Regulatory framework to tackle household financial distress
Catarina Frade (FEUC & CES)
BEHAVE International Conference
Households in the Financial Crisis: Consumer credit and policy
Lisbon, January 17, 2014
Policy and regulation crossroads
Financialization
Welfare State
shrinkage
Political and
regulatory
challenges/responses
Contract Law Principles
and Legal/Judicial culture
Individual contraints
in decision making
process
Contract Law Principles /Legal and
Judicial culture
Relevant contract law principles and duties:
The pacta sunt servanda principle (contracts are to be
honored) as the legal ground of the capitalist economy
certitude, stability and confidance
Good faith principle in negotiations and contract
fulfilment (to act with fairness, honesty and consideration for
the other contractual partner interests)
Information duties (disclosure) prescribed to
lenders/sellers aiming to support borrowers/buyers
decisions
Conditions
favorable to
trade and
long-time
commitments
Contract Law Principles /Legal and
Judicial culture
• Consumer law and the recognition of the inequality
between financial institutions and individuals
(consumers).
– General information duties (disclosure) in consumer
protection law
– Reinforcement of information duties concerning financial
products (v.g. consumer credit law; mortgage law, ECB and
Bank of Portugal orders, etc.)
– Approach to the rebus sic stantibus theory (change of the
circumnstances theory) (v.g. art. 6º, V of the Brazilian
Consumer Code)
Rebalance of the
bargaining power
of contractual
partners
Contract Law Principles /Legal and
Judicial culture
• Legal and judicial culture (civil law countries like Portugal)
Positivism and rule of law
Adversarial spirit and distrust in ADR mechanisms to solve
conflits (negotiation, mediation, arbitration, etc.)
Neglect of consumer law rules in favor of general contract
law norms and principles
Judicial activism regarded with suspicion and criticism
Standardized/
routinized law
enforcement
Contract Law Principles /Legal and
Judicial culture
Current legal framework and judicial practice favor:
an uneven distribution of credit risk, adverse to borrowers;
unbalanced solutions that many not provide a satisfactory
protection of borrowers’ rights and interests and in the mid-term
also of those pertaining to lenders.
The perception of reality
• What do we see?
Retreat of public provision of welfare (housing, education, health,
retirement)
Increase dependence of market, including financial market, for the
provision of households´well-being (“financialization” of society)
Increase vulnerability of households to the dynamics/crisis of labor
market and other life events (micro-level) and to economic and
financial downturns (macro-level)
The perception of reality
• What do we see?
Higher exposure to risk from financial institutions due to short term
interests of shareholders, the globalization of financial products and
practices, and the diversification of customer profiles
Vulnerability of democratic political institutions in monitoring and
regulating autocratic economic institutions (a lender/borrower
relationship is also common)
Policy implications and challenges
The shift:
From individual responsability (contract law and tort law, financial
literacy) to more a collective risk sharing approach (independent debt
couselling, debt adjustment regimes, bankruptcy, responsible lending)
Balancing pacta sunt servanda (freedom of choice, autonomy
of will) with retibus sic stantibus (change of circumstancies)?
More doctrine and jurisprudence discussion is needed!
Policy implications and challenges
The shift:
From monolithic solutions (one size fits all) to multi-level and customized
solutions
‘regulatory mix’ combined with co-operation and
co-responsiveness of public institutions, market, society and individuals
Centralized regulation versus deregulation versus
decentralized regulation ?
Discussion towards governance and legitimacy issues!
Policy implications and challenges
The shift:
From cristalized rules and procedures to more adaptative policies, laws
and procedures
« deterrance and compliance debate
« judicial activism?
Fundamental economic and social rights in a context of public
resources deficit?
The reinvention and reaffirmation of fundamental rights
towards human dignity and freedom (constitutional law)!