Effective protection for consumers in light of economic consequences of covid-19 – but at what cost?

The coronavirus pandemic has had unexpected and far-reaching economic effects on all sectors of society. The current situation has required and will require urgent solutions from the government to support the economy. When planning new measures, even fundamental rights have at times had to be relinquished in order to achieve a certain goal.

The government’s latest planned measures to prevent the economic impact of the coronavirus pandemic include easing consumers’ financial distress and protecting consumers from over-indebtedness. Keeping this in itself very good goal in mind, the government has submitted a proposal to the Parliament to halve the interest rate cap for consumer loans from the current 20 percent to 10 percent. At the same time, direct marketing of consumer credits would be banned. Both actions are planned to be temporary (valid until the end of 2020) and intended to apply also in part (retroactively) to existing credit agreements.

Negative effects of the bill on consumers

Unsecured consumer loans are typically granted to those who, for example, fall outside the scope of conventional bank loans due to their creditworthiness. Unsecured loans involve a significantly higher credit risk than conventional bank loans, meaning that interest rates must also be higher than for bank loans for the sake of business profitability. The nominal interest rate of 8 percent on a conventional bank loan combined with, for example, the interest accruing on a short-term one-off loan over the loan period and the credit risk associated with such a credit product is a commercially unsustainable product. It should also be noted that many unsecured credit products offered by traditional credit and payment institutions also have a nominal interest rate well above the 10 percent threshold.

For the reasons mentioned above, the actual consequence of the amendment may be a decline in the supply of unsecured consumer credits, in particular for those consumers for whom such an option would be the only way to be resilient to financial distress caused by the coronavirus (or any other reasons) or the need to make acute and mandatory purchases. In its draft proposal, the government itself has acknowledged that the new lower interest rate cap may have the consequence that the most economically disadvantaged consumers will be completely excluded from these credits. This is also stated unequivocally in a recent study, ”The interest rate cap of the corona period does not bring relief to consumers”, by Aalto University. According to the same study, a 10 percent interest rate cap does not increase consumers’ access to credit at a moderate interest rate.

Fundamental rights’ perspective in achieving the goal

The effects of the bill directly affect the fundamental rights of traders. Restrictions on fundamental rights require that certain requirements are met. In restricting fundamental rights, attention must be paid to e.g. proportionality assessment, which includes requirements for the appropriateness, necessity and proportionality of the restrictions. Assessing the fulfillment of these conditions naturally requires time and careful consideration. It should be noted in particular that it is not possible to disregard such basic conditions on the basis of the Emergency Powers Act, as it focuses (currently) only on restrictive measures designed to protect human health.

In the preparation of the bill, it would have been particularly important to identify possible alternative courses of action that could achieve the same or even better outcome in ways that are less restrictive of fundamental rights. For example, faster-than-planned introduction of the positive credit register and development of debt counseling would be means whose range of use and consequences should be assessed in the light of the pursued goal. In addition, a temporary cut in official and other public fees, which cause a statistically high percentage of payment default entries, as well as in the costs of payment delays to the debtor, could alleviate the situation of consumers in financial difficulty more effectively than the proposed interest rate cap. However, due to the exceptionally fast preparation schedule for the amendment, alternative courses of action have not been sufficiently assessed.

The amendment would also cover consumer credit agreements concluded before the law enters into force, insofar as the credit is drawn after the entry into force. However, a transitional period of two months is proposed for such loans, during which the interest rate cap would apply to old consumer loans to the extent that the credit is drawn from 1 July 2020. The amendment would therefore also affect consumer credit agreements retroactively.

The permanence of contractual relations is a key element in the protection of property in a constitutional state, and retroactive interference with contractual relations should, in principle, be viewed negatively. This has its base on the idea of protecting the legitimate expectations of parties to the agreement, which is why the essential rights and obligations of the contractual relationship cannot be restricted in such a way that the party’s position is weakened excessively. The planned amendment would not only have a retroactive effect on the content of credit agreements, but would also cause significant costs to creditors, e.g. with system changes, customer communication and the termination of credit agreements that become unprofitable. Termination of unprofitable credit agreements would in turn lead to a significant decline in business as well as downsizing of operations – leading further into potential lay-offs and terminations of employments.

It should also be mentioned that the lack of retroactive effect has been a key factor in the Parliament when preparing the previous price cap regulation and assessing its constitutionality. In this tight schedule, the amendment would now take another directions and hence, would diverge from the Constitutional Law Committee’s previous policy – using the new argument “coronavirus” as a ground for the amendment.

Unpredictable consequences in a changing economic environment

A thorough business impact assessment would have been necessary, especially when the effects of the planned change affect a very limited group of companies and when the effects are critical for the operating conditions of the individual target companies. The business impact assessment is also facilitated by open stakeholder consultation, which, fortunately, has been carried out by the Parliament’s Commerce Committee. The Commerce Committee has consulted a wide range of experts, who have each given their opinions on behalf of the groups they represent. However, this replaces in no way a thorough business impact assessment at the early stage, which would have been particularly important given the nature of the regulation. Hence, in an already uncertain and unknown economic situation the risk remains that the amendment will have unpredictable and undesirable effects.

Relieving the position of debtors in a challenging financial situation and curbing over-indebtedness are very important and desirable goals. However, hastily prepared price regulation for a single group of consumer products may not be the most effective way to achieve these goals. The amendment would pass on the costs of limiting the economic impact of the coronavirus crisis directly to private companies. At worst, the result of hasty preparation and very poor impact assessment is that the regulation as a whole will ultimately have counterproductive and detrimental effects.

Text and additional information: Olli Kiuru, Partner and Head of Finance practice, tel. +358 40 7168 020, [email protected]