Introduction
Federico FERRETTI
The topic of this book is the over-indebtedness of consumers in the European Union (EU)
from a multi-disciplinary and multi-stakeholder perspective.
With the recent unprecedented turmoil in financial markets and the long-lasting effects of the
ensuing most severe economic crisis in the modern history of Europe, this has become a
concern for both national and EU policy-makers. Yet, it is not an entirely new theme and the
possible role of the EU has already been discussed in both policy and academic circles for
over twenty years.1 However, little has been materially done so far at EU level, but in the
wake of the gravity of the recession on consumers the issue seems to have turned from
urgency into emergency.
The latest official figures are few years old and they indicate that over-indebtedness is a
problem that concerns one in nine people across the EU2 and it impacts harshly on the lives
of those who are affected, carrying great social and economic costs for the EU as well as
challenges for the integration of its markets. Few years on and anecdotal evidence suggests
that these figures have certainly not recovered. On the contrary, they may be even worse as
the effects of the crisis persist and many Member States are still coping with profound
economic, political, and social repercussions. Moreover, with the austerity measures imposed
by many Member States, non-performing loans and job losses have remained high with little
prospects of improvement.
All in all, the harm caused by the financial crisis has raised important issues regarding the
protection of consumers, the scope, intensity and effectiveness of regulation in financial
E.g. see the writings over twenty years ago of Huls “Towards a European Approach to Overindebtedness of
Consumers”, 16 Journal of Consumer Policy (1993), 215-234 and the early academic literature and reports that
followed. Examples are Reifner, Kiesilainen, Huls, Springeneer, Consumer Overindebtedness and Consumer
Law in the European Union, Final Report, Contract Ref. B5-1000/02/000353 (September 2003); Huls, Reifner
and Bourgoinie, Overindebtedness of consumers in the EC Member States: facts and search for solutions
(Kluwer, 1994);. See also Group of Specialists on Seeking Legal Solutions to Debt Problems (Cj-S-Debt), Final
Activity Report of the Group of Specialist for Legal Solutions to Debt Problems (CJ-S-DEBT), CJ-S-DEBT
(2006) 6 Final (Strasbourg, 18 January 2007); OCR Macro, Study of the problem of Consumer Indebtedness:
Statistical aspects, Report submitted to the Commission of the EU DG Health and Consumer Protection,
Contract n. B5-1000/00/000197 (October 2001); OEE Etudes, Towards a Common European Operational
Definition of Over-Indebtedness, report prepared for the use of the European Commission, Directorate-General
for Employment, Social Affairs and Equal Opportunities (February 2008).
2 Eurostat, “Over-indebtedness and financial exclusion statistics”, data from September 2012, available at
http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Overindebtedness_and_financial_exclusion_statistics
1
1
markets, as well as the need for additional safeguards to stem the social problems that the
crisis has exacerbated.3
At the same time, the topic of this book is a traditionally difficult one to analyse, especially if
taken in its European context. Consumer over-indebtedness has been often associated with
financial credits, whose cultural approach, use and extension has varied significantly from
one Member State to the other. Yet, the integration of EU consumer and mortgage credit
markets is crucial for an efficient functioning of the EU financial system, the economy, and
the Internal Market. The market for loans available to consumers has grown rapidly across
the EU and it has become increasingly sophisticated. The liberalisation and expansion of
credit markets alongside the increased availability of credit from financial institutions have
explained the relatively recent mounting levels of consumer debt across societies. If more
credit is available and offered to a broader base of consumers, more consumers become
indebted and, consequently, a larger number of consumers become unable to meet the
contracted obligations. On the other hand, credit availability and open access to credit
markets have meant widening participation and financial inclusion to allow as many
consumers as possible without discrimination to participate in the credit society and the
consumption model of the market economy. These bases may also suggest why for a long
period of time excessive lending or borrowing have been the focus of consumers becoming
over-committed and unable to repay their debts, pushing the debate over behavioural issues
of creditors or debtors. Irresponsible lending and predatory practices on one side, and
irresponsible borrowing decisions, consumption choices, and cognitive biases on the other
side have so far dominated the attention of scholars and policy-makers alike.4 The emphasis
on behavioural causes has often resulted in the attribution of defaults to a responsibility of the
creditor or a personal failure of the debtor.
Therefore, alongside the advancement of measures for the abolition of obstacles for further
integration, the promotion of responsible lending to limit over-indebtedness has gained
priority in the EU agenda as the core policy to address consumer over-indebtedness. It has
introduced a new concept that makes reference to the delivery of responsible and reliable
markets, where consumer confidence is restored and credit products are appropriate for
consumers’ needs and tailored to their ability to repay. They envisage a framework that could
3See, for example, European Commission Staff Working Paper on National Measures and Practices aimed at
Avoiding Foreclosure Procedures for Residential Mortgage Loans, SEC(2011) 357 final.
4
Ramsay, “Between Neo-Liberalism and the Social Market: Approaches to Debt Adjustment and Consumer
Insolvency in the EU”, 35 Journal of Consumer Policy (2012), 421-441; Micklitz, “Access to, and Exclusion of,
European Consumers from Financial Markets after the Global Financial Crisis”, in Wilson (ed.) International
Responses to Issues of Credit and Over-indebtedness (Ashgate, 2013), 47-77.
2
ensure that all lenders and intermediaries act in a fair, honest and professional manner before,
during, and after the lending transaction. To obtain credit consumers must provide relevant,
complete and accurate information on their finances. They are encouraged to make informed
and sustainable borrowing decisions.5 The resulting legal instruments focus on the advertising
and marketing of credit products, the information to be provided to borrowers prior to
granting any loans, ways to assess product suitability and borrower creditworthiness, advice
standards, responsible borrowing and issues relating to the framework for credit
intermediaries (disclosures, registration, licensing and supervision).6
However, in so doing over-indebtedness has been looked in its static dimension. All
definitions, conceptualisations, and measurements make reference to the time when
consumers apply for credit. This has been reflected in the policy and the law, which insist on
the usual paradigm of information requirements and the assessment of creditworthiness at the
time of the making of the loan. Such measures may capture existing or likely debt problems if
further credit is taken, but they cannot address the most frequent causes of consumer overindebtedness, such as life-time events and poor market conditions, when repayment
difficulties emerge at a later stage.
Certainly behavioural factors may have a role in consumers becoming over-indebted but
market deregulation, coupled with incomplete social safety nets, are often recognised as
structural conditions that lead to an environment hospitable to financial difficulty.7
This consideration should be contextualised with the findings of recent studies on the nature
and causes of over-indebtedness which reveal empirically how this is not limited to the issue
of debts stemming from financial credits but it includes all consumer essential outgoings, and
it is tied to income and other expenditures relating to taxation and cuts in social welfare.
Consumers are considered over-indebted if they are having – on an on-going basis –
difficulties meeting (or falling behind with) their commitments, whether these relate to
5 See Communication of the European Commission to the European Council of 4 March 2009 ‘Driving
European Recovery’, COM (2009) 114 and the Public Consultation on Responsible Lending and Borrowing,
available atec.europa.eu/internal.../responsible_lending/consultation_en.pdf .
6 See DIRECTIVE 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit
agreements for consumers and repealing Council Directive 87/102/EEC, L 133/66; DIRECTIVE 2014/17/EU of
the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to
residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No
1093/2010, L 60/34.
7 Braucher, “Theories of Overindebtedness: Interaction of Structure and Culture”, 7 Theoretical Inquiries in
Law (2006), 323-346.
3
servicing secured or unsecured borrowing or to payment of rent, utility or other household
bills.8
The major causes for consumer over-indebtedness, which the literature had already
acknowledged,9 have been confirmed to be external life-time events such as illness or
divorce, or macro-economic factors like unemployment, declining wages, or generally low
income vis-à-vis the cost of living.10 The findings reveal that people who lose their jobs and
incomes have a higher probability to default and become entrapped in unsustainable debt, as
do people confronted with accidents of life no one can anticipate. Behavioural factors, such
as poor financial choices, mismanagement of resources, or irresponsible lending practices
seem to have a limited bearing. Yet, a reading of the major causes behind problem debt could
be a conjuncture of external events with behavioural factors, where consumers do not adjust
effectively their budgets to the external changes.11
All considered, it becomes clear that the nature of the problem finds its roots in a number of
national soils which are beyond the remit or control of what the law can do, and which are far
broader than the credit-debt relationship – for example issues of political economy, taxation,
labour markets, salary levels and cost of living, etc. These are very sensitive national political
issues and not much can be expected at the level of EU policies and law.
Clearly, responsible lending policies and the resulting law appear inadequate to address
comprehensively the problem and certainly they do not offer debt solutions. Yet, if the law
cannot do much to solve the causes of the problem, it may nevertheless intervene to alleviate
it in ways similar to the recovering of the economic value of businesses facing financial
hardship or collapse. When natural persons are involved, however, this issue raises moral and
political questions and resistance. Still, as over-indebtedness has increased with the crisis, in
the last few years many Member States have moved towards national regimes for the
protection of consumers in financial distress and the treatment of the insolvency of natural
8 Civic Consulting, The Over-Indebtedness of European Households: Updated Mapping of the Situation, Nature
and Causes, Effects and Initiatives for Alleviating its Impact (Brussels, 2014).
9 E.g. see Ramsay, Consumer Law and Policy (Hart 2007), sp. 578-580; Caplovitz, The poor Pay More:
Consumer Practices of Low Income Families (Free Press 1963); Adler and Wozniak, “The Origins and
Consequences of Default – An Examination of the Impact of Diligence”, Research Report n. 6, (Scottish Law
Commission, 1980); Berthoud and Kempson, Credit and Debt: The PSI Report (PSI, 1992); Hoermann (ed.),
Consumer Credit and Consumer Insolvency: Perspectives for Legal Policy from Europe and the USA (ZERP,
1986); Elliott, Not waving but drowning: Over-indebtedness by misjudgment (CSFI, 2005); Balmer, Pleasence,
Buck, and Walker, “Worried Sick: the Experience of Debt Problems and their Relationship with Health, Illness
and Disability” 5(1) Social Policy and Society (2006), 39-51; Dominy and Kempson, Can’t Pay or won’t Pay?
A Review of Creditor and Debtor Approaches to the Non-Payment of Bills (DCA 2003); Niemi, “Consumer
bankruptcy in comparison: do we cure a market failure or a social problem?” 37 Osgoode Hall Law Journal
(1999), 473-503.
10 Civic Consulting, supra note 8.
11
E.g. see Banque de France, Étude des Parcours Menant au Surendettement (September 2014).
4
persons. However, these are individual but uncoordinated regimes or initiatives in the
Member States which expose the absence of common, harmonized or appropriately resourced
strategies at EU level.12
As far as the EU is concerned, Council Regulation (EC) 1346/2000 and its Recast
Regulation13 - which have been designed for the cognate area of corporate insolvency but that
can have a limited application for the insolvency of natural persons - do not attempt to
impose a common system at EU level, but instead to ensure that insolvency proceedings
opened in one Member State are recognized in all other Member States. The Regulation
outlines that the domestic law of the country where the case is opened is applicable as long as
the individual has established a ‘centre of main interest’ (COMI) in the relevant jurisdiction.
Moreover, the Regulation’s rules have given raise to forum shopping also by natural persons
through abusive COMI-relocation, i.e. the movement of assets from one country to another so
as to take advantage of a more favourable legal position. The Recast Regulation is designed
to improve the co-ordination of insolvency proceedings within the EU, ensure the equitable
treatment of creditors and minimise ‘forum shopping’. They do not provide for substantive
rules on insolvency proceedings.
In any case, COMI provisions and the new rules of the Recast Regulation are capable of
affecting a minority of skilled or well-informed consumers/small traders, but they can hardly
be applicable to the majority of people in financial distress, i.e. the vulnerable consumers.
It is in this context and against this background that this book took shape as part of a broader
research project funded by the Civil Justice Programme of the European Commission. If EU
responsible lending alone does not appear suited to deal with the complex multi-dimensional
problem of household over-indebtedness, to what extent an integrated but reformed EU
personal insolvency regime would be necessary? This is the wider research question of the
research project entitled ‘Consumer over-indebtedness, responsible lending, and the
insolvency of natural persons: the need for a comprehensive reform to protect consumers in
financial difficulty’ led by Dr Ferretti (Brunel University London, UK) in partnership with
12
See, for example, London Economics, Study on means to protect consumers in financial difficulty: Personal
bankruptcy, datio in solutum of mortgages, and restrictions on debt collection abusive practices, Final Report
prepared for the Financial Services User Group, Contract № MARKT/2011/023/B2/ST/FC, (December 2012);
Gerhardt “Consumer Bankruptcy Regimes in the US and Europe. Further effects and implications of the crisis”
CEPS Working Document No. 318(July 2009).
13
COUNCIL REGULATION (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings, OJ L 160 1-18;
REGULATION (EU) 2015/848 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 20 May
2015 on Insolvency Proceedings (Recast), OJ L 141 19-72.
5
Prof Salomone (University of Trento, Italy), Prof Sutschet (Osnabrück University of Applied
Sciences, Germany) and Mr Tsiafoutis (Consumer Association EKPIZO, Greece).
The research project is related to the EU priority which aims to promote the creation of a
genuine European area of justice in the area of personal insolvency. As hinted, it aims to
investigate the extent to which re-conceptualised and integrated responsible lending and
personal insolvency regimes at EU level may be necessary or desirable, where irresponsible
lending and borrowing behaviours are punished but objective difficulties and good faith of
over-indebted consumers find protection. The hypothesis is that a desirable legal regime
should address comprehensively all the stages that lead to the financial difficulty of
consumers from prevention to cure, and it should recognise that the financial distress of
natural persons is intertwined with social, political, and cultural issues.
This collection of edited multidisciplinary essays from academics and a variety of different
stakeholders originates from expert workshops that the research team has organised in four
selected Member States: the UK, Germany, Greece and Italy. They are a selection of papers
emanating from a range of presentations delivered by recognised national academic and nonacademic experts representing a diversity of interests involved in the issues surrounding overindebtedness. These experts were invited to discuss national perspectives from different
disciplines and interest groups, and to exchange knowledge with the research team –
consumer organisations, practitioners, academics, advisors, industry representatives, and
local agencies.
The workshops held in the UK, Germany, Greece, and Italy also offered the opportunity to
draw comparisons of the social, economic, and regulatory frameworks of over-indebtedness,
responsible lending and borrowing, and personal insolvency regimes and understand the
difficulties behind a prospective EU intervention in the area and its form.
These jurisdictions have been chosen to offer samples of diversity in terms of economic and
legal tradition, culture, historical and current attitude towards personal debt, and the scale of
pre-crisis household indebtedness.14 They also offer an interesting comparative view from the
perspective of the impact of the current economic crisis and its effect on the levels of over-
14 On the different legal traditions and cultural issues of personal debts see e.g. Gelpi and Julien-Labruyère, The
History of Consumer Credit (Basingstoke, Macmillan Press 2000); Graeber, Debt – The first 5,000 years
(Melville House 2011); La Porta; Lopez-de-Silanes, Shleifer, and Vishny, “Law and Finance”, 106(6) The
Journal of Political Economy (1998), 1113-1155; Beck, Demirgüç-Kunt, and Levine, “Law and finance: why
does legal origin matter?”, 31(4) Journal of Comparative Economics (2003), 653-675. On the statistics on level
of personal indebtedness see OECD, “Household debt”, in OECD Factbook 2014: Economic, Environmental
and Social Statistics (OECD Publishing, 2014). http://dx.doi.org/10.1787/factbook-2014-27-en; See also
Eurostat, supra note 2.
6
indebtedness, since they are at extreme ends of the spectrum. According to the latest findings,
each jurisdiction belongs to a different grouping/cluster of countries divided as being ‘very
high’ (Greece), ‘high’ (Italy), ‘moderate’ (UK), or’ low’ (Germany) in terms of frequency of
household arrears and percentage of total population with arrears on key commitments.15 The
selection of countries that are mature in their membership of the EU is intentional to avoid
issues of financial sectors typical of the new Member States that have been through structural
changes in a relatively short period of time and, consequently, have common structural
characteristics that may have exacerbated the effects of the financial turmoil or have
impacted differently on the causes of over-indebtedness (e.g. borrowing in foreign currencies,
heavy reliance on influx of foreign capital, transition to market economy and sudden growth
in house prices with following severe negative equities, etc.).16
The research team is indebted to all those experts who held presentations or participated as
discussants. In particular, in the UK it is grateful to Professor Peter Cartwright (University of
Nottingham), Professor Elaine Kempson (University of Bristol), Professor Robin Jarvis
(Brunel University London and ACCA), Dr Joseph Spooner (London School of Economics
and Political Sciences), Ms Joanna Elson (Money Advice Trust), Ms Gillian Key-Vice
(Arrow Global and GVK Limited), Ms Sue Lewis (Consumer Panel UK), Mr Mick McAteer
(The Financial Inclusion Centre), Ms Sarah Beddows, Mr Peter Tutton (Step Change).
In Germany, many thanks go to Professor Heinz Vallender (University of Cologne),
Professor Peter Rott (University of Kassel), Ms Patricia Wruuck (Deutsche Bank, Research),
Mr
Walter
Joachimiak
(Statistisches
Bundesamt),
Mr
Christoph
Zerhusen
(Verbraucherzentrale), Mushtaq Ahmad (Deutsche Bank, Credit Risk Management), Michael
Bretz (Creditreform), Eva-Maria Trube (Diakonie); Professor Antonio Miras (University of
Applied Sciences Osnabrück).
In Greece, the team’s appreciation is for Professor Giorgos Mentis (University of Athens),
Ms Despoina Prassa (Bank of Greece), Ms Melina Mouzouraki (Practitioner and Member of
European Consumer Debt Network), Professor Christina Livada (University of Athens and
Legal Advisor in Hellenic Bank Association), Ms Olympia Linardatou (Legal Advisor in
EKPIZO), Professor Theodoros Katsas (Democritus University of Thrace), Dr Andromahi
15 Civic Consulting, supra note 8; See also the data in Bouyon and Boeri, ECRI Statistical Package (ECRI
2014).
16 E.g. see European Central Bank, Banking Structures in the New EU Member States (January 2005), at
https://www.ecb.europa.eu/pub/pdf/other/bankingstructuresnewmemberstatesen.pdf; Farkas, “The Impact of the
Global Economic Crisis in the Old and New Cohesion Member States of the European Union”, 57(1) Public
Finance Quarterly (2012), 53-70; Koyama, “Economic Crisis in New EU Member States in Central and Eastern
Europe: Focusing on Baltic States”, 5(3) Romanian Economic and Business Review (2010), 31-55.
7
Delikostopoulou (Legal advisor in Panhellenic Federation of Consumer Associations
‘Paremvasi’).
The book is structured in five Parts.
Part I comprises of a chapter on the EU dimension. It sets the scene and explores the state of
the art of EU policies and law to address consumer over-indebtedness (Ferretti and Livada).
It is followed by four parts each one focusing on the studied Member States and presented in
the book in the chronological order of the workshops held throughout the project.
Part II covers the UK, with contributions from the perspective of debt advisors (Elson and
Tully), the impact of the crisis on household over-indebtedness (Kempson), the debt crisis
and the function of responsible credit (Gibson), the role of the State in responsible lending
and how it has been regulated over the last decade alongside evidence of irresponsible
behaviour (Rowlingson, Gardner, and Appleyard), and the structure of English and Welsh
personal insolvency solutions and problems that they create for consumer protection (Tribe).
Part III explores consumer over-indebtedness in Germany. It includes contributions on the
statistics and analysis of over-indebtedness in the country and the role played by the Federal
Statistical Office (Joachimiak), followed by an economic discussion of the micro and macrodimensions of over-indebtedness from a lender’s perspective (Wruuck). An analysis of the
German legal framework (Sutschet) and the law and policy in relation to prevention of overindebtedness (Rott) provide the juridical picture.
Part IV is focused on Greece. Essays range from a discussion of the dimension of crisis and
the response of the law (Mentis), the role of debt advice and consumer organisations in the
Greek personal debt crisis (Mouzouraki), the regulatory framework of responsible lending as
a preventive tool of over-indebtedness (Livada), the recent amendments introduced in
personal insolvency legislation (Katsas), and the sensitive issue in Greece of the protection of
the principal residence of consumers (Tsiafoutis).
Finally, Part V analyses the situation in Italy from multiple perspectives. Contributions
include the dimension of over-indebtedness in Italy and the characteristics of the overindebted households (Anderloni and Vandone), the evolution of the household credit market
and changes in the structure of the supply side in order to highlight the way in which these
changes have improved the quality and efficiency of the credit provided (Cosma), the powers
and the duties of consumer associations in Italy, including case-studies and proposed
solutions for preventing and repairing over-indebtedness (Biasior), an analysis of the peculiar
approach taken by the Italian legal system and the interface with credit contracts (Cerini), and
8
non-contract legal tools against over-indebtedness in the debt discharge discipline introduced
by the new consumer insolvency law, addressing in the end the residual issues of debt advice
and financial education (Comparato).
Grant Agreement JUST/2013/JCIV/AG/4620 inder the Civil Justice Programme of the
European Commission
9