘choose’ to engage with that sector.⁹ Piciotto recommends such an insulation of savings from financial speculation by ‘treating banks and other managers of savings essentially as public utilities’.¹⁰

This and other recommendations for consumer protection reform, including some which will be explored in this book, have not as yet been embraced by regulators.

This book commences with an exploration of the political, economic and regulatory context in which credit regulation is taking place in the wake of the global financial crisis. It then moves to apply these considerations in a critique of particular regulatory responses, including current approaches to interest-rate ceilings, the role of credit-rating agencies, approaches to housing finance, and responsible lending. Possible new strategies and directions for consumer credit regulation will then be explored. These include the possibility of extending responsible lending regimes to protect small-business borrowers, the adoption of product safety regulatory concepts in relation to unsafe credit products, a recognition of the relationship between corrupt structures and corrupt practices and a consideration of the role of private sector actors, such as banking corporations, in consumer protection.

2 The international context

Chapter 1 by Toni Williams, ‘Continuity Not Rupture: The Persistence of Neoliberalism in the Internationalization of Consumer Finance Regulation’, notes the pre-crisis assumptions that financial transactions were both private transactions affecting only the financial institution and customer involved and parochial transactions contained within national boundaries. Therefore, national – as opposed to international or global – regulation was seen as appropriate. One impact of the global financial crisis has been a recognition that integrated, international financial consumer protection policies are necessary in order to strengthen financial stability. The chapter argues, however, that the integrated, international regulation being contemplated adopts the neoliberal national regulatory models that have sorely failed consumers in their relevant jurisdictions. It is noted, for example, that the G20’s financial stability model embraces neoliberalism’s financial consumer, who is responsible for, and capable of, protecting herself, and who is engaging with neoliberalism’s ‘competitive, resilient and disciplined’ markets. This model, it is argued, ignores the complex and opaque nature of consumer finance products that deny consumers a basis on which to make choices in an allegedly competitive market. It further ignores both the behavioural biases that affect consumer choice and the size and influence of transnational firms that enable them to create entry barriers to potential competitors and design products and services to suit them and their shareholders rather than consumers.

Consistent with neoliberalism’s economic consumerist approach, Williams finds it telling that at the G20 summits held between November 2008 and November 2011, financial consumer protection was discussed in aspirational terms only, rather than in terms of concrete regulatory action to be taken in order to achieve it. Similarly, the Organization for Economic Development and Cooperation (OECD), entrusted by the G20 with the task of developing high-level principles for financial consumer protection, has demonstrated in those principles a clear preference for ‘market-enabling regulation in the form of information-based consumer rights and remedies’.

Williams hypothesizes that the G20 model is likely to fail in protecting consumers, given the failure of national neoliberal regulatory models to effectively protect consumers from harmful products. The example used is the regulatory model implemented in the UK and Australia to deal with payment protection insurance (‘PPI’), which has not prevented the exploitation of consumers who, notwithstanding the regulatory emphasis on financial literacy and disclosure, continue to be sold PPIs in circumstances where they do not understand the product and it is of no benefit to them.

Micklitz’s chapter on ‘Access to, and Exclusion of, European Consumers from Financial Markets after the Global Financial Crisis’ considers the international context in which European consumers have found themselves as a result of credit access or exclusion from safe credit access. The chapter identifies three categories of consumer who have been differently affected by the global financial crisis on the basis of economic conditions in their nation-states: the ‘normal consumer’ who has not been adversely affected; the ‘consumer at risk’ of being adversely affected; and the ‘affected consumer’. Those adversely affected as a result of having entered into consumer credit agreements will not find the market as forgiving of them as it has been of financial institutions and nation-states which, consistently with Crouch’s neoliberal regulation for the ‘giant firm’, have been excused from their debts. Micklitz notes, by contrast, that individual consumers will be held to their liabilities under consumer credit contracts, lose their homes and face bankruptcy.

Micklitz then goes on to discuss the pre-crisis global ideology of ‘easy access to consumer credit’ and the ‘democratization of credit’ which, as explained above, fits neatly within the neoliberal, economic consumerist paradigm. The irony is that while such a creed should have led to a focus on solutions to financial exclusion, it failed to do so because of a lack of ‘social regulation’, such as consumer protection regulation, which would protect consumers from harmful credit products and facilitate access to safe credit. Instead, the credit access that was ‘opened up’ was often harmful and predatory. The consequences of this lead Micklitz to conclude that ‘European law does not really care about the socially and financially excluded’.

3 Current responses

In Part III, current regulatory responses to issues of credit and over-indebtedness in the wake of the global financial crisis are considered in light of the international context outlined in Part II above.

In ‘Culture or Politics? Models of Consumer Credit Regulation in France and the UK’ Iain Ramsay focuses on consumer credit regulation in France and in the UK because they ‘represent distinct approaches’ and have resulted in lower levels of consumer credit in France. In this regard Ramsay describes the French political economy as incorporating a distrust of credit and neoliberal models of regulation and adopting a producerist model of consumer credit protection, evidenced, for example, in the opposition to credit gratuit (interest-free credit offered by retailers) by the banks on the basis that it represents unfair competition in the credit market. Whereas in the UK there is an economic consumerist emphasis on consumer choice, in France the emphasis is on consumer protection per se. Ramsay notes that these differences are evident not only in legislation, but also in the approaches taken by the courts: whereas English courts have shown a reluctance to interfere with contractual obligations under credit contracts, French courts have demonstrated a willingness to impose duties and responsibilities on the lender beyond the scope of the credit contract itself.

With respect to credit ratings agencies and the information collected by them, in France only negative information pertaining to defaults is kept on record, whereas the UK has positive credit reporting. An explanation given for the French reluctance to embrace positive credit reporting is the French suspicion and distrust of the collection of information which may infringe on the human dignity inherent in privacy. The UK has favoured positive credit reporting on the basis of increasing consumer choice and managing risk. Turning to interest-rate ceilings, Ramsay notes that since the Second World War France has consistently maintained price ceilings on credit. This might be attributable to the influence of labour in France and a distrust of credit as exploitative of workers. The question of interest-rate ceilings remains a hotly debated topic in the UK due to concerns that they would serve to restrict choice and exacerbate financial exclusion. Finally, mortgage-lending practices are more conservative in France than the UK, which has resulted in lower default rates in France. This can be contrasted with the greater propensity for risky home mortgage lending in the UK.

While these examples do seem to fit neatly within the neoliberal, economic consumerism versus consumer protection/producerism/welfarism dichotomy, Ramsay cautions against generalizations, noting that ‘[t]he French approach might be explained by “French exceptionalism”, a hold-out against the increased global domination of a neoliberal capitalism of “mindless consumerism” stoked by consumer credit and credit cards’. He points out that France has certainly embraced aspects of neoliberalism and would have embraced them more enthusiastically if not for the global financial crisis, which tilted the balance back towards a recognition of the dangers of credit. It remains the case, however, that there are clear differences between the two countries in their approaches to credit regulation. Ramsay concludes that this makes it difficult to isolate and identify a ‘European model of credit regulation’.

Therese Wilson’s chapter on ‘The Responsible Lending Response’ draws on the neoliberal context outlined by Williams and analyses responsible lending regimes in Australia, the US, Europe and South Africa. Consumer protection imperatives, it is argued, have to some extent been hijacked by a ‘financial stability’ imperative, looking to the protection of markets rather than people. Drawing on Crouch’s thesis concerning the ‘non-death of neoliberalism’, Wilson argues that the focus on financial market protection is partly attributable to the financial sector’s ability to persuade government that it needs to be protected because state economies are dependent on its survival. The chapter refers to the ‘reactive’ rather than ‘proactive’ nature of responsible lending regimes, where responsible lending has been a reaction to the actual ‘free market’ failure that has occurred and does not seek to guard the consumer against other possible failures that might arise. The US focus on responsible lending for residential mortgages only, rather than on consumer credit more generally, is given as a clear example of this. Wilson also highlights the evidence in some responsible lending regimes of the ‘responsibilization’ of the consumer, whereby the regime focuses on irresponsible borrowing rather than on irresponsible lending. This is clearly the case with the South African regime, where a borrower’s failure to make full and truthful disclosure of their financial position gives rise to a complete defence to creditors in response to any allegation of ‘reckless’ lending. Similarly, reference to ‘creditworthiness’ in the EU directives contains, it is argued, an implicit judgement of blameworthiness, which feeds ‘responsibilization’. A major concern regarding the ‘responsible borrower’ approach is that it ignores both structural causes of over-indebtedness, including lack of real choice for some consumers, and theories of behavioural bias, which hold that consumers will display overoptimism and overconfidence when entering credit agreements. The chapter argues that an effective responsible lending regime should: (1) focus on responsible lending, rather than responsible borrowing, in order to avoid over-indebtedness; (2) focus on consumer credit in general, not limited to residential mortgage loans; (3) encourage flexible, individualized credit assessment practices; and (4) involve a regulatory agency charged with enforcement, which is adequately resourced to properly monitor and enforce compliance with market conduct regulation, including responsible lending obligations.

4 Possible future initiatives

Part IV concludes with four chapters that outline new approaches and directions for consumer credit regulation, in the wake of the global financial crisis. Eileen Webb’s chapter on ‘Extending Responsible Lending to Small Business: A “Consumer” Categorization?’ argues that because of the vulnerable position in which small business borrowers can find themselves, consumer protections afforded to individual credit consumers should be extended to small business credit consumers. It is argued that this is particularly necessary in the wake of the global financial crisis, given the impact of the crisis on small businesses. Webb notes that small business borrowers in many jurisdictions, including Australia, are limited in terms of consumer protection and the legal avenues open to them to pursue lenders who behave in a manner which would give rise to legal action in the event of such conduct on the part of an individual consumer. In Australia, for example, small bus...

Table of contents

• Cover
• Title Page
• Copyright Page
• Table of Contents
• List of Figures and Tables
• List of Contributors
• Preface
• PART I INTRODUCTION
• PART II INTERNATIONAL CONTEXT
• PART III CURRENT RESPONSES
• PART IV POSSIBLE FUTURE INITIATIVES
• Index