There has been a record growth in unsecured consumer credit granted by Finnish credit institutions. Mohamed Dabo reports on the government’s Covid-related measures on consumer credit and insolvency
In April 2020, the Finnish government proposed amendments to its legislation on consumer loans due to the coronavirus outbreak.
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According to the government’s proposal, the applicable interest rate on consumer loans will be temporarily capped at 10% instead of the previous 20%. Also, any direct marketing to consumers will be banned. These restrictions came into force on 1 May, and will apply until 31 December 2020.
Interest rate cap
In addition to the cap on interest rates for consumer loans, the act also regulates the maximum amount of other credit costs.
The proposed interim provisions mean the interest rate on consumer loans may not exceed 10%, even if the agreed rate was higher. However, the proposed provisions would only apply to consumer loans other than so-called commodity-linked loans. Therefore, credit card loans by, for example, Visa and Mastercard are excluded from the scope of the cap. It will also be prohibited to raise any fees charged under a credit agreement.
Where the proposed interest rate cap has not been complied with, courts will automatically dismiss any claims for excess interest.
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By GlobalDataProhibition of direct marketing
The proposed interim provisions regarding direct marketing would impose a ban on direct marketing of consumer loans.
The proposed ban would apply to any direct marketing – including electronic marketing – and apply irrespective of whether the marketing is directed to new or existing customers.
However, according to the proposal, the ban would be limited to direct marketing only, and would therefore apply only to marketing targeted at a specific consumer or household. As a result, any marketing of consumer loans – such as by telephone, email or personal social media – would be prohibited, whereas marketing by newspaper, radio, street or television advertisements would not.
Some notable trends
A growing share of consumer credit in Finland is granted by non-Finnish credit institutions. These companies have increased their combined share to around 27% in just a few years.
The introduction of new companies and operating models in the consumer credit market has increased the supply of loans to a wider customer base. Payday loan companies are also playing an increasing role; their combined loans receivable figure increased by more than 50% in 2017.
Debt collection cost restrictions
The Finnish Ministry of Justice has also announced that it is planning to temporarily extend the restrictions on debt collection costs applicable to consumer debts to the collection of debts from SMEs.
As above, a proposal on the implementation of the temporary measures is expected in the coming weeks, but it is unclear when this will take effect. The temporary measures are expected to remain in force until the end of 2020.
Creditors’ right to apply for bankruptcy
On 28 March, the Finnish Ministry of Justice announced that it is preparing a temporary reform of the Finnish Bankruptcy Act to restrict a creditor’s right to apply for a debtor’s bankruptcy.
The reform will temporarily remove the assumption of insolvency due to short-term payment default as grounds for a creditor’s bankruptcy filing. This assumption is most commonly used to prove the debtor’s insolvency when a creditor is applying for a debtor’s bankruptcy. A creditor can also seek to prove the debtor’s insolvency in other ways, but this is generally more cumbersome.
Changes to enforcement
The government intends to help debtors who are subject to enforcement proceedings by providing incentives for creditors to use flexible collection measures, such as granting payment-free months and lengthening payment periods. Amendments to the corporate restructuring framework are also underway.
The Advisory Board for Bankruptcy Affairs has already issued a recommendation suggesting that, in the current situation, the inability to repay new debts for a company undergoing restructuring proceedings should not necessarily lead to the discontinuation of the proceedings. The Finnish Ministry of Justice is also assessing the need for reforms to ease Finnish companies’ access to corporate restructuring.
Other measures
Finland has published a number of other crisis measures relating to government funding, lowering of banks’ capital requirements, extending the deadline for preparing financial accounts, and temporary reforms in employment law.
The stock of consumer credit granted by credit institutions has increased rapidly in recent years. In particular, unsecured consumer credit other than overdrafts and credit card credit has grown at a record rate.
The Bank of Finland estimates that a key factor in the growth of unsecured consumer credit by credit institutions is the good performance of car sales in recent years.
A relevant benchmark could be vehicle financers outside the credit institution sector. Despite strong growth in unsecured consumer credit granted by credit institutions, the overall credit losses recorded on consumer credit have remained moderate, at least prior to Covid-19.
