Legal Alert – Proposal For Legislation Concerning Microloans
The Finnish Ministry of Justice set up a working group (the Working Group) on 2 December 2011 with the task to prepare amendments to legislation to reduce reported problems caused by short term/payday loans (Microloans).
The Working Group delivered its report on the issue on 11 April 2012 drafted in the form a government bill. Subsequently a modified government bill was submitted to the Finnish Parliament on 6 September 2012 (government bill number 78/2012, the Government Bill).
The report and proposal by the Working Group has been subject of a lively debate and initial proposals to introduce limitations on Microloans received strong opposition from the relevant business sector.
The Government Bill is still subject to possible amendments during the processing of the Government Bill in the Parliament. The tentative timetable for the processing of the bill will be published by the Finnish Parliament over the coming weeks (as per 6 September, the Parliament had only noted receipt of the Government Bill).
The Government Bill refers to a statement from Suomen Pienlainayhdistys r.y. (in English, the Finnish Micro Loan Association) according to which the proposal would in effect mean that the Microloans business would cease to exist in its current business model form, as the Microloans business would cease to be profitable.
The Government Bill suggests amendments to legislation affecting Microloans, most importantly to Chapter 7 of the Consumer Protection Act. The main reason given for the proposed changes is the reported increased amount of judgments relating to consumer credit debts.
The most drastic change suggested is the implementation of a cap for charges and costs which can be collected from the consumers, expressed as an annual percentage rate of the principal of the loan. This cap would be applicable to onetime credits, ongoing credits as well as secured and unsecured credits.
However, the proposed limitations would not be applied to pure commodity linked credits (provided there is no possibility to withdraw cash money) or credits with a principal loan amount of EUR 2,000 or more. According to the proposal, the maximum annualized percentage rate of charges would be 50 percentage points above the reference rate defined in Section 12 of the Interest Act (633/1982, as amended), which, at the current reference rate being one percent would mean 51 percent annually.
In order to prevent the circumvention of the limitations for the charges collected, the Government Bill also proposes amendments to the Finnish Interest Act whereby agreement stipulations requiring consumers to pay additional charges instead of, or in addition to, penalty interest for late payment, e.g. liquidated damages or contractual penalty, would be void, if such liquidated damages or contractual penalty, in combination with the penalty interest for late payment would exceed the legally permitted interest rate.
Further, the provision regarding responsible credit granting practice is proposed to be amended to prohibit specific charges for the use of a text message, and other similar services, when granting credits and also in other communications between consumers and creditors relating to the Microloan.
The rationale behind this proposal is, according to the Government Bill, to improve the consumers’ ability to assess the total costs of the credits.
In relation to Microloans this would likely mean that creditors would no longer be allowed to charge consumers e.g. for credit applications made via text messages. Confirmation messages and other possible measures taken via text messages later during the loan period, such as postponing the due date, would also be prohibited if subject to charge.
Moreover, creditor’s obligation to assess consumer’s creditworthiness is proposed to be more specified and tightened. Currently the assessment shall be based on sufficient information considering the amount of the credit and other circumstances. According to the Government Bill, this assessment should in future be based on sufficient and adequate information on the consumer’s income and other financial circumstances.
According to the Government Bill the latest statistical information published by Statistics Finland, the reported average cost of Microloans loans was 920 percent of the loan capital on an annualized basis. Hence, the proposal would significantly limit the annual cost that may be charged on Microloans loans compared to current levels.
The Government Bill proposes that the changes to the law would take effect after a transition period of three months, starting from the final approval of the proposed legislative changes. However, the pricing cap, i.e. the regulation imposing restrictions on charges for Microloans would enter into force after a slightly longer transition period. The Government Bill does not specify the length of this longer transition period.
The Government Bill notes that the limitations on the charges permissible for Microloans will be applicable only to credit agreements concluded after the new legislation has entered into force, i.e. the new rules do not have any retroactive effect, with the exception of the prohibition to require extra charges on SMS/text messaging services, which will also apply to existing credit agreements.
Changes to debt collection cost regulation
In addition to the now proposed changes to the Consumer Protection Act, a government bill on reforming the debt collection legislation was submitted on 7 June 2012. The debt collection costs for consumer credits would be significantly limited especially in small credits with a principal loan amount of EUR 100 or less.
The government bill proposed that the new legislation would enter into force after a transition period of three months, beginning when the legislative proposal is finally approved, however no later than 16 March 2013.