Even though Ireland has had one of the highest levels of growth in consumer credit in the EU, the regulatory framework has not
followed this development. It remains a framework for a pre-“credit society”, mainly based on the premise that it is better to let the credit market work with as little intervention as possible. There are therefore very few constraints for lenders.
Most of the constraints pertain to credit unions (i.e. capped interest rate) and should favour the provision of appropriate credit for low-income households. However, despite the popularity of credit unions, their action is limited by the necessity to save before borrowing as well as by the competition of moneylenders who are able to provide credit on the doorstep with high flexibility, even if the benefits cost the borrowers dearly.
Regarding information, the Irish framework respects the minimum standards set by the European Commission through its successive Credit Directives. Nevertheless, in relation to the social role of consumer credit in Ireland, this standard is too low to really ensure responsible credit practices.
Given that the decision-making process not only involves basic financial skills (informed by financial education and information provided by lenders) but is also affected by emotions, advice from a specialist is essential (Gloukoviezoff, 2008; LRC, 2009). Therefore, financial education – without discussing the quality of the training provided – and information cannot be considered as a substitute for advice. It is doubtful that these efforts will enable low-income households to accurately assess their financial situation as well as the appropriate features of the credit.
Regarding advice, the fact that credit scoring deprives the borrower of a potential relationship with the lender puts lenders in a situation that does not allow them to properly inform their borrower about the personal consequences of borrowing. Therefore, even though requirements regarding information provided by potential borrowers are of course welcome, it is doubtful that this information will be sufficiently useful for people at risk of overindebtedness.
It appears that the Irish strategy to reinforce the quality of information on the consumer credit market is valuable but too limited to achieve a fair access to credit. Likewise, the Law Reform Commission’s report concluded that there were
... considerable doubts as to whether the provision of information to
This suggests that an information based approach to consumer credit regulation must be combined with other preventative measures in adopting a thorough approach to preventing overindebtedness. In particular, lender-side measures must be adopted which seek to ensure responsible lending practices are observed to counter-balance the above
difficulties in ensuring responsible borrowing practices(LRC, 2009,
p.84).
Among the shortfalls that the Law Reform Commission points out is the lack of effective information-sharing through the Irish Credit Bureau and other suppliers. It is questionable whether it really helps lenders to assess the level of risk of their customers. The main weaknesses are that the databases are incomplete, since information- sharing is not compulsory and is fragmented between several providers.
However, even if these weaknesses were addressed, the high level of interest applied to lending would remain a disincentive for lenders to assess accurately the level of risk of each borrower (Stiglitz, 2010). A lender does not mind if a borrower fails to finally repay his/her debt as long as:
• the borrower has already made the lending profitable by paying fees on arrears until being unable to repay; • the overall lending activity of the lender is profitable,
taking into account all its customers.
When lenders assess risk through credit scoring, it is the global portfolio of borrowers rather than that of the individual borrower which is the pertinent issue (Gloukoviezoff, 2008). These observations are similar to the conclusions of the Law Reform Commission:
Commercial lending is based on maximising profit, not eliminating risk. This means that commercial lenders may accept that certain borrowers will default, and charge higher rates for this. Also, fiercely competitive consumer credit markets and sales-related remuneration systems may mean that disincentives exist for lenders to engage in responsible lending practices. Thus while a certain number of defaults may be simply the cost of doing business for a lender, each case of overindebtedness can result in personal tragedy for debtors and their families. This provides a
further justification for the law to contain measures requiring
responsible lending practices to be observed(LRC, 2009, p.86).
Considering that “a certain number of defaults may be simply the cost of doing business for a lender”, the fact that the Irish system to deal with overindebtedness is totally out-of-date is an extremely serious issue.
There is almost no constraint in Ireland to framing the way financial difficulties are taken into account. Lenders have only to inform the debtors, while the debtors have to negotiate with their creditors and to make the best decisions possible, based on the information available. There is no legal framework to allow for all debts to be taken into account simultaneously nor for a global solution for rescheduling the debt – which may include potentially writing-off part or all of the debt.
Basically, the present framework sees the solution in the commercial relationship between a service provider and a customer. It implicitly considers that when difficulties occur, it is the responsibility of the debtor. Therefore the whole system is structured so that pressure is put on the debtor to make him/her repay what is owed. Such an understanding of causes of financial difficulties can only lead to inappropriate answers.
Overindebtedness cannot be explained solely by the lack of financial capabilities of the debtor or his/her unwillingness to repay his/her debts. Debtors’ difficulties have also to be linked to the service provided by lenders, as it could be argued that the latter should have an expertise that allows them to assess the risks they take and therefore assume. Even though the debtor has a responsibility, overindebtedness is a social phenomenon which is the result of the widespread use of consumer credit and the fact that unexpected events occur which make the repayment of loans impossible.
Debtors who can pay but won’t repay are not overindebted and should therefore not be able to access any specific procedures. However, for the vast majority of debtors who face real financial difficulties, as well as for creditors, it would be beneficial to develop procedures addressing initial problems such as missed payments right up to cases of overindebtedness. This would require debt settlement procedures that take into account all the debts as well as an insolvency procedure that would be easily accessible and really allow a fresh start.
Despite these weaknesses, Ireland could build on its valuable assets like the credit unions and MABS. But both these organisations would work more effectively within a regulatory framework that makes better use of their strengths.
In order to achieve a more responsible credit sector, irresponsible practices have to be costlier for lenders than responsible practices. Currently, it is the opposite. A more appropriate regulation is needed as
... the law currently places all the costs of overindebtedness on debtors
and on the State’s social welfare system, despite at least partial contribution from creditors to the causes of overindebtedness. While sections 47 and 48 of the Consumer Credit Act 1995 provide some protection against irresponsible or predatory lending, this protection is
quite limited(LRC, 2009, p.99).
Regarding arrears, some pilot projects which have been carried out in partnership with the IBF show that financial service providers understand that it is also in their interests to manage debt in a more efficient way. Even though the involvement of multiple creditors makes it difficult to reach an agreement which includes the global debt, it is necessary to find a way to constrain all lenders (even the most reluctant) to collaborate. In other words, a regulatory intervention is needed in order to neutralise the competition effect of the free market and to allow a more cooperative search for a solution. Such issues have been partly addressed by the UK, France and Belgium.