BACKGROUND
The Ministry of Justice has, on 1 August 2021, set up a working group to make permanent amendments to the regulation of consumer credit. Additionally, the Ministry of Justice has set up a monitoring group to monitor and evaluate the work of the consumer credit working group. The assessment of the consumer credit legislation commenced on 1 August 2021 and ended on 28 February 2022.
The purpose of the working group was to set a permanent interest rate cap for ongoing revolving credit agreements, which have been concluded prior to 1 September 2019, as far as new withdrawals are made after the entry into force of the law. Additionally, in this context, it was also being examined whether it would be reasonably possible to apply a credit cost cap to these credits. Furthermore, the intention was to prepare for permanent regulation on the marketing of consumer credit, and to extend the obligation to verify the identity of the credit applicant to cover, as far as possible, all consumer credit agreements and online shopping invoicing services.
The working group’s draft for government proposal has been published on 11 March 2022. The amended law should enter into force as soon as possible. The proposal is scheduled to be presented to the Parliament on the week 38/2022 (i.e. the week starting on 19 September 2022). Considering the transition periof of six months, it is assumed that the amendments will take effect during Q2-Q3/2023. However, the political pressure and the nature of these amendments may affect this legislative process.
POTENTIAL AMENDMENTS
Interest rate cap
The interest rate cap is proposed to be reduced to 15 %, so that the new interest rate cap would also be applicable to old ongoing revolving credit agreements to the extent that new withdrawals are made under such agreements. Furthermore, it is planned to tie the interest rate cap to the reference rate referred to in the Interest Act (633/1982) (being currently 0 %). Accordingly, when the reference rate would rise, the interest rate cap would also increase respectively – however only up to 20 %, which would be an absolute cap. Contrary to what was previously indicated, no further restrictions to other credit costs are proposed.
The proposed amendment aims to control the supply of credit to consumers with an exceptionally high credit risk and to reduce over-indebtedness among consumers. Additionally, it intends to make the pricing of loans with large principal amounts and long loan terms more reasonable.
If a lender would breach the interest rate cap, the consumer would not be liable to pay any interest or other credit costs related to the credit.
Marketing of consumer credits
The regulation applicable to the marketing of consumer credits is proposed to be refined and restricted. The proposed amendments consist of the following:
- chapter 7, section 13 of the Consumer Protection Act (38/1978, the “CPA”) regarding good lending practice is to be amended so that it would specify in greater detail the type of marketing that should be considered contrary to good lending practice (e.g. any marketing directed towards consumers with bad credit records or consumers who may otherwise be expected to have difficulties performing in accordance with the credit agreement);
- an infringment of the good lending practice could lead not only to prohibition to continue the relevant practice, but also to the imposition of a penalty payment;
- new provisions on displaying different payment methods online, which, among other things, stipulate the order in which payment methods are to be displayed; and
- new provisions on a caution that must be included together with marketing communications when marketing consumer credit, pursuant to which consumers taking credit would need to be cautioned subject to the fulfilment of certain conditions and the impact that the consumer credit could have on their economy.
Obligation to verify the identity of consumers
The Ministry of Justice proposes that the identity verification obligation is extended to all consumer credits, including situations where the consumer chooses an online payment as a method for payment enabling them to postpone the payment (i.e. invoice). This is aimed to prevent the misuse of another person’s personal identity number and other information in online shopping. This proposed provision would not affect the payment methods already offered under chapter 7 of the CPA (i.e. consumer credits) or under the Payment Services Act (290/2010).
The identity of consumers will have to be verified in accordance with the provisions set forth in section 8 of the Act on Strong Electronic Identification and Electronic Trust Services (617/2009). Going forward, strong electronic identification would always be required when applying for a new credit or increasing the credit limit or the amount of credit. Information on e.g. the verification method shall also be stored for five years. The obligation to identify the customer lies with the service provider offering the relevan payment method.
IMPACTS
The most critical impacts for creditors arguably ensue from the retroactive nature of the forthcoming amendments relating to the lowering of the credit interest rate cap. Revolving consumer credit agreements concluded prior to entry into force will be impacted the most due to the extent of alteration they are susceptible to following the implementation of the amendments. Additionally, the creditors would need to reevaluate their marketing procedures to ensure their compliance with the proposed marketing regulation. The new provisions on the obligation to verify the identity of consumers will merely impact situations in which consumers select an invoice as their preferred payment method since such obligation is already applicable to other payment methods (i.e. consumer credits and payment services).
The regulation around consumer credits is extensive and the amount of regulation is constantly increasing. In addition to these proposed amendments to the marketing and offering of consumer credits, new legislation is currently being prepared regarding e.g. macroprudential supervision in order to prevent excessive household indebtedness. Creditors will need to assess the impact of these new regulations on their business operations, as amendments to the existing regulatory framwork often create a more constrained business environment for the creditors.
We at Waselius&Wist follow and review the regulatory changes and developments constantly. We are happy to explain the content of the upcoming regulation and assist you with analysing how your company is affected by the new provisions.