by Iain Ramsay

Udo Reifner has been an inspiration in promoting the ideal of a finance for citizens and productive credit system. He has made a great contribution to international thinking and policy making in the EU on financial services. His many collaborative research projects at the IFF since 1987 have maintained an important critical perspective on developments in personal finance. Udo’s work is imaginative and rich in ideas, which have often stimulated others. In this blog, I focus primarily on his work on responsible credit, and overindebtedness, and the principles established by the European Coalition on Responsible Credit founded in 2006.

Since the Great Recession of 2008, triggered by problems in sub-prime mortgage markets in the US, an international paradigm change has taken place in the approach to the regulation of consumer credit. Concepts such as responsible credit, applicable throughout the life of a credit contract, have become embedded in international soft law documents. Many ideas in this paradigm were foreshadowed by Udo who before the recession outlined fundamental principles of responsible credit.((Discussed in ‘A Call to Arms’—For Regulation of Consumer Lending’ in J Niemi, I Ramsay & W Whitford, Consumer Credit, Debt and Bankruptcy (Oxford, Hart, 2009) chapter 6.)) These were underpinned by the idea that credit was essential for full participation in society, and must be affordable for all. Credit should be productive for the borrower: credit relations should be transparent and understandable; lending should be cautious, responsible and fair: credit contracts should adapt to changes in circumstances; protective legislation has to be effective; overindebtedness should be a matter of public concern and bankruptcy should lead to rehabilitation; borrowers must have adequate means to defend their rights and be free to voice their concerns.

At the time of formulation of these principles the EU was about to finalise its Directive on consumer credit which, under the pressure of financial institutions operating through their respective governments, had watered down the responsible lending principle and envisaged a Directive driven primarily by an interest in market expansion rather than regulatory protection. Neoliberal ideas seemed dominant. Policies such as interest rate ceilings were regarded as old-fashioned, blunt, and ineffective methods of market regulation. Ironically the Directive came into effect a few weeks before the demise of Lehman brothers, initiating the largest downturn in the world economy since the Depression of the 1930s.

Commentators on credit often divide narratives of credit regulation into those which emphasise access and those which emphasise protection. The dominant international narrative pre-2008 was that of access to credit, albeit subject to consumer protection measures which promoted confidence in the market. Early work by the World Bank in central Europe focused on promoting credit bureaux, truth in lending, financial literacy and financial ombudsmen, institutions intended to construct a neo-liberal credit subject for the newly developing credit markets in those countries.((See e.g. early draft of World Bank Good Practices, ‘Good Practices for Consumer Protection and Financial Literacy in Europe and Central Asia (2008).))

Udo critiqued the increasingly neoliberal approaches to consumer credit protection where ‘the debtor must learn to adapt to the market’, arguing that consumer credit regulation must recognise the relational nature of credit contract, the structural causes of overindebtedness and the inevitably redistributive nature of consumer credit regulation.

The European Coalition for Responsible Credit principles promote both access and protection throughout the life of the credit contract. They recognise that credit is ‘essential for full participation in society’ but that credit relations should be ‘productive’. Udo argues that this requires responsible credit, but it might also raise broader macroeconomic questions about the optimal level of consumer credit in a society, a theme taken up by Adair Turner in 2015, arguing that many contemporary economies produce both too much and also the wrong types of credit.((See e.g. early draft of World Bank Good Practices, ‘Good Practices for Consumer Protection and Financial Literacy in Europe and Central Asia (2008).))

The Great Recession had a major effect on international thinking about household credit. The Financial Stability Board in 2010 reported on consumer credit, emphasising the importance of responsible lending, strengthened oversight agencies, and established the international organisation FINCONET to steer national initiatives. The OECD developed international principles for financial consumer protection including responsible business conduct and fair treatment of consumers. The World Bank indicates in a 2017 survey that 90 percent of jurisdictions have controls on excessive borrowing, intended to give effect to the OECD principle of fair treatment of consumers.((See e.g. early draft of World Bank Good Practices, ‘Good Practices for Consumer Protection and Financial Literacy in Europe and Central Asia (2008).)) The EU Mortgage Credit Directive (2014), which before 2008 had been wending its way through the EU legislative process with a market expansion mission, was substantially changed to include tougher rules on irresponsible lending and greater controls on the supply side of the market. The European Court of Justice intervened in several credit cases to nudge member states towards higher ground rules on mortgage foreclosure procedures.

Interest rate ceilings remain a controversial method of regulation. Udo and others in a comprehensive report for the EU tested several hypotheses concerning the effects of ceilings with results which indicated the complexity of issues surrounding their role. Thus, while ceilings might limit access to high risk consumers little evidence existed that individuals would turn to illegal money lenders.((‘Study on interest rate restrictions in the EU Final Report’, U Reifner, S Clerc-Renaud, RA Michael Knobloch (2010) http://ec.europa.eu/internal_market/finservices-retail/docs/credit/irr_report_en.pdf.)) The UK traditionally eschewed ceilings but in a significant volte-face, the Financial Conduct Authority introduced ceilings for short term high cost loans in 2015, based on careful cost-benefit analysis which indicated that the costs of payday loans to certain high risk consumers outweighed their benefits. The FCA later found in a review of the effects of ceilings almost no evidence that individuals were substituting for lack of access by using illegal money lenders.

An important aspect of Udo’s research has addressed the treatment of overindebtedness in the EU and his 2003 report with Nik Huls, Johanna Niemi and Helga Springeneeer, provides a template for the European regulation of over-indebtedness, focusing on the importance of the fresh start, public debt counselling and advice, and rehabilitation of the debtor.((‘Consumer Overindebtedness and Consumer Law in the European Union’ Udo Reifner, Johanna Kiesilainen, Nik Huls, Helga Springeneer (2003) at http://www.knl.lv/raksti_data/1147/parskats_ES_2003.pdf.))

Udo gradually moved towards the position that the long-term nature of credit relations, where individuals are borrowing for many basic needs against future income, required methods of adapting to interruptions in income which draw on extended ideas of force majeure. Overindebtedness is an ‘integral part of the credit society’((Reifner, n1,107.)) requiring forms of adaptation over time which responds to the needs of consumers. These ideas remain to be fully developed but they provide a direction for future research and also pose difficult questions about credit in contemporary societies where credit may be supplementing income in a model of ‘loans for wages’ with some consumers paying a high price for credit.

Ten years after the Great Recession many may be forgetting the pre-crisis scandals of payment protection insurance in the UK, the Dexia scandal in the Netherlands, or the details of the sub-prime mortgage scandal in the US. Indeed, in the US, the Trump administration seems set on dismantling the Consumer Financial Protection Bureau, established in the wake of the crisis to ensure greater safety for financial products. The political battle for meaningful responsible credit norms continues.

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Der Beitrag Responsible Credit and the European Coalition for Responsible Credit erschien zuerst auf iff | institut für finanzdienstleistungen e.V..

by Alessandro Somma

I.

Siamo nel 2013, l’ultimo anno del secondo esecutivo presieduto da Angela Merkel, a capo di una coalizione di Cristianodemocratici, Cristianosociali e Liberali. È in questo frangente che il Parlamento tedesco discute di una riforma della disciplina dell’insolvenza con disposizioni dedicate anche ai consumatori, poi approvata come Gesetz zur Verkürzung des Restschuldbefreiungsverfahrens und zur Stärkung der Gläubigerrechte (del 15 luglio 2013). La riforma è voluta fortemente dai Liberali, qualificati da Udo Reifner come “il partito di chi possiede i soldi”, quindi il partito dei creditori, che li concedono in prestito a consumatori, imprese e Stati, ovviamente dietro il pagamento di interessi. I debitori dovrebbe essere considerati dei benefattori, dal momento che fanno fruttare somme di denaro altrimenti destinate a rappresentare una ricchezza inerte. E invece sono bistrattati dagli autori della riforma, tanto che per Reifner essa determina “un ritorno al principio del XIX secolo”.

A partire da questo episodio si sviluppano brevi ma incisive riflessioni che muovono dal senso del neoliberalismo in quanto attuale fondamento dello stare insieme come società, per poi considerare nel merito il ruolo del debito in quanto dispositivo biopolitico.

II.

Prima di entrare in dialogo con queste riflessioni vorrei sottolineare un pregio di questo scritto, in qualche modo amplificato dal suo essere concepito per una occasione ben precisa: una conferenza per un pubblico di persone più o meno esperte di indebitamento, ma non necessariamente in quanto giuristi. Di qui lo stile tendenzialmente divulgativo, che pure nulla toglie alla precisione e profondità del discorso, e soprattutto il ricorso ad immagini ed espressioni forti, pensate per impressionare l’ascoltatore prima e il lettore poi.

È uno stile poco utilizzato dai cultori del diritto, che di norma reputano il carattere scientifico di una trattazione compatibile unicamente con il ricorso a linguaggi paludati, a dimostrazioni in punta di penna, ad argomentazioni capaci di testimoniare l’incrollabile equilibrio di chi le propone. Come se il diritto fosse una scienza esatta, come se non coinvolgesse passioni ed emozioni al pari della politica, di cui costituisce del resto una diretta espressione.

Proprio questo viene invece occultato dal giurista, di norma intento a legittimare il proprio ruolo sfoggiando capacità innate di maneggiare un complesso di conoscenze tecniche, in quanto tale distante dall’arena politica. Salvo poi scoprire che, dopo aver contribuito a creare un clima di accettazione per la tecnocrazia, non è più lui il tecnocrate di moda. Questo ruolo, infatti, è stato usurpato dall’economista, dal quale il giurista non può fare altro che mutuare il linguaggio e le teorie sempre più indispensabili ad attribuire significato alle parole dei più disparati legislatori.

Se dunque vuole recuperare visibilità sulla scena del dibattito pubblico, il cultore del diritto deve ripoliticizzare il suo discorso, e deve farlo senza nascondere le passioni che questo comporta. E senza per questo rinunciare al carattere scientifico del suo argomentare, all’articolata dimostrazione delle tesi sostenute, dando così finalmente vita a un filone letterario che altri studiosi frequentano da tempo con successo: primo fra tutti Simon Springer con il suo “fotti il neoliberalismo“((Springer, Fuck Neoliberalism, in 15 International Journal for Critical Geographies, 2016, p. 285 ss. http://142.207.145.31/index.php/acme/article/download/1342/1172.)).

Il linguaggio di Reifner non è così colorito, ma non per questo è meno forte: stigmatizza fin dall’inizio il carattere autoritario del neoliberalismo ben esemplificato dalla nota ma poco evocata attività dei Chicago Boys nel Cile degli anni Settanta e Ottanta, ovvero “dall’accoppiata di Friedman e Pinochet”. E liquida il sistema del credito erogato dalle banche come “sfruttamento senza scrupoli dei più poveri sostenuto dalla legislazione europea”. Per poi concludere che ci troviamo in un conflitto tra classi, tuttavia non quelle identificate da Marx, ovvero i capitalisti e i lavoratori, bensì quelle cui prelude la distinzione di Engels e Kautsky tra persone a cui sono riconosciuti diritti e persone senza diritti: i creditori e i debitori.

III.

La classe dei creditori, chiosa Reifner, è la stessa degli “investitori”. Una classe che in effetti è collocata al centro dell’ordine economico di matrice neoliberale in quanto ordine incentrato sulla libera circolazione dei fattori produttivi: in particolare dei capitali. Se questi non hanno frontiere, allora gli Stati devono essere disposti a fare qualsiasi cosa per attirarli, ovvero per attirare investitori, a partire dall’abbassamento delle pressione fiscale sulle imprese e dalla svalutazione e precarizzazione del lavoro.

Prima non era così. Era diffusa l’idea che le merci dovessero circolare liberamente, ma si riteneva che lo stesso non valesse per i capitali: era questo il senso del cosiddetto compromesso di Bretton Woods, così denominato perché raggiunto in occasione della celeberrima conferenza tenutasi presso l’omonima cittadina sul finire del primo conflitto mondiale. In quell’occasione si affermò solennemente che occorreva combattere la disoccupazione rivitalizzando il commercio internazionale, se del caso fornendo capitali ai Paesi bisognosi attraverso una Banca mondiale. La libera circolazione dei capitali avrebbe invece rappresentato una minaccia((Cfr. M. Morgenthau, Closing Address to the Conference, in International Monetary Fund and International Bank for Reconstruction and Development. Articles of Agreement, Washington, U.S. Treasury, 1944, p. iv.)), tanto che nello Statuto del Fondo monetario internazionale si dice esplicitamente che “gli Stati membri possono esercitare gli opportuni controlli per regolamentare i movimenti di capitali” (art. vi).

Il neoliberalismo incide profondamente su questo assetto. Del resto si è affermato nel corso degli anni Ottanta per rovesciare lo schema alla base dei cosiddetti Trenta gloriosi, pensato per tenere insieme crescita e occupazione: lo schema alla base della spirale virtuosa originata dal potere contrattuale dei lavoratori, produttiva di una buona crescita dei livelli salariali, a sua volta motore per l’incremento dei consumi, e quindi dell’occupazione e della forza dei lavoratori. Evidentemente gli effetti della libera circolazione dei capitali avrebbero inceppato un sistema incentrato sul sostegno della domanda, alimentato anche dalla redistribuzione della ricchezza realizzata dalle strutture dello Stato sociale: il rovesciamento del compromesso di Bretton Woods e l’affossamento del compromesso keynesiano sono le due facce della stessa medaglia.

IV.

L’interesse per il contributo di Reifner non risiede solo nell’indicazione degli investitori, ovvero dei creditori, quali tipi umani di riferimento per l’edificazione e lo sviluppo del neoliberalismo. Particolarmente apprezzabile è anche l’individuazione delle dinamiche intimamente biopolitiche che sostengono un simile sviluppo, del resto ben esemplificate dall’espressione tedesca Schuld: che in italiano, e in diverse altre lingue, significa sia “debito”, sia “colpa”.

Reifner sottolinea come questa identificazione sia funzionale “a una sfrenata globalizzazione del modo di pensare capitalista”. Produce infatti “una buona morale dei pagamenti”, e con ciò “il radicamento in noi di una prigione che ci siamo scelti”, utilizzata tuttavia per legittimare gli attacchi, anzi le bastonate ai debitori insolventi: il Schuldnerbashing. Tutto questo mentre soprattutto i politici neoliberali mostrano atteggiamenti di tutt’altro tipo nei confronti di chi possiede ingenti somme di denaro, quindi dei creditori, spesso e volentieri protetti con il segreto bancario. Più precisamente: mano pesante con una categoria composta nella stragrande maggioranza dei casi da disoccupati o comunque caduti in disgrazia per motivi a loro non imputabili, e mano di velluto con “gli investitori, i fondi speculativi, gli strozzini”. E si potrebbe aggiungere: mano pesante anche contro i creditori socialmente deboli, se è vero che i mitici Rapporti Doing business della Banca mondiale, catalizzatori di riforme in linea con l’ortodossia neoliberale, sponsorizzano l’abbandono della categoria dei creditori privilegiati: in massima parte lavoratori rimasti senza stipendio nel periodo precedente il fallimento del datore di lavoro((A. Somma, Giustizia o pacificazione sociale? La codeterminazione nello scontro tra modelli di capitalismo, in Politica del diritto, 2015, p. 549 ss.)).

Ovviamente non è sempre stato così, e anzi l’osservazione storica mostra che la remissione dei debiti ha una lunga tradizione((A.D. Manfredini, Rimetti a noi i nostri debiti. Forme della remissione del debito dall’antichità all’esperienza europea contemporanea, Bologna, Il Mulino, 2013.)). È cioè tipico del neoliberalismo utilizzare il debito come strumento attraverso cui produrre e governare le soggettività individuali, ma anche quelle collettive((M. Lazzarato, La fabbrica dell’uomo indebitato. Saggio sulla condizione neoliberista, Roma, DeriveApprodi, 2012.)).

Lo si ricava al meglio osservando le correnti modalità con cui si procede allo sviluppo della costruzione europea: la stigmatizzazione del debito sovrano al solo fine di imporre forme di assistenza finanziaria condizionate all’adozione di specifiche riforme strutturali. Il tutto alla base di una vera e propria economia del debito, tale in quanto fondata su rapporti che, diversamente dalle relazioni di scambio, sono anche formalmente instaurate tra soggetti impari. Di qui la particolare radicalità delle riforme, che nel disprezzo delle più elementari regole democratiche determinano una contrazione della spesa sociale, la privatizzazione del patrimonio pubblico, la liberalizzazione dei servizi locali e la riduzione delle relazioni di lavoro a relazioni di mercato qualsiasi((A. Somma, The Biopolitics of Debt-Economy. Market Order, Ascetic and Hedonist Morality, in B. Keller, A. Somma, P. Zumbansen (a cura di), Reshaping Markets. Economic Governance, the Global Financial Crisis and Liberal Utopia, Cambridge, Cambridge University Press, 2016, p. 115 ss.)).

V.

Come precisato da Reifner, il denaro dato a prestito si iscrive in un rapporto che dal punto di vista del senso economico dell’operazione ben può essere qualificata come locazione di denaro. Di qui lo specifico interesse del creditore non tanto alla restituzione della somma, bensì a percepire gli interessi il più possibile elevati, soprattutto per un tempo il più esteso possibile.

Questo schema è applicato con particolare accanimento nei confronti dei debitori sovrani, il cui comportamento è anch’esso plasmato dai canoni della moralità in linea con l’economia del debito: quella per cui prevale l’obbligo di ripagare il debito su tutti gli altri obblighi incombenti sull’ente pubblico, innanzi tutto quello di assicurare il godimento dei diritti fondamentali.

A questi aspetti si è dedicato il Rapporto sulla riforma del sistema monetario e finanziario internazionale predisposto nell’ambito delle Nazioni Unite da una commissione presieduta da Joseph Stiglitz((United Nations, Report of the Commission of Experts of the President of the United Nation General Assembly on Reforms of the International Monetary and Financial System del 21 settembre 2009, www.un.org/ga/econcrisissummit/docs/FinalReport_CoE.pdf, p. 121 ss.)). Lì si affronta l’essenza dell’economia del debito: l’assoggettamento incondizionato del Paese debitore alla volontà dei creditori più forti e spregiudicati, che può essere efficacemente contrastato solo interrompendo la spirale dell’indebitamento: con l’insolvenza sovrana. Il tutto, però, solo se si abbandona l’attuale modo di gestirla((Su cui C. Paulus, A Resolvency Proceeding for Defaulting Sovereigns, in 3 International Insolvency Law Review, 2012, p. 1 ss.)), se si adottano cioè procedure partecipate in cui siano previsti audit pubblici, ritenuti la modalità principe con cui ottenere “una ristrutturazione trasparente ed equa del debito, ed eventualmente una sua cancellazione”.

Il tema dell’equità, accanto a quello della trasparenza, è un punto centrale nel Rapporto Stiglitz, dove si stigmatizzano gli effetti che il modo attuale di affrontare il debito sovrano produce in particolare sul sistema dei diritti sociali: le politiche di austerità imposte dal servizio del debito violano “i diritti dei cittadini comuni, cioè i diritti all’istruzione, alla salute e alla pensione”. Ma è proprio questo ciò che accade nel momento in cui si condiziona la concessione di prestiti al rovesciamento del compromesso keynesiano((T. Mahmud, Is it Greek or déjà vu all over again? Neoliberalism and Winners and Losers of International Debt Crises, in 52 Loyola University Chicago Law Journal, 2011, p. 629 ss.)), che ancora una volta si conferma essere l’obiettivo primo dell’ortodossia neoliberale.

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Der Beitrag Biopolitica ed economia del debito erschien zuerst auf iff | institut für finanzdienstleistungen e.V..

by Damon Gibbons

In November 2008, at the peak of the financial crisis, and only a month after the British Government had bailed out three of the UK’s largest banks, HM Queen Elizabeth II visited the London School of Economics. Whilst there she famously asked((‘The Queen asks why no one saw the credit crunch coming’, Daily Telegraph, 5^th November 2008.)) the academics present why no-one had seen the crisis coming? After pondering this question for a period of eight months, a formal response was eventually delivered by some of the nation’s most respectable economists to the Royal Household. Its analysis concluded((Cited in Gordon, J. (). ‘On the role of the actuary in a changing world’. Dolman Scott Ltd. )):

“In summary, your Majesty, the failure to forsee the timing, extent and severity, and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people…”

Perhaps then, one of the lessons from the crisis is that the British intelligentsia, as well as the very bright people in charge of global financial institutions, the central banks, and the regulators should, in future, make more of an effort to listen to those providing critiques of neo-liberalism rather than its cheerleaders?

It was certainly not the case that no-one understood the dangers of credit market liberalisation. From 2005 onwards, Udo devoted his considerable energies to providing a comprehensive critique of these. Bringing together critical voices ranging across numerous academic disciplines, consumer groups, and, in some cases, from within the financial sector itself, Udo was the driving force behind the creation of the European Coalition for Responsible Credit (‘ECRC’). He also made an immense intellectual contribution to the positions that the ECRC adopted. Distilling his vast knowledge of the history, ethics, and the legal foundations of credit use in society, Udo drafted and promoted the seven Principles of Responsible Credit, which some thirteen years later remain a lodestone for those of us who can imagine and seek to ensure a more productive, ethical, and effective financial services system.

For me, one of the finest expositions of Udo’s thought – revealing the detailed socio-legal analysis which underpin the Principles – is his Chapter ‘Responsible Credit in the EU: National Law, the New EU-Directive and Beyond’, which was published in a collection of papers seeking to understand the impact of consumer credit regulation on economic activity((In Delia, E.P, ed (2007) ‘Evolving Legislation on Consumer Credit and Trade Practices: Stimulus or Drag on Economic Activity?’.)) in 2007.

The chapter begins by recognising that the neo-liberal approach to credit regulation was being exported from the US (and inevitably therefore the UK) into European markets with a resulting deterioration in the types of financial services products being offered to consumers. Usurious prices ‘disguised as risk based pricing’; the cross-selling of useless insurances, and the constant flipping of credit agreements into long term revolving debt obligations were the main results. But it is Udo’s summary of the policy narrative behind the process of market liberalisation which particularly catches the attention in his introduction (p.54):

“Claiming that everybody should have access to credit, the quality of credit products is increasingly freed from all cultural rules that historically defined consumer debts as a dangerous product. More access will lead to more competition and cut prices so that ‘the consumer’ will profit. This is the neo-liberal message from DG Market in Brussels.”

The proposition of universal access to credit is rightly to be considered preposterous if one simultaneously removes controls over pricing and relies only on consumers being properly informed about the content of agreements for their protection. Udo was clear: providing credit at extortionate prices to the poorest was driving them further into poverty and creating ‘social losses’ – or, for me, what could be termed economic externalities: for example in the form of mental and physical health problems or increased homelessness.

Udo’s chapter therefore rightly focused on defending the historical protections that had been put in place in Europe and which were being threatened by the European Commission’s acquiescence to neo-liberal ideology (p.56):

…continental Europe has still a rich and active history of protection against usurious credit practices which are not limited to interest rates. It is mostly not part of the consumer credit legislation which followed the first EU Consumer Credit Directive but is part of the tradition of civil law with its rules on bona fide and good morals, on anatocism, default interest, early repayment, improvident credit extension and limits to usurious refinancing practices. This legislation still in force starts from the assumption that for ordinary people less debt is better than much debt and that debt which does not represent actual investments is dangerous for people and families.”

At the time of writing, Udo, and the ECRC he founded, sought to defend these types of protections across continental Europe by calling for a ‘Responsible Lending’ principle within what was to become the Consumer Credit Directive of 2008. However, the Commission could not be persuaded on this point. In the end the Directive would contain nothing more than a requirement for Member States to ensure lenders assessed the ‘creditworthiness’ of applicants – for example by calculating credit scores based on the information held by credit reference agencies. Quite rightly, Udo identified that this process achieved the precise opposite of what was actually needed because it enabled lenders to segment for their perceived risk, and to price accordingly (p.58):

“The scores derived from those data bases for each household increasingly are not the basis for credit denial but more for the higher prices for poorer clients in risk based credit pricing systems. It thus achieves the opposite: the debt burden of the overindebted is higher with than without ‘responsible lending’ which leads to a self-fulfilling prophecy: higher risk equal higher cost, equal an increased debt burden which again increases overindebtedness.”

We now know, of course, that the expansion of credit data, ever increasing market segmentation, and risk based pricing are the key ingredients in the development of sub-prime markets and create considerable instability in the financial system – especially when portfolios of sub-prime loans are bundled up as investment opportunities through the process of securitisation. But even in 2007 and 2008, with the causes of the financial crisis coming into view, policy makers held to the ridiculous notion that lenders would use information positively to make responsible lending decisions of their own accord, and that formal requirements in this respect were not necessary.

Importantly the concept of Responsible Lending, as articulated by Udo, covers not only the decision to lend, but also the subsequent adaptation of credit agreements in the face of changes in the circumstances experienced by borrower. This is critical as a means of protecting people from exploitation and preventing overindebtedness (p.60):

“[Responsible Lending] is not only a principle which intends to prevent unconscious borrowing (and lending) but it wants to adapt credit to the needs and social circumstances of consumers to make render it productive for them. Thus national regulations incorporate the wisdom of several thousand years in handling personal debts when they for example limit anatocism fix interest rate ceilings and regulate duties to care for the families and their living conditions if credit turns from a promising investment into mere debt.”

The chapter goes on to detail the many different laws and regulations in place in countries across Europe which could, if drawn together into a cohesive package, form the basis of a pan-European Responsible Lending Directive. The level of detail in the chapter, which includes not only the specific laws and regulations, but in many cases also discusses their historical development and the legal and ethical principles contained within them, is considerable. This was a typical feature of Udo’s work and is of great and lasting value. There is not space here to comment on the many individual ‘best practices’ which the chapter highlights. However, the natural end point of the chapter is set out in the Principles for Responsible Credit, and specifically in Principle 3: ‘Lending has at all times to be cautious, responsible and fair’, which includes (p.91) the following:

“There needs to be a social guarantee that lenders will not abuse their position when the borrowers circumstances worsen through no fault of their own. In these circumstances lenders should not be able to seek higher charges on default or to worsen the position of the borrower further. There also needs to be a more sophisticated understanding of risk and a proper consideration of risk across the credit portfolio rather than an attempt to identify an individual risk based price for each and every social group.”

For me, writing this review in 2018, it is clear that the distribution of risk amongst society lies at the heart of our continuing problems in the ‘post-financial crisis’ period. Our economies are held back by considerable debt overhangs. The burden of repayments are concentrated in low to middle income groups, who, particularly here in the UK, have also been faced with a cost of living crisis. Individual risk based pricing penalises these groups – they become higher risk as their financial circumstances worsen. Social, or ‘solidarity’, pricing as Udo once called it, urgently needs to be adopted as a fairer, more responsible, and more stable, alternative.

Achieving this, and in the process reimagining a credit society which is productive, responsible, and socially just, is an immensely difficult task. We will need to use our collective imaginations and engage in discussion with those eminent economists and the very bright people in global finance, central banks and regulatory institutions, who have not been particularly open to criticism in the past. The door is even now only half open. When we do talk to them, it will serve us well to have Udo’s words in our minds.

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Der Beitrag Responsible Credit in the EU erschien zuerst auf iff | institut für finanzdienstleistungen e.V..

by Joseph Spooner

Introduction

“Responsible Bankruptcy” is a work typical of Professor Reifner’s writing – thoughtful, wide-ranging in scope, passionate and provocative. It poses a challenge to bankruptcy law scholars and policymakers, highlighting the limitations of this institution. It makes a confronting case that “solutions” to the problem of over-indebtedness that accept unquestionably the legitimacy of creditors’ claims to full repayment of nominal debt sums may create more difficulties than benefits. Similarly problematic are approaches that treat default and bankruptcy as exceptional events outside of the market, rather than (“hidden”) aspects of market relations. Professor Reifner argues compellingly for a rethinking of the debt contract as a “productive cooperation over time”, with a consequent reimagining of how contract law and bankruptcy law should treat debt and default. This reimagining could be built upon foundational principles of responsible lending, and the sharing of the risks of a “credit society”.

This post aims to show how convincing this critique can be, by illustrating its application to the case of legal responses to the recent and ongoing household debt crisis in Ireland. This country is a particularly important example due to the particularly heavy effect the Global Financial Crisis inflicted on it, and the role that international organisations of the “Troika” (European Commission, European Central Bank, International Monetary Fund) played in developing policy responses to the ensuing household debt emergency.

“Contract law offers little for such credit arrangements”

One might have considered that the Global Financial Crisis and Great Recession, in starkly illustrating failures in (consumer) credit markets, would have marked a point when private law departs from classical legal understandings of consumer creditor-debtor relationships. These events have provoked criticisms – ranging from critical left to mainstream economics perspectives – extending beyond specific causes of crisis, to condemn the fundamental structure of our modern financialised, debt-based, economy. Such accounts question the “seeming neutrality of the legal obligation of debt“((Susanne Soederberg, Debtfare States and the Poverty Industry: Money, Discipline and the Surplus Population (Routledge 2014) 3.)) and instead highlight the “brutality“((David Harvey, Seventeen Contradictions and the End of Capitalism (Profile Books, 2014).)) and “harshness“((Atif Mian and Amir Sufi, House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again (University of Chicago Press 2014).)) of debt. Experiences over the past decade have led to increasing recognition among international organisations that key societal problems of economic stagnation, inequality and even political instability can be traced to the centrality of debt in our contemporary economy,((International Monetary Fund, ‘Gaining Momentum? World Economic Outlook April 2017’ (2017); Bank for International Settlements, ‘The Global Economy: Maturing Recoveries, Turning Financial Cycles?’ (BIS 2017).)) and so to the harmful effects of the structures produced by debt contracts.((Atif Mian and Amir Sufi, ‘The Macroeconomic Advantages of Softening Debt Contracts’ (2017) 11 Harvard Law and Policy Review 11.))

Instead of radical response to the crisis, however, “the Great Conversation that many were expecting never took place”.((Graeber, Debt : The First 5,000 Years (Melville House 2012) 381.)) Graeber argues that both in historical and contemporary societies, States have

“insisted on legislating around the edges, softening the impact, eliminating obvious abuses like debt slavery, using the spoils of empire to throw all sorts of extra benefits at their poorer citizens… so as to keep them more or less afloat – but all in such a way as never to allow a challenge to the principle of debt itself.“((Graeber n 6 above, 390–391.))

In a similar manner, Professor Reifner notes that contract law offered little by way of response to the crisis. It persisted in applying the dominant logic of “spot” transactions to the long-term relationship of the credit contract,((Reifner (n 1) 553)) while maintaining an adversarial model of contracting under which each party is authorised and expected to pursue only self-interest, without regard to her counterpart’s welfare. This criticism is supported by the example of Irish courts in post-crisis contract law cases, who have persisted with contractual orthodoxy in the face of efforts of debtors (often without representation) to raise innovative defences to creditors’ claims for enforcement.

In the case of ICS Building Society v Grant,((ICS Building Society -v- Grant [2010] IEHC 17.)) a debtor raised an objection of unfairness to a bank’s claim to recover the deficiency obligation (or shortfall debt) owing after the bank had repossessed an investment property, under a mortgage contract in respect of which the debtor had defaulted. The Irish High Court considered the debtor’s argument that the bank had engaged in reckless lending in advancing the loan, and that the court should take this into account either to refuse the bank’s claim or to find the bank civilly liable under a tort of reckless lending. In a short judgment, the court curtly rejected this argument both as a matter of Irish common law precedent and from the perspective of legal principle. Firstly, the court noted that “the argued for tort of reckless lending does not exist in law as a civil wrong” and that it was “not within the competence of the court to invent such… a civil wrong.“((ibid 6.)) Secondly, the court opposed lender liability for reckless lending as running contrary to existing principles of private law, based as they are on ideas of parties reaching mutually beneficial agreements through each pursuing her own self-interest. It stated that:

“Contract law assumes that those entering into an agreement intend that it should be legally enforceable and, unless the contrary is shown, have acted in relation to each other by their mutual choice and not out of compulsion. People can enter into bad bargains. The law never enquires into the adequacy of any consideration for a contract.”

The introduction of a civil wrong of reckless lending would disrupt this conception and “would tend to remove the presumption of arm’s length dealing as between borrower and bank and replace it with a new relationship based on a duty of nurture that other common law countries do not see it as their duty to put into the marketplace”.((ibid.)) Finally, Charleton J found it difficult to envisage lender liability for imprudent loan transactions, since the judge considered that a borrower could not escape the contribution she apparently would necessarily have made to the alleged negligence by agreeing to the loan transaction.

Similar issues arose in another case where an Irish bank – which had failed, been nationalised and restructured during the crisis – sought to recover millions of Euro loaned for property development projects. Here the court considered that the lender’s claim to enforce a personal guarantee was not affected by its failure to lend with “ordinary prudence”, where it had taken property as security worth much less than the value of the sums advanced.((Irish Bank Resolution Corporation Ltd -v- Cambourne Investments Inc & Ors [2012] IEHC 262, [44].)) The court again noted that there is no recognised tort of reckless lending, that the grounds on which a contract can be overturned due to factors such as undue influence are very limited, and that “it remains universally the case that parties to a proposed contract bargain as to its terms so that each side will benefit.” The court considered simply that “anyone who borrows money from a bank must pay it back” and that while the

“decision of the bank to lend money was foolhardy, and the decision to borrow it was as bad. Once lent, money is repayable. It is this principle which establishes, unless excluded, the preservation of mutuality of obligations in contracts of loan.“((ibid 54.))

This strikingly orthodox view of the law’s approach to lending transactions contrasts with the judge’s obiter comments on the role of irresponsible lending in contributing to the Irish financial crisis and recession, however. Charleton J commented that the case produced extensive evidence “of the kind of heedless lending behaviour that has caused fathomless damage to the Irish economy”.((ibid 63.)) The judge noted that activities of banks “intent on lending money without proper analysis… have caused ruination to not only those involved in imprudent transactions but also to the wider community that has been required to assume responsibility for debt on a gigantic scale”. The court continued to suggest economic policy, prudential regulation and consumer credit regulation reforms that might curb reckless lending practices and the social costs they produce. Charleton J concluded in the following terms:

“Finally, any attitude that a bank on considering a loan does not have to take the requirement of the borrower to repay into account is redolent of exploitation as opposed to sound commerce. It is an incorrect viewpoint. In this case, as in many others, both sides are equally to be faulted for the improvidence of their arrangements.“((ibid 70.))

This opinion did not influence the judge’s ultimate decision, however, which followed orthodox contract law principles in holding that the creditor was entitled to a court order for the repayment of the monies it had advanced, however recklessly. This case illustrates the striking position under which courts feel obliged to apply principles of contract law that they consider openly to contribute to exploitation, “ruination… to the wider community” and “fathomless” economic damage. Professor Reifner warned of the risk that if legal rules “are not adjusted to the principles of justice, the gap between state and society will widen.“((Reifner (n 1) 563.)) In these statements of Irish judges it is difficult not to see how this gap has already opened widely indeed.

As Professor Reifner notes, the judges in these cases had their hands bound by contract law doctrine and the framing of debt contracts under a “sales ideology”, that “has led to the total exclusion of all legal remedies for credit and debt relationships.“((ibid 552.)) Under normal rules of contract law, creditors are under no duty to consider whether a loan offered is in the best interests of the debtor, in the context of the debtor’s social environment. The principles of sanctity of contract and caveat emptor mean that creditors bear no responsibility when the loan proves unsuitable, and need not acknowledge that the true value of the loan falls below its original nominal level. This gives an absolute quality to debt claims, and enshrines an understanding of a debt as an uncompromised and “safe” asset.((A point made by Mian and Sufi (n 4).)) This approach not only fails to recognise the special nature of debt contracts as long-term cooperative relationships; but gives a special status to debt claims above other legal claims. Monetary damages in other categories of claim are usually awarded based on actual losses, considering the claimant’s efforts to mitigate harm suffered. Debt claims allow creditors to uphold the nominal value of the original loan, “or even to increase it through interest charges”, while ignoring the fact that lending is a risky activity for both lender and borrower – a prediction by two parties as to future events.((This position also fails to acknowledge that the recovery of the full nominal value of a loan may not fit easily with the fact that lenders may already have protected their interests through risk-based pricing, securitisation, and the sale of loan books to debt buyers.))

“Bankruptcy of Bankruptcy”

To a scholar of bankruptcy law, Professor Reifner’s paper sometimes makes for difficult reading – a hallmark of his scholarship, which never allows us to rest on our laurels or enjoy for too long the comfort of unchallenged familiar ideas. I maintain optimistically that bankruptcy holds great potential to address problems caused by excessive debt in our contemporary era of financialised capitalism, whether these relate to economic stagnation, inequality or even political unrest. Nonetheless Professor Reifner’s critique of current models of bankruptcy law is compelling, and issues a pressing reminder of the evolution needed for the law to fulfil its potential in producing positive (and progressive) public policy outcomes.

At a practical level, bankruptcy (at least in the more well developed and progressive systems) offers a more accessible and reliable source of relief to an over-indebted consumer than the alternative of litigating individual contract claims against all her creditor.((William C Whitford, ‘Ideal of Individualized Justice: Consumer Bankruptcy as Consumer Protection, and Consumer Protection in Consumer Bankruptcy, The’ (1994) 68 American Bankruptcy Law Journal 397.)) Professor Reifner highlights how this practical benefit comes at a price, however. To obtain discharge – and so have declared unenforceable otherwise valid contractual claims – debtors must of course access bankruptcy procedures, and the costs involved mean that some debtors will be “too poor for bankruptcy”.(( Reifner (n 1) 557.)) This has proven to be the case in countries such as the US((See e.g. Pamela Foohey and others, ‘No Money down Bankruptcy’ (2016) 90 Southern California Law Review [i].)) and UK,((See e.g. Iain Ramsay and Joseph Spooner, ‘Submission to Insolvency Service Call for Evidence: “Insolvency Proceedings: Debt Relief Orders and the Bankruptcy Petition Limit”’ (2014) <https://www.academia.edu/8703184/Joint_Submission_with_Prof_Iain_Ramsay_to_Insolvency_Service_Call_for_Evidence_Debt_Relief_Order_access_conditions_and_creditor_bankruptcy_petitions>; Joseph Spooner, ‘Recalling the Public Interest in Personal Insolvency Law: A Note on Professor Fletcher’s Foresight’ (2015) 3 Nottingham Insolvency Business Law eJournal 537.)) where bankruptcy costs exclude many debtors from the relief legislation seems to make available. Contract law’s primacy over bankruptcy law also means that secured debts may be untouched by bankruptcy’s discharge. This position limited the ability of bankruptcy to offer relief to victims of the mortgage debt crisis, who instead were largely directed into consensual renegotiation plans of limited efficacy.((See e.g. Iain Ramsay, ‘Two Cheers for Europe: Austerity, Mortgage Foreclosures and Personal Insolvency Policy in the EU’ in Hans W Micklitz and Irina Domurath (eds), Consumer Debt and Social Exclusion (2015); Patricia A McCoy, ‘Barriers to Foreclosure Prevention during the Financial Crisis’ (2013) 55 Arizona Law Review 723; International Monetary Fund, ‘Dealing with Household Debt’, World Economic Outlook 2012 (IMF 2012) <http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/c3.pdf>; Alan M White, ‘Deleveraging the American Homeowner: The Failure of 2008 Voluntary Mortgage Contract Modifications’ (2008) 41 Connecticut Law Review 1107.)) In a context of tightened UK household budgets, recently borrowers have relied increasingly on secured lending even to fund purchases of essential items,((Financial Conduct Authority, ‘High-Cost Credit: Including Review of the High-Cost Short-Term Credit Price Cap’ (FCA Feedback Statement FS17/2, 2017); Joe Lane and Hamse Yusuf, ‘Hire Purchase: Higher Prices’ (Citizens Advice Bureaux 2016).)) rendering obsolete bankruptcy’s protection from seizure of such necessary assets.((See e.g. Mikki v Duncan [2017] EWCA Civ 57.))

Professor Reifner shows how these problems stem from a hierarchical positioning of contract law above bankruptcy. While contract law governs a “normal” credit transaction and credit relationship, for Professor Reifner, bankruptcy is cast as exceptional. It is situated “outside of the normal credit relationship after it has been terminated unilaterally by the creditor”, “a point of no return, at which a person is already branded by her insolvency”. This makes clear that the price a debtor must pay for the benefits of bankruptcy is to affirm and accept as valid the creditor’s full claim for the nominal value of the debt. Bankruptcy makes judgment neither about the validity of debts nor the appropriateness of the lender’s conduct. Indeed, it treats all creditor claims as valid and merely offers exceptional relief to the debtor. While contemporary bankruptcy laws have softened their punitive aspects, entry into insolvency still generally requires a debtor’s admission that she has defaulted, manifested in her acceptance of scrutiny and supervision, and her compliance with a range of substantive and procedural duties (most notably to earn income for creditors during a repayment plan). Professor Reifner argues that in this way the law places the creditor beyond reproach and “virtually canonises the creditor as the true representation of a sane economy.“((Reifner (n 1) 555.)) For him, “creditors are therefore given the role of gods while debtors remain the sinners.“((ibid 559. Note how some commentators expressly explain consumer bankruptcy as being justified by a societal virtue of forgiveness: Heidi M Hurd, ‘The Virtue of Consumer Bankruptcy’ in Ralph Brubaker, Robert M Lawless and Charles J Tabb (eds), A Debtor World: Interdisciplinary Perspectives on Debt (OUP USA 2012); Karen Gross, Failure and Forgiveness: Rebalancing the Bankruptcy System (Yale University Press 1997).))

Without challenge to the premise that creditors’ claims for full repayment are legitimate, policymakers may remain reluctant to allow bankruptcy law to encroach too extensively on creditors’ “rights”. A logical conclusion of the reasoning is the contractualisation of bankruptcy law. In England and Wales, policymakers have been happy to stand back and observe a dramatic decline in compulsory bankruptcy cases, as debtors are diverted in large numbers into the contractual Individual Voluntary Arrangement renegotiation procedure.((See e.g. Ramsay and Spooner (n 24).)) In Ireland, the Personal Insolvency Act 2012 enacted under Troika supervision adopted primarily a model of consensual renegotiation or “market-based debt resolution”.((International Monetary Fund (n 25) 14.)) This is given effect by requirements that debtors at least attempt to reach a solution via consensual restructuring arrangement procedures before becoming eligible for the statutorily-mandated automatic debt discharge of bankruptcy.((Personal Insolvency Act 2012, secs. 145–47. )) Again, in this case the debtor must reaffirm her indebtedness and the validity of her creditors’ claims, before asking her creditors for debt forgiveness. Creditors are not obliged to accede to this request and can “veto” a debtor proposal, as confirmed by the Irish courts. When debtors challenged as unreasonable creditors’ refusal to accept proposed restructurings, the Irish courts rejected these claims, using reasoning that is recognisably similar to that of the contract cases discussed above. The Irish High Court confirmed that

“creditors of a debtor are entitled to vote to accept or to reject a proposed [restructuring arrangement]. An essential element of the scheme is that they are free to vote in favour or against as they interpret is in their best interests…. The question of the reasonableness or unreasonableness of a creditor in refusing to vote for [a proposal] is not a matter for consideration by the Court… it is expressly a matter for the creditors…“((O’Callaghan (A Bankrupt) [2015] IEHC 185.))

To emphasise the point, the court reiterated that a bank “is entitled to have regard to its own legitimate commercial interests in its dealings with debtors.” A failure to challenge the logic of an adversarial and self-interested contract law, which allows creditors to treat as concrete the abstract value of a debt, therefore resulted in this contractual orthodoxy permeating and dominating even the exceptional institution of bankruptcy law.

Conclusions

Professor Reifner’s argument can be understood from many perspectives, including a concern for an internal coherence of the legal system as well as a coherence of legal and economic thinking. It also makes a compelling case from a social justice perspective, highlighting inequality in the credit relationship and the asymmetric legal treatment of debtor and creditor. Private law and regulatory policy have generally tolerated this inequality and concealed it behind contract law’s veneer of formal equality,((“The job of insolvency law is to compensate for the shortcomings of general contract law, so that the latter can maintain the fundamental fiction that every participant in the market can be prosecuted because he has unlimited access to money at any time.”: Reifner (n 1) 553.)) under faith that the equity-efficiency trade-off would ensure this approach guaranteed economic gains for all (with frequent emphasis on how this regulatory model might maximise access to assumedly efficient and welfare-enhancing credit markets).((See e.g. Iain Ramsay, ‘Consumer Credit Law, Distributive Justice and the Welfare State’ (1995) 15 Oxford Journal of Legal Studies 177.)) As Professor Reifner notes, however, the legal protection of creditor rights in the expectation of welfare gains “is still a heuristic. Its application has to be justified by its economic utility. The financial crisis has called this into question.“((Reifner (n 1) 563.)) Even authors and international organisations using mainstream economic ideas now highlight the harmful macroeconomic effects of debt contracts’ unequal allocation of the risks of a debt-based society.((Mian and Sufi (n 4); Mian and Sufi (n 6).)) As debt contracts, and contract law, shift the losses of a debt crisis onto debtors and away from creditors (whose claims to the full nominal value of the debt plus interest – and often security – remain intact), a “debt overhang” problem arises as households’ spending capacity declines and economic demand plummets. The necessary response to this problem is to expand debt relief through bankruptcy, but also to induce equity sharing (and so lender responsibility) into mortgage contracts. This developing view regarding the role of debt contracts in contributing to pressing economic problems shows the prescience of Professor Reifner’s call for the recognition of debt contracts as a “productive cooperation over time”, and a “system in which the true value of a claim emerges in the course of a credit relationship.” It now falls on both contract law and bankruptcy to respond to this challenge.

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Der Beitrag Responsible Bankruptcy erschien zuerst auf iff | institut für finanzdienstleistungen e.V..

by Johanna Niemi

The Woman from Sarajevo (Gospodjića, 1945), a novel by the 1961 Nobel laureate Ivo Andrić, starts with a lonely death, first suspected as a murder. The deceased turns out to be a usurer who has just met her lonely end. The teaching of the novel is that greed leads to misery. Thus, Andrić joins the literary tradition of Shakespeare (The Merchant of Venice), Dostoyevsky (Crime and Punishment) and Dickens in depicting the usurer as a greedy, morally despicable creature. Interestingly, Shakespeare wrote well before the industrial revolution, while Dickens and Dostoyevsky more or less coincide with it and Andrić’s novel tells about the time around the First World War, a time when the role of credit was quickly expanding.

The world literature does not explain what usury is. There is a strong historical sentiment in Christianity and still existing in Islam that all money lending for interest is morally reprehensible, if not outright forbidden. According to this line of thinking all money lending would be usury – a standpoint that would be untenable in an industrial market economy. Nor do the great writers suggest that all money lending would be usury, just the particularly heinous and greedy practices. In the contemporary credit society credit given by greedy individuals plays a rather marginal role, nor does it appear to be popular theme in contemporary fiction.

In credit societies, credit is generally available from institutional sources. Increasingly it is cross-border. For example, the newspapers reported just before Christmas that already fourth Norwegian internet bank starts to offer consumer credit in Finland. Typically the credits are between one thousand and 50.000 euros, with an interest of 20-50 per cent for loans below € 10.000 and between 12-20 per cent for loans below that amount. On special offer are consolidating loans to pay off several outstanding consumer credits. There is no discussion about whether these interest rates are reasonable. Rather, the Finnish government is worried because Finland has no positive credit register and has commissioned a study whether such a register would be desirable.

Reading news like this those of us whose interest in consumer credit derives from work with over-indebted debtors and households wonder what kind of debtors are willing to agree to these kinds of interest when the market rate for many credit forms has for a long time been very low, even close to zero.

Luckily, Udo Reifner has given us the necessary tools to contemplate about this. If you have not yet read the book Usury Laws by Udo and Michael Schröder (2012), I recommend to do so. The book has the most boring subtitle of an EU project: ‘A legal and economic Evaluation of Interest Rate Restrictions in the European Union’ but it is dynamite.

It turns out that the European countries have a strong tradition and sentiment against usury, both historically and in present time. However, what practical conclusion should be drawn from that sentiment seem to be lost in the contemporary credit economy. There is no common European policy or law, but the member states have set up their own policies, which vary widely.

Actually, usury may just be a catchy title for the more boring regulation: Interest Rate Restrictions (IRR). Interest Rate Restriction, however, indicates that there should be some legally set rate to the highest acceptable interest level but that is not the case, nor do the authors propose that there should be one. Usury as a term suggests that there is some kind of limit to what is acceptable in individual cases. And that seems to be the opinion of most legislators.

So, what is usury and why the concept has been marginalized in credit societies? Looking at examples from fiction, the answer is clear: Usury refers to situations of individual exploitation in which the usurer knows the vulnerabilities of the exploited person. In a credit society this is rarely the case.

Based on the information compiled in Usury Laws, regulation of usury can be systematized into three types: the civil law tradition, the criminal law and the administrative/consumer protection regulation. These three disciplines of law approach usury in different ways and with different sanctions. This is interesting in itself, and a further study should evaluate how the choices between different legislative strategies have been made and how these choices affect the credit market and the debt problems. Here I just want to summarize some of the findings of Udo’s and Michael’s study.

In the following summary I proceed with the degree of individualization vs. general standard setting by the regulation. I start with criminal law, which is most focused on the individual liability, proceed to civil law and finally to administrative/consumer protection law, which is market regulation by nature. My analysis is illustrated in a table below.

The allocation of criminal liability is based on individual culpa. There is no crime nor punishment without a basis in the law, nulla poena sine lege. This principle requires that the elements of a crime are precisely enough defined in law. In addition, to be held liable the accused person must have known about the factual criminal elements, such as the vulnerability of the victim, and s/he must have had the criminal intent. Thus, the criminal law is suited for situations in which the creditor has detailed knowledge about an individual debtor and her circumstances, not for anonymous market transactions.

The criminal law is mostly oriented towards the natural persons. However, there is increasing discussion about the criminal liability of corporations in criminal law. Some jurisdictions do have a criminal fine on a corporation, a sanction that could be efficient in usury type of actions by corporations.

The criminal sanctions do not address the problems of unbalanced credit transactions. The criminal sanctions, typically fines, prison sentence and community service with or without rehabilitative aspect, do not modify the credit transaction per se. A civil law remedy, such as compensation or damage payment or annulment of a contract, can be adjudicated in the criminal procedure but the procedure does not necessarily favor an individually adapted remedy.

In civil law usury can be prohibited in the form of a prohibition against extortionate contract stipulations and in particular against the exploitation of the vulnerable situation of another person. Such a prohibition may require that the creditor knew about the vulnerable situation of the debtor.

The civil law remedies are designed for contractual relations and allow for annulment or adjustment of a contract or a specific part of the contract, such as interest. However, only some jurisdictions have explicit legal provisions that regulate how an extortionate interest clause affects the validity of the contract, ranging from the annulment of the whole contract to total and partial disregard of the obligation to pay interest.

Reifner and Schröder see a shift from this kind of morally based regulation of contracts towards a market evaluation model, in which the evaluation of the contracted interest is done against the market rate of interest. Historically, this type of regulation has been more common in Romance countries than in continental countries. The reference to market rate has been formulated, for example, so that an interested above double the market rate has been forbidden. There is no universal norm in contemporary Europe, but Reifner and Schröder found several examples of market based standards of interest rate restrictions, connected to different market rates with varying percentages. There seems to be no common policy when the rate ceilings vary from some six percentage to over four hundred (that is four time the capital of the loan). The regulations also vary according to the type of credit.

Finally, an administrative setting of interest rate restriction comes close to civil law regulation but the focus is on regulating the whole market instead of individual contracts. Substantially the difference to civil law approach is not necessarily big, but the institutional and procedural settings are different.

In traditional contract law the evaluation of the acceptable interest rate ceiling is set up by courts in individual cases. In consumer protection approach an administrative body or a central bank regulates the interest rates. Thus, information about a defined highest interest rate(s) is publicly available.

In addition, the supervision of the system is tasked to institutions that specialize in consumer protection or market regulation. Such an institution may take action either on its own initiative or on the basis of complaints. The concept of sanctions is related to market behavior and can include loss of license, prohibition to use an illegal standard contract clause foe example.

Table. Three traditions of usury regulation.

The economic part of the book, analyzing the impact of interest rate restrictions is written by Michael Schröder. A very rough summary of this analysis is that overall impact on the credit market is not that big since usury ceiling is well above normal competitive market rates. However, there may be an impact on the position of vulnerable groups of debtors and on certain credit forms. The interest rate restrictions may exclude high risk debtors from access to credit. The interesting question from the perspective of over-indebted debtors and households is, do caps on interests reduce or increase the risk of over-indebtedness. There is no conclusive evidence to answer this point, however.

With Reifner and Schröder’s book we are much better equipped to contemplate on usury, acceptable interest rates and the impact of regulating them. The book should be compulsory reading to all law drafters, students of contract and market law, researchers on debt problems and comparative law scholars. So, basically to everyone.

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Der Beitrag Usury – A Forgotten Concept? erschien zuerst auf iff | institut für finanzdienstleistungen e.V..

by Alan White

The unique genius of Professor Udo Reifner’s work lies in his synthesis of broad critical theory and a praxis in debtor and consumer advocacy. In his paper, “Fundamental Freedoms and the Inability to Pay in the European Financial Crisis: Toward a Collective Human Right for Discharge of States?” he draws vital connections between the exclusion and overindebtedness of persons and the exclusion and overindebtedness of states, in the context of the recent Greek debt crisis and the response of international institutions in the form of the “troika” (European Commission, European Central Bank and International Monetary Fund).

Reifner’s “Fundamental Freedoms” begins by sketching the features of the Greek and broader European debt crisis: state borrowing whose gains were privatized by banks and their shareholders, while losses are being socialized via imposed austerity. The result for Greeks has been dramatic spike in youth unemployment, rising from 20% to 50% or more by 2012 in Greece, with similar rates in Spain, and in Portugal, Italy and Ireland, to more than 40%. The consequences for future of Europe are far-reaching, and include the possibility of excluding meaningful political participation for the young generation.

Property and contract rights were given primacy in the crisis, meaning the power of individual states and European institutions were marshalled to enforce creditor claims. Ad hoc creditor alliances, composed largely of European banks, acted as a sort of parliament, and the troika (European Commission, European Central Bank and International Monetary Fund) acted as the executive on behalf of these stakeholders. This new executive became a de facto European government without democratic control or accountability.

Against this new creditor supranational state Reifner argues for the fundamental human right not to be enslaved, in other words to be permitted to earn a living. “From the viewpoint of the wage earner, there is little difference between not earning at all and earning wholly for a creditor. Pauperism may be the necessary result of either.” This fundamental right implies a right for an individual to discharge excessive debt that cannot be repaid. He cites the US Supreme Court 1934 decision in Local Loan Co. v. Hunt (292 U.S. 234 (1934)), European decisions, the UN Charter and the antislavery principles of all international human rights instruments.

Yet this human right to a discharge of enslaving debts is at odds with the more firmly constitutional (in Europe and even more so in the United States) protection of the contract and property claims of creditors. Taking the antislavery principle seriously means acknowledging a right to discharge for the overindebted individual.

But what of the citizens of the overindebted state? A human rights perspective views the state as the guarantor of rights, not the holder of rights. On the other hand, some human rights are by nature collective, such as the right of unions to organize workers. Similarly, oppressed racial and ethnic groups may have recognized human rights that are collective as well as individual in nature. Turning back to the unemployed and disenfranchised youth of Greece and other debtor nations, Reifner argues that there can be a collective human right to discharge of state debt. Yet, he acknowledges that casting the issue as one of human rights places authority in perhaps undemocratic courts to enact remedies.

On the other hand the creation of supra-national creditor authorities like the troika has the effect of preventing states from protecting the human rights of young people to earn a living and participate in the polity. States ought to advocate for the human rights of their vulnerable populations and demand that creditors assume with them the duty to discharge sovereign debt that defeats the rights of those populations.

Echoes of Reifner’s themes are heard and felt today in the United States, where a young generation is being progressively excluded from employment, housing and full civic participation. In particular, total student loan debt has reached $1.3 trillion, exceeding credit card debt, and the second largest category behind only home mortgages. Serious delinquent loans are approaching 10% of borrowers. Youth unemployment peaked at 20% in 2010, and is now hovering around 10% despite a very tight labor market. Young people are unable to buy homes, are barred from professional licenses by debt defaults, and find their political institutions unresponsive and worse. The sovereign debt of the United States, although not giving rise to external austerity measures imposed by supranational entities, nevertheless mandates a continual austerity, further shredding the social safety net and state support of education, and driving the upward spiral of educational debt. Professor Reifner’s writing calls on us to remember not only the damage of debt, but also the political and institutional structures marshaled by creditors to inflict that damage.

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Der Beitrag Sovereign Debt and Human Rights erschien zuerst auf iff | institut für finanzdienstleistungen e.V..