Consumer credit applied for via text messages or Internet websites has been offered in Finland for several years now. This new form of credit is still finding its place and the legal and regulatory boundaries for it are currently being sought.
The Consumer Agency, which supervises companies offering quick credit from the viewpoint of consumer protection, has for long had concerns regarding the business practices of companies offering credit via text messages. The Agency has issued guidelines specifically for companies offering SMS credit, negotiated with the market players and taken a case to the Market Court 2007 to set a precedent. A decision on the case was handed down in spring 2009.
Legislation pertaining to quick credit is currently being amended and a government proposal on quick credit has recently been handed to the parliament. The proposal is being circulated and is set to be discussed by the Commerce Committee next.
Market Court lays down rules for quick loans
The Market Court handed down its decision in May 2009 regarding a case brought by the Consumer Agency. According to the court's decision, Oy Atlas Invest Ab, which offers credit via text messages, must cease to offer credit around the clock and refrain from concluding credit agreements before submitting contract terms and other necessary information to the customer personally and given the customer time to become familiar with them. The company may also no longer market quick loans by using advertising messages emphasising speed.
Highlighting the speed of granting a loan and the around-the-clock nature of the service is in conflict with the principle that credit applications should require careful deliberation. Marketing which increases rash loan decisions and, as a result, excess indebtedness is inappropriate for a credit institution.
According to the Market Court, a consumer about to take a quick loan must have sufficient time to read the preliminary information and terms of contract prior to concluding an agreement. As such, there should be a sufficient time period between applying for the loan and receiving the funds. The Market Court stated that the company may not transfer funds for loans applied for at night before seven in the morning and, further, that the company must not market the loans with advertising messages emphasising speed.
With regards to contract terms, according to the Market Court it is not sufficient that the company states that information is available on e.g. their website. Instead, the relevant information must be delivered to the consumer by email, for example, prior to concluding the loan agreement. This helps ensure that the customer has his own copy of the agreement, which he can refer to in case a dispute arises.
A significant target group for quick loans is constituted by young adults below 30 years of age, who tend to have relatively little experience of managing their own finances and debts. Because of this, the inappropriateness of marketing was assessed particularly from the viewpoint of young adults.
It is the Consumer Agency's view that the principles reflected in the precedent set by the Market Court's decision apply to other quick loan companies as well. The Agency expects all quick loan providers to take the Market Court's decision into consideration in how they do business.
Legislative changes on the way
The Parliament is presently discussing a legislative proposal which would have a broad impact on the supply of credit. The legislative proposal pertains to quick loans, which are typically quick consumer credits with short payment periods and no collateral requirements. Loans are granted based on applications made online or via text message. The legislative proposal touches on aspects such as indicating actual annual interest and identifying the credit applicant. Legal provisions pertaining to usury and the determination of penalty interest are also re-evaluated in the proposal.
According to the legislative proposal, the marketing of small and short-term loans must disclose the actual annual interest of credit. At present, there is no such requirement and comparing different credits has been difficult. A time frame for granting loans, as mentioned in the Market Court's decision, will also be included in the new legislation.
Usury or not?
The legislative proposal also calls for the penal code's legal provisions on usury to be updated. The business practices of quick loan companies have not been considered usury as referred to in the penal code, which would lead to criminal investigation. Under the existing provisions in the penal code, interest rates applied to quick loans would be compared to interest rates used by financial institutions for similar credit products. As financial institutions have not offered credit products similar to quick loans, the possibility of applying existing legal provisions to quick loans has been unclear. According to the legislative proposal, the punishability of usury would be subject to the interest rate or other financial benefit to the creditor being clearly disproportionate to the service performed by the creditor.
It is not possible to set a specific maximum annual interest rate to judge whether a case meets the definition of usury, as the situation needs to be evaluated on the whole based on the criteria specified in the legal provision. In the context of small and short-term loans the actual annual interest of credit may be considerably high without being deemed usury. With such credit products, certain costs independent of the loan amount, such as fees charged for services that are considered part of appropriate lending practices, affect the actual annual interest rate of credit to a greater extent than in the context of larger and longer-term credit. Then again, this means that larger and longer-term credit may meet the definition of usury even if the actual annual interest for credit is lower, as the aforementioned costs have a relatively more minor effect on the actual annual interest rate.
Change in penalty interest has no effect on the quick loan market
Restrictions on creditors' right to charge customers interest higher than the statutory penalty interest are in the works. The legislative reform would apply to all consumer credit and have considerable significance to consumers. If the original interest rate for a loan is higher than the statutory penalty interest, the higher interest could only be charged for a maximum of six months from the debt falling due. The reform would give consumers with difficulties making payments a better chance of managing their debt.
Penalty interest has not, however, been a problem in the context of quick loans, as they generally feature processing and service charges rather than interest. While these costs, when expressed as an actual annual interest rate, are very high figures, debtors who are late in making payments may not be charged penalty interest at a rate equal to the actual annual interest rate. The collection of such processing and service charges may not carry over to the period of delayed payment. Instead, the statutory maximum rates for debt collection as specified in the Act on Debt Collection will apply.
Regulation, but also responsibility in lending
Not all of the problems observed in the supply of quick loans can be remedied through legislative means. The Parliamentary Legal Affairs Committee's comments on the legislative reform state that the prevention of debt problems calls for improved readiness among consumers, particularly the young, to understand the management of one's finances and increasing attention to the availability of social credit. Sufficient resources for financial and debt advisory services must also be ensured.
In terms of business law, offering quick loans is not subject to registration or licensing and quick loan companies do not fall within the jurisdiction of the Financial Supervision Authority or other authorities. One problem observed in the quick loan market is that businesses come and go at a rapid rate. The Parliamentary Legal Affairs Committee's consultation document calls for urgent legislative amendments to govern registration and responsible lending as well as moves to make supervision by the relevant authorities broader and more effective.
Press release on the Market Court's decision (3.6.2009)