R ESPONSIBLE C REDIT The Portuguese Experience Maria Lúcia Leitão • Head of the Banking Conduct Supervision Department Regional Conference on Consumer Protection and Financial Literacy World Bank and Financial Sector Commission of Bulgaria 10 June 2014
R ESPONSIBLE C REDIT R ESPONSIBLE C REDIT : a comprehensive approach Responsible credit embraces: • Responsible lending Responsible borrowing Responsible management of pre-arrears and arrears Responsible credit shall cover all phases of the credit life cycle : • Prior to the conclusion of the credit agreement During the lifetime of the credit agreement In the renegotiation of credit agreements in pre-arrears or arrears 2 • 10 June 2014 Regional Conference on Consumer Protection and Financial Literacy
R ESPONSIBLE C REDIT OECD G20 Principles on Financial Consumer Protection 3. Equitable and Fair Treatment of Consumers All financial consumers should be treated equitably, honestly and fairly at all stages of their relationship with financial service providers. (…) 5. Financial Education and Awareness Financial education and awareness should be promoted by all relevant stakeholders and clear information on consumer protection, rights and responsibilities should be easily accessible by consumers. (…) The provision of broad based financial education and information to deepen consumer financial knowledge and capability should be promoted, especially for vulnerable groups. (…) 3 • 10 June 2014 Regional Conference on Consumer Protection and Financial Literacy
R ESPONSIBLE C REDIT R ESPONSIBLE L ENDING Credit institutions shall grant credit in a prudent , honest and transparent • manner Responsible lending practices promote: • Credit risk control , thus contributing to reinforce credit institutions’ prudential soundness and the safeguard of financial stability Consumer protection , by ensuring that the credit products offered are suitable to each customer’s needs and financial capacity Prudential supervision and conduct of business supervision pursue the • same goal 4 • 10 June 2014 Regional Conference on Consumer Protection and Financial Literacy
R ESPONSIBLE C REDIT The principles of R ESPONSIBLE L ENDING Responsible lending is mostly based on • the following principles Non-misleading advertising Provision of complete and accurate information to customers Customer assistance “Fairness for consumers of financial services and Suitability assessment products can be achieved through a range of protection measures such as fair and clear advertising , improved transparency […], Creditworthiness assessment standardised information , […] assessments of creditworthiness/suitability , sound and clear advice […].” 5 • 10 June 2014 Regional Conference on Consumer Protection and Financial Literacy
R ESPONSIBLE C REDIT Implementation of R ESPONSIBLE L ENDING principles Advertisement : • How to ensure effective oversight (ex-ante vs ex-post approach)? Provision of information: • Standardised information sheet / Monthly statements Mystery shopping proves to be effective Customers’ assistance: • Assistance vs counselling? Training of staff is a priority Suitability: • Standard products should be offered to improve comparability Cross-selling Creditworthiness: • Which level of Loan-to-value / Loan-to-income? How to assure creditworthiness during the lifetime of the loan? 6 • 10 June 2014 Regional Conference on Consumer Protection and Financial Literacy
R ESPONSIBLE C REDIT R ESPONSIBLE B ORROWING Customers should make informed and • responsible credit decisions For that purpose, customers should: • Be capable of interpreting and understanding information on the credit product Assess if the credit product offered suits their needs and “Through studies and research on financial capacity behavioural economics, supervisors and regulators can try to identify the capabilities of consumers , as well as the Financial education is the key for • decision making pitfalls that result from responsible borrowing biases and heuristics.” 7 • 10 June 2014 Regional Conference on Consumer Protection and Financial Literacy
R ESPONSIBLE C REDIT R ESPONSIBLE CREDIT in the Consumer Credit Directive (CCD) The CCD establishes principles and rules to promote responsible credit practices • Advertisement: standard information in advertisement of consumer credit products (representative example) Information duties: provision of complete and accurate pre-contractual and contractual information - standardised information sheet (SIS)/annual percentage rate of charge (APR) Customer assistance/suitability: provision of adequate explanations to customers /right of withdrawal (14 calendar days) Creditworthiness assessment: obligation to consult credit registry databases Credit intermediaries shall also observe these rules • 8 • 10 June 2014 Regional Conference on Consumer Protection and Financial Literacy
R ESPONSIBLE C REDIT R ESPONSIBLE CREDIT in the Mortgage Credit Directive (MCD) The MCD extends the principles and rules laid down in the CCD to mortgage credit and • sets out new rules on responsible credit Customer assistance / suitability: Requires relevant staff to have an adequate level of knowledge of the products Establishes rules for staff remuneration (sales incentives under scrutiny) Sets out rules on the provision of advisory services Creditworthiness assessment: obligation to make a thorough and prospective assessment of the consumer’s creditworthiness Responsible borrowing: measures to promote financial education of consumers Management of pre-arrears and arrears : imposes measures to avoid foreclosure The MCD also establishes specific rules on credit intermediaries • 9 • 10 June 2014 Regional Conference on Consumer Protection and Financial Literacy
R ESPONSIBLE C REDIT R ESPONSIBLE CREDIT in the perspective of the European Banking Authority Opinion of the EBA on Good Practices for • Responsible Mortgage Lending (2013): Make reasonable inquiries to confirm customers’ financial capacity Ensure a reasonable debt service coverage Establish prudent loan-to-value ratios Ensure that credit is refused when minimum requirements are not met 10 • 10 June 2014 Regional Conference on Consumer Protection and Financial Literacy
R ESPONSIBLE C REDIT R ESPONSIBLE CREDIT in the perspective of the European Banking Authority Opinion of the EBA on Good Practices for • the Treatment of Borrowers in Mortgage Payment Difficulties (2013): Act honestly, fairly and professionally Implement internal policies for dealing with distressed borrowers Provide information and assistance to borrowers When viable, offer renegotiation solutions to borrowers to avoid foreclosure 11 • 10 June 2014 Regional Conference on Consumer Protection and Financial Literacy
R ESPONSIBLE C REDIT R ESPONSIBLE LENDING in Portugal: advertisement of credit products Advertising campaigns on all banking products and services must observe disclosure • rules Banco de Portugal (2008) defined enforceable rules on accuracy and transparency of • information ; balanced information on advantages and access conditions and restrictions Main features of the supervisory model adopted: • Ex-post supervision (except ex-ante for structured deposits) Mixed principle and ruled-based regulation Risk-based approach All the different means of communication are under scrutiny (TV, outdoors, mail shots, internet, booklets,…) 12 • 10 June 2014 Regional Conference on Consumer Protection and Financial Literacy
R ESPONSIBLE C REDIT R ESPONSIBLE LENDING in Portugal: advertisement of credit products Before After ABC Bank ABC Bank It’s mine for only It’s mine for only €15 /month x 48m €15 /month for every €500 APRC of 21.6% for a 48-month credit of €500 APRC of 21.6% for a 48-month credit of €500 with an with an annual interest rate of 16%. Total amount payable annual interest rate of 16 % by the consumer of €724.50 13 • 10 June 2014 Regional Conference on Consumer Protection and Financial Literacy
R ESPONSIBLE C REDIT R ESPONSIBLE LENDING in Portugal: price lists Bank Customer Website http://clientebancario.bportugal.pt) Banco de Portugal (2008) set forth • requirements for the release of information on fees, expenses and interest rates regarding retail banking products and services Price lists allow for a comparison of • products while increasing competition Price lists are available at every counter • and on credit institutions’ websites Harmonised Banco de Portugal’s Bank Customer template • Website displays the price lists of all credit institutions http://clientebancario.bportugal.pt/pt- PT/DireitosdosClientes/DireitoInformacao/Precarios/Paginas/Precarios.aspx 14 • 10 June 2014 Regional Conference on Consumer Protection and Financial Literacy
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