My Complaint to the European Commission
EUROPEAN COMMISSION
DG Health and Consumer Protection
B-1049
Dear Ladies and Gentlemen;
I am writing to you today about an issue of great concern that has left consumers in a significantly harmed and disadvantaged financial position by lenders in
Presently when consumers find themselves in financial trouble they are being thwarted in addressing their debt situation by a fair and reasonable way through the unilateral and unfair actions of banks and creditors.
Consumers who are unable to make the minimum contractual payments on their debts or who make the minimum payments at the cost of their health, stress, social exclusion and harm to the safety and security of their families are being denied access by lenders to the most consumer appropriate solutions to remedy the situation.
When a consumer is faced with financial troubles they have the following reasonable options to address their debt obligations:
- They can continue to attempt to make some amount of payment but may incur penalties and higher punitive interest rates as punishment by lenders for inadequate payment performance.
- They can put forth a mutually binding fair, reasonable and sustainable repayment offer based on their current situation, with the ability to increase payments as their situation improves. This process is recognised in legislation as an Individual Voluntary Arrangement (IVA) under the Insolvency Act 1986.
- They can go bankrupt.
- They can enter a debt management programme (DMP) which is a non-binding repayment plan that can leave consumers paying for decades and afford them little to no protection from the unilateral term changes of creditors.
- If there is a valuable asset it can be sold or borrowed against in an attempt to remedy the debt situation.
Presently lenders like HSBC and Northern Rock have set artificial, high and unilateral hurdles to accepting IVA proposals from consumers in financial trouble. They have done this in blatant disregard to the British Banking Association code of conduct which clearly states that banks will:
- Consider cases of financial difficulty sympathetically and positively.
- Will do all we can to help you to overcome your difficulties.
- With your cooperation, we will develop a plan with you for dealing with your financial difficulties and the more you tell us about your full financial circumstances, the more we may be able to help.
Banks are clearly and flagrantly not protecting consumers’ rights to put forth fair, reasonable and sustainable repayment plans according to that code since they are rejecting repayment offers from consumers through an IVA proposal. IVA proposals are prepared by a licensed and regulated Insolvency Practitioner. This proposal requires a thorough review of the individual consumer situation and the Insolvency Practitioner states within his comments on the proposal to creditors that the offer put forward has the reasonable prospect of being approved and implemented and it would be in the interests of the creditors for the affairs of the debtor to be dealt with on the basis of the proposal. This is the most fair and reasonable method for the consumer to repay their debts and avoid bankruptcy.
Greater than 80% of all approved IVAs end with the successful completion of the debtors obligations to repay their debt, while 80% of DMPs never complete successfully. Also the average return to creditors in an IVA enables a creditor to obtain a 40% repayment of their debt, while in bankruptcy only 5% of debts are recovered. More importantly DMPs have proven to be an even less effective solution when you consider that only 19% of debts are recovered in a DMP.
There are significant disadvantages to entering bankruptcy or a DMP as a solution. Not only is there a financial disadvantage but also an emotional cost as well. Consumers are also hesitant to address their financial situation in bankruptcy due to the perceived social stigma of bankruptcy. Because of the banks disregard to the debtors fair, reasonable and sustainable IVA proposal, many debtors do not turn to bankruptcy, out of fear or shame, as a solution, and are then left in a situation of social exclusion, limping along month-to-month, leaving their families in significant disadvantaged positions and causing great physical and emotional stress, including anxiety, depression, strain and the loss of opportunity for the children of those families. This places the debtor in a financial and life disadvantaged position which results in greater future costs as their credit suffers from this course of action and the future cost of funds is excessively high as a result.
Additionally when consumers are denied reasonable access to real solutions, like the IVA, the consumer may alternatively go to a ‘loan shark’, some commit suicide or many pursue a non-binding and unilaterally creditor controlled DMP in an effort to repay their debt. Knowing that the vast majority of these plans fail to remedy the debt situation it is only creditors which primarily benefit from the DMP course of action. When a consumer repays debts in a DMP they may pay for decades without ever contractually resolving the debt. They may pay for years only to realize that the repayment plan is not binding on their creditors and leaves them at the whim of the bank, and continues to leave them in a disadvantaged position, much like that faced by families that are afraid to go bankrupt.
Alternatively, banks are accepting clients into DMPs without any regard as to the appropriateness of that as the best solution. The banks appear to exercise no caution and in fact HSBC in its publication that it sends to consumers in financial trouble, titled “Putting Your Finances in Order”, does not even mention the option of an IVA or consultation with an insolvency practitioner. Instead they divert consumers towards exclusively towards groups which either assist with token payment programmes or DMPs.
Currently in a DMP the banks are the ones that control the terms offered. Any considerations given in the reduction of interest or penalties is not done through individual negotiations with the banks. The banks provide guidance on what they are willing to do.
It seems to me that this situation should be carefully reviewed by the European Commission since you have provided clear intent and guidance when it comes to the issues of consumers being treated fairly and reasonably.
That guidance has come in many forms, from previous case rulings to directives. Some of the relevant positions are presented below to protect consumer’ interests.
Many of these issues are found under the larger category of unfair consumer terms which finds:
· The Directive sets out the general criteria for determining whether a commercial practice is unfair, in order to establish a limited range of dishonest practices prohibited throughout the EU. These criteria apply if the practice is contrary to the requirements of professional diligence ( "Professional diligence" means the standard of special skill and care that a trader may reasonably be expected to exercise towards consumers, commensurate with honest market practice and/or the general principle of good faith in the trader's field of activity.) and if it materially distorts or could materially distort the behavior of the average consumer ( "To materially distort the economic behavior of consumers" means using a commercial practice to appreciably impair the consumer's ability to make an informed decision, thereby causing the consumer to take a transactional decision that he would not have taken.) . It also establishes the difference between misleading practices and aggressive practices and describes the criteria for identifying such practices.
· A commercial practice may mislead by commission or by omission. A practice is misleading by omission if it fails to provide the minimum information or factual information that the average consumer needs prior to purchase. It accordingly establishes a list of the information the consumer needs before purchasing, e.g. the main characteristics of the product, the price (inclusive of taxes), delivery costs (where applicable) and the right of withdrawal.
· A practice is misleading by commission if it gives false information or deceives or is likely to deceive the average consumer, even though the information given may be factually correct.
· Consumers should be informed of any additional costs that are compulsory for obtaining the credit before the conclusion of the credit agreement. Even if the amount of such costs cannot be determined in advance, consumers should receive adequate information both in advertising and at a pre-contractual stage.
· The creditor shall adhere to the principle of responsible lending.
· A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.
· Where any seller or supplier claims that a standard term has been individually negotiated, the burden of proof in this respect shall be incumbent on him.
o These terms shall include:
§ Making an agreement binding on the consumer whereas provision of services by the seller or supplier is subject to a condition whose realization depends on his own will.
§ Requires any consumer who fails to fulfill his obligation to pay a disproportionately high sum in compensation.
§ Irrevocably binds the consumer to terms with which he had no real opportunity of becoming acquainted with before the conclusion of the contract.
§ Enables the seller or supplier to alter the terms of the contract unilaterally without a valid reason which is specified in the contract.
§ Obliging the consumer to fulfil all his obligations where the seller or supplier does not perform his.
The rejection of fair and reasonable IVA proposals by creditors appears to fall under the guidance of the above directives. Without banks individually considering the repayment offers of their customers, and in a blatant disregard of the British banking code, lenders are pushing consumers into inferior solutions rather than allowing them to fairly and honorably repay their debts which one could argue have been in many cases, lent without regard to the borrowers solvency to begin with.
Furthermore, in an IVA a lender can carry sufficient voting power to reject the fair and reasonable offer from the consumer and will exercise that power at the harm of other merchants and businesses included in that repayment plan. This also appears to be in conflict with the protection of consumer economic interests from unfair business-to-consumer commercial practices that indirectly protects legitimate businesses from their competitors who do not play by the rules in this Directive and thus guarantees fair competition in fields coordinated by it.
It seems that when banks offhandedly reject a fair, reasonable and sustainable IVA proposal where their financial returns are higher, and leave consumers with solutions where the banks returns are lower, that the motive of the banks is primarily punitive and anti-consumer, rather than financially prudent.
Additionally I would argue that if a consumer was aware of the creditors’ arbitrary, unilateral and unfair actions in the case of financial difficulties then the consumer might make a different decision than to enter into an agreement with that bank. At this time the situation that exists is that consumers are lead to believe that banks that participate in the
Sincerely,
Chairman
Myvesta UK
