Project No. ETD/2009/IM/H3/87

Submitted by

Prof. Dr. Udo Reifner, Sebastien Clerc-Renaud, RA Michael Knobloch

Institut für Finanzdienstleistungen e.V. (iff)

In association with

Zentrum für Europäische Wirtschaftsforschung GmbH (ZEW, Mannheim)

Institut für Finanzdienstleistungen e.V.

Rödingsmarkt 31/33

20459 Hamburg

Tel. +49 40 30 96 91 0

Fax +49 40 30 96 91 22

Sebastien Clerc-Renaud, iff

Prof. Dr. Udo Reifner, iff

RA Michael Knobloch, iff

Dr. Michael Schröder, ZEW

Christian D. Dick, ZEW

Lena Jaroszek, ZEW

Dr. Svitlana Voronkova, ZEW

Zwetelina Iliewa, ZEW

Brussels/Hamburg/Mannheim.

Disclaimer: The views expressed in this study are the views of the contractors and

subcontractors, and not of the European Commission.

assistance for ZEW. Prof. Iain Ramsay (University of Kent), Damon Gibbons (Centre for Responsible Credit),

Dr. Achim Tiffe, Laura Flach and Kerim Al-Umaray have contributed to this report for iff.

iff/ZEW – Final Report on interest rate restrictions in the EU III

types of interest rate restrictions that exist in the EU Member States (Part 1) and gives

and details the mechanisms and levels at which interest rate ceilings are set in

those countries with such a regulatory structure in place.

competition and on social and economic welfare.

Restrictions, (referred to as IRR throughout this study), and the purpose of IRR which is

to ensure that consumer credit markets function well and that they promote the social

welfare of people by means of appropriate and adequately priced credit products.

The report indicates that there is considerable variation in the attitude of EU Member

States towards the regulation of consumer credit prices. In addition, even where there is

IRR are all derived from this historical principle. Interest derived from credit has

been morally rejected and even criminalised where it amounts to the exploitation

of personal weakness, but has got different legal forms according to the

differences in the development of consumer credit markets.

attitude to consumer credit, remain diverse and do not lend themselves to simple

The report therefore provides information as to -
*    the regulatory choices,
*    the role of legal harmonisation in EU consumer credit law; and
*    information as to the factors which may favour one or the other solution.

expert in each of the 27 Member States, as well as responses from 20 individual

providers, from 34 provider associations, from 47 consumer organisations, from 44

public authorities in all Member States and from 12 other institutions.

IV iff/ZEW – Final Report on interest rate restrictions in the EU

The legal part of the report provides a consistent inventory of existing IRR in EU Member

States and shows how they are designed and function within the different legal systems.

IRR in the context of the various regulatory systems and legal frameworks and cultures.

of credit contracts. In other words, the study is concerned with existing laws and

legal rules and their application in limiting charges imposed by lenders, directly or

indirectly, for the use of capital by borrowers.

2008/48/EC, referred to as ‘CCD 2008’ throughout this study)

which have remained separate for centuries.

While direct IRR limit the contractual interest rate or the amount of interest that can be

charged indirect IRR have a restrictive impact on the cost of credit. With respect to

indirect IRR, all Member States provide for rules which contain some restrictions on the

pricing of credit.

which explicitly forbids usury, under criminal as well as private law, or implicitly

incriminates the intentional exploitation of the weakness of another person at an

individual level through extortionate pricing, especially in relation to credit.

iff/ZEW – Final Report on interest rate restrictions in the EU V

France, Germany, Italy, the Netherlands, Poland, Portugal, Slovakia, Spain,

Slovenia).

linked to the interest rate charged and to exploitation of the borrower. In some Member

States it may be used more indirectly in the context of criminal lending (Italy, Malta,

Estonia, Denmark), anatocism (Romania. Luxembourg) or it may simply be applied to

high-priced loans (Portugal, France, Belgium, Spain, Slovenia, the Czech Republic,

Slovakia, Hungary, Ireland, the UK and in German case law).

may have been modernised or adapted to modern usage, or which may just remain

While modern interest rate ceilings are typically imposed administratively, courts in

Germany have transformed the ancient subjective principle of good morals into a modern

objective interest rate ceiling, a process that would in principle be open to Member States

with no interest rate ceiling; some initial forms of this may also be identified in Estonia,

Spain and Sweden.

seem to have had much impact on the economy (Greece, Ireland, and Malta).

rate, multiplied by a quota such as that applied in France of one-third, or based

on a money market rate multiplied by four, as in Poland, have developed fairly

new systems with a high degree of effectiveness (Belgium, Estonia, France,

Germany, Italy, the Netherlands, Poland, Portugal, Slovakia, Spain, Slovenia).

13.2% pa for a long-term loan there, while in France the spread between ceilings

for the different forms of credit was between 5.72% pa and 21.63% pa as at

March 2010.

where they apply only to overdraft credit and protected housing loans; in Ireland

where they are confined to credit unions and moneylenders; in Greece to nonbanks;

in the Netherlands where mortgages are excluded; and in Malta where

further exemptions apply.

which may be derived from national markets or from the EU (Belgium).

apply where no other rate has been agreed.

VI iff/ZEW – Final Report on interest rate restrictions in the EU

Luxembourg, Poland, Portugal, Slovakia, Spain (overdrafts only) and Slovenia

Portugal), with lending restricted to institutions licensed by the bank, by a

licensing authority (such as a Ministry as in the case of Belgium or a specialist

agency in the UK, France, Netherlands, Estonia, Germany), by a consumer

protection authority (Ireland, Bulgaria, Latvia), by a Market Inspectorate

(Slovenia), by a Consumer Ombudsman or by a Financial Authority as in Finland.

a permitted rate of interest or the nullity of the contract with the possibility of

judicial allocation of the obligations under the contract.

since official enforcement mechanisms are costly and only able to cover a

minimum of cases directly.

to ‘naming, blaming and shaming’ in the market or where it serves as an effective

require private investment to enable access to justice.

depend of the existence of sufficient and efficient administrative power.

apply to the morally indifferent behaviour of profit maximisation, which

may favour a split between the mainstream and factually unregulated

shadow markets.

well between right and wrong, do not depend on individualised administrative or

individual consciousness but produce cases with little effect on the general level of

interest rates in the market.

not combined with private law sanctions and the involvement of specialist

consumer agencies, effectively exclude outsiders and illegal lenders but have less

impact on mainstream providers.

administratively under private law. In this regard, Germany is an exception,

iff/ZEW – Final Report on interest rate restrictions in the EU VII

where such a system has been developed purely on the basis of the general

principle of good morals under private law. But such systems are particularly

exposed to circumvention through purely nominal pricing and ancillary services.

even between providers and consumer organisations, as to the overall effectiveness of

their national IRR in regulating credit prices on the market. The following classification

reflects only a general assessment and does not claim to provide facts or representative

opinions, merely indications. It should be noted, especially where low effectiveness is

assumed, that it included responses from Member States with no significant IRR.

Direct IRR are seen as follows (average grade from 1 to 5 in parentheses).

(3) Poland, Austria, Bulgaria, Czech Republic, Estonia, Latvia, Lithuania, Slovakia,

The results coincide roughly with the general assumption that strict interest rate ceilings

are the most effective, especially if they have been in place for a long time, whereas

general principles alone appear to give rise to concerns as to effectiveness.

on the consumer in relation to a credit agreement.

additional cost elements or disadvantageous rules on compounding and

calculation. They are open to circumvention and thus additional rules are needed

to fill these loopholes.

also import others.

restricted to the use of the actuarial method.

brokerage must be included.

instalment purchase), in which time prices are applied that are not defined

as interest in the conventional sense, are also covered.

ceilings regard the factual burden a borrower is able to carry. This is why

the focus on voluntary inclusion of additional cost elements may be good

for price disclosure while leading to circumvention in usury law.

Nine Member States therefore have different regimes while four Member States still apply

disclosure exemptions to IRR and seven will adapt disclosure rules to the needs of IRR

legislation after implementation of CCD 2008.

VIII iff/ZEW – Final Report on interest rate restrictions in the EU

France, Germany, the Netherlands (recent inclusion).

exemption by IRR in all Member States.

ceilings where IRR is specific to certain products, as in France. The ceiling in

Slovenia is extremely high.

debate about IRR resembles the debate about the APRC and whether such services

provide for a special advantage in addition to the loan and whether they have been

contracted voluntarily. These questions are the subject of controversy in all Member

States with IRR, which remains unresolved.

the UK, France, the Netherlands and Germany, and significantly increases the

level of payments due from the consumer. Experts and consumer advocates claim

that hidden kick-back provisions and the financing of the premiums through the

banks resemble charges which are already covered by the definition of the APRC.

product (capital life insurance, construction savings plans) with lower interest

earned than through direct repayments reach higher prices if both products are

seen as one.

the burden of payments significantly.

separately.

but with decreasing effect.

of fees are in force in Belgium, Germany, the Czech Republic, Estonia and Malta.

completed by only five Member States by March 2010, but in another 12 Member States

a draft was imminent.

of financial products for the application of IRR since most tend to harmonise

interest disclosure rules with rules restricting interest.

iff/ZEW – Final Report on interest rate restrictions in the EU IX

repeated in the recitals of the final version in 2008 requires certain restrictions with

regard to over-indebtedness and thus comes close to being a form of IRR.

behaviour in consumer credit.

consumers, requiring or recommending certain loan-to-income ratios which have

an indirect effect on interest rates through risk-based pricing.

consumer information law, already harmonised through the respective EU Directives, do

not cover the pricing of credit. Its underlying legal concepts of transparency and fairness

are more procedural than substantive. They regard the way products are marketed and

serviced while the questions of IRR, especially usury and high prices, are left to the

applied. Art. II-7:301 of the Draft Common Frame of Reference define such principles in

future EU-contract law as “principles recognised as fundamental in the law of the Member

States”. But the common reference point, assumed as a market with functioning

competition, has led to the application of the fairness principle with regard to IRR in

some cases as well. The European Court of Justice has just ruled that a Spanish law

could also extend the EU concept of unfairness to IRR (EJC Dec. of June 3, 2010 C-

484/08).

responsible behaviour in fair competition in the Czech Republic, Estonia and

Ireland.

principles as well as fairness principles. Estonia and Ireland explicitly describe high

cost of credit as potentially “unfair” in their legislation. Also Germany used

standard contract term law to void clauses on interest compounding.

The economic part of the report aims at explaining the economic, social and financial

consequences of interest rate restrictions. Due to the complexity of market phenomena

and because of a lack of comparable datasets across countries, it is not possible to

identify a set of unambiguous effects. However, the report examines a number of

hypotheses concerning the impacts of IRR and presents the available data in relation to

these, as well as provides a theoretical framework for understanding the effects of IRR.

Within the testing of the hypotheses the economic part of the report refers only to direct

IRR in the form of interest rate ceilings. Furthermore, because IRR in 5 of the 14 Member

States with ceilings have to be considered insignificant mainly due to their scope of

application (Estonia Greece, Ireland, Malta, and Spain) analysis has centred on the group

of countries with significant IRR in place - a group which is therefore comprised of 9

Member States (Belgium, France, Germany, Italy, the Netherlands, Poland, Portugal,

Slovakia and Slovenia).

X iff/ZEW – Final Report on interest rate restrictions in the EU

depends on the collateral, the credit history and the income/wealth situation of

the borrower. Due to the fixed costs to each loan, small amounts of credit may be

relatively expensive. As the risk of low-income borrowers is perceived to be high,

lenders charge these customers higher interest rates.

costs. Obviously, and depending on the level at which the restriction is

To discuss the implications of these supply-side mechanisms, the theoretical discussion

also focuses on consumer credit, taking into account both neoclassical and behavioural

we demonstrate in a classical framework how a decision to finance consumption

makes consumer credit different from other types of credit (eg. for investment

purposes), which are taken out for a project to earn a positive (monetary) return.

The neoclassical view postulates that, when households decide about their

incorporated into the consumers’ choice of their optimal consumption behaviour.

rationale for credit as a means to “make ends meet” for deprived households who

do not have a realistic perspective of an improvement of their situation.

growth) may lead to systematic (and predictable) deviations from rational

distorted: they may be willing to borrow money even when it is rather unrealistic

that their future income will be sufficient to repay the debt. Consumers may also

erroneous beliefs about the actual time period during which they will use the

credit. It might also stem from conceptual difficulties to understand the effect of

barriers to credit access for selected groups of the population. As interest rate

iff/ZEW – Final Report on interest rate restrictions in the EU XI

their options to choose from). Whether subject to strong cognitive biases or not,

consumers with debts will nevertheless be subject to external factors that can put

pressure on their ability to service their debts to maturity.

In the light of this trade-off, it is important to evaluate whether the mechanisms

postulated by theory are observed in reality and to what extent their effects are

economically important (and not just minor compared to other influencing factors). To do

reveals the following:

examination of the economic effect of interest rate restrictions: the studies

compare legally and economically relatively similar entities (ie. the U.S. states)

which may regulate interest rates in different ways. The observed differences

between the considered entities can then - with some caution - be identified as

the effect of interest rate restrictions. Due to the heterogeneity of EU Member

States, a comparable exact identification for the EU is not feasible.

obtained for low levels of interest rates cap (eg. reduced credit access) need not

necessarily be transferable to higher levels of interest rate caps.

credit is not per se beneficial (especially in the long run). Furthermore, when

severe problems identifying the exact effects of interest rate restrictions, as

observations are also determined by a multitude of other economic and regulatory

To demonstrate the heterogeneity of consumer credit markets across the Member States

of the European Union, and to provide a comprehensive picture of their importance, we

We discuss the markets for total credit to households, housing credit, and consumer

credit (without housing) for all EU 27 countries. Where illustrative, we also provide

separate analyses for EU 25 or EU 15 countries or the New Member States.

XII iff/ZEW – Final Report on interest rate restrictions in the EU

this report: Germany, France, the Netherlands, Poland, Sweden and the UK. The reasons

behind this choice include diversity in terms of economic characteristics, financial

cultures, size and attributes of the consumer credit markets, as well as the heterogeneity

of the legal framework of interest rate restrictions in these countries. It is this

heterogeneity in the chosen countries which allows us to draw conclusions with regard to

the effect of interest rate regulation on consumer credit markets and over-indebtedness,

and to appreciate reasons for different outcomes in credit markets beyond interest rate

regulation. The case study countries can be summarised as follows:

credit to households and consumer credit to households in EU 27 countries at the

end of 2008.

and France represent the countries with the largest national consumer credit

markets. The remaining case study countries included in the study - Poland,

Sweden and the Netherlands make comparatively small contributions to the

overall volume of credit to households in Europe. The former 3 countries are also

smaller countries.

and the UK. Neither of these countries have interest rate restrictions. In contrast,

in Germany and France regulations of consumer credit interest rates have been in

effect for a long time and in Poland interest rate caps were only recently

introduced.

To guide the reader of this report through relevant issues regarding interest rate

authorities, consumer associations, providers and provider associations. The survey

enables us to learn from stakeholders’ experience with regard to the effect of interest

rate restrictions (or lack of thereof) on the credit markets in the respective countries. It

differences. The inclusion of heterogeneous stakeholders (regulators, consumer

organisations, provider associations) will enable us to consider potentially divergent

perspectives about issues in question in a balanced way. Accordingly, we base our

judgement of the hypotheses on several sources: the interpretation of existing data,

previous empirical evidence, as well as the information from Stakeholder Questionnaires.

certain threshold interest rate is exceeded. Hence, they may not be served credit

in the presence of IRR.

ceilings in most European countries, the scope of the interest rate restrictions is

not expected to be equivalent to the ones documented in the US a few decades

iff/ZEW – Final Report on interest rate restrictions in the EU XIII

ago. Rather, it is likely that access to mainstream credit (including overdrafts and

revolving credit) remains rather unaffected by IRR, while there may still be

missing credit options to low-income borrowers which are served in the high-cost

credit segment in some countries.

subject to political controversy.

significant way.

IRR) only constitute a relatively small fraction of the entire consumer credit

market in which they exist. A lack of these market segments is unlikely to lead to

an economically significant drop in the volume of credit markets, as the latter is

affected by a multitude of other factors, as well.

credit (ie. the absence of IRR).

prevent the market entry of one or more forms of high-cost credit.

restrictions is unlikely to be purely mechanistic. Rather, lower levels of consumer

credit and the tougher regulation of credit (including IRR) may both be

consequences of a third factor - the country’s attitude towards credit.

obtaining credit from (potentially expensive) non-bank sources, such as utility

providers. However, it does not appear that there are systematic differences in

lending from non-bank sources between countries with and without IRR.

XIV iff/ZEW – Final Report on interest rate restrictions in the EU

reveal a particularly pronounced increase of over-indebtedness in the aftermath of the

financial market crisis.

views collected from stakeholders indicate that there might be a link as postulated

next year when the relevant data are available.

introduction of IRR, we focus on average interest rates. Drawing on these data

and findings from the Stakeholder Questionnaire, there is no unambiguous

regulation by charging fees for which the regulation does not apply.

impediment to market entry.

other dimensions, such that it is hard to assess how important interest rate

restrictions are in this environment.

criteria) across countries regardless of the presence of IRR.

competition in high cost credit markets in the UK, a country without IRR in these

segments. This also deemphasises the role of interest rate restrictions in the

context of competition.

interest rate cap to coordinate their (non-competitive) price setting at a rate just below

the cap. Other studies have found some evidence on this issue. We demonstrate that the

market structure and the exact way in which interest rate restrictions are

implemented.

In summary, we find that there are less clear-cut implications of economic significance of

interest rate restrictions than it is sometimes argued. It is apparent that IRR do shape

the supply side of the consumer credit market in three respects:

iff/ZEW – Final Report on interest rate restrictions in the EU XV

customer groups from credit access (which might or might not be an explicit

very high interest rates are not offered in the presence of interest rate

restrictions.

their credit product in a way so that the existing interest rate regulation does not

apply.

We also conclude that many observations on credit markets are not only driven by

assume that there are clear patterns in the attitude towards credit across

countries which may explain both the preferences for strict interest rate

regulations prevailing in some countries and, eg. reduced incidence of credit of

their consumers.

XVI iff/ZEW – Final Report on interest rate restrictions in the EU

1.1 Legal theoretical background ...................................................................... 28

1.1.1 Definition of interest rate restrictions (IRR) .......................................................28

1.1.2 Empirical survey ...........................................................................................35

1.1.3 General principles of IRR in national legislation ..................................................38

1.1.4 Effectiveness ................................................................................................57

1.2 Direct IRR................................................................................................ 61

1.2.1 Contractual interest rate ceilings .....................................................................61

1.2.2 Default interest rate ceilings ...........................................................................83

1.3 Other cost relevant factors ......................................................................... 91

1.3.1 Uniform definition of interest (rates) ................................................................92

1.3.2 Anatocism and compounding...........................................................................94

1.3.3 Variability of interest rates............................................................................ 100

1.3.4 Fees and charges ........................................................................................ 104

1.4 Effects of the CCD 2008 on IRR................................................................. 111

1.4.1 EU Directives and national IRR ...................................................................... 111

1.4.2 Implementation of CCD 2008 ........................................................................ 112

1.4.3 Small amounts of credit ............................................................................... 113

1.4.4 Short-term loans......................................................................................... 114

1.4.5 Responsible lending ..................................................................................... 115

1.5 Social impact of high-cost credit................................................................ 119

1.5.1 Credit products ........................................................................................... 119

1.5.2 Consumer welfare ....................................................................................... 124

1.5.3 Assumed effects on credit markets................................................................. 125

1.6 Stakeholder views on IRR ........................................................................ 125

1.6.1 Political and legal discussions........................................................................ 126

1.6.2 IRR and consumer over-indebtedness ............................................................ 128

1.2.1 Preferred characteristics of an interest rate ceiling ........................................... 132

1.6.3 Importance and adequacy of IRR regulation in the EU....................................... 134

1.6.4 IRR and other regulatory options ................................................................... 139

2.1 Theoretical background............................................................................ 142

2.1.1 Outline ...................................................................................................... 142

2.1.2 The individual choice of credit ....................................................................... 144

2.1.3 Interest rate restrictions and capital allocation................................................. 151

2.1.4 Resulting Hypotheses................................................................................... 155

2.1.5 Credit to consumers vs. credit to businesses ................................................... 157

2.2 Existing studies on IRR ............................................................................ 158

2.2.1 Outline ...................................................................................................... 158

2.2.2 Natural experiments .................................................................................... 158

2.2.3 Comparison of different States within the USA................................................. 159

2.2.4 Payday loans: the discussion of the desirability of credit access.......................... 160

iff/ZEW – Final Report on interest rate restrictions in the EU XVII

2.2.5 Reports about IRR in EU Member States ......................................................... 161

2.2.6 Summary................................................................................................... 163

2.3 Credit market overview............................................................................ 166

2.3.1 Outline ...................................................................................................... 166

2.3.2 Data availability and definitions ..................................................................... 167

2.3.3 Overview of household credit in the EU 27 ...................................................... 168

2.3.4 Interest rates on credit to households in the EU............................................... 183

2.4 Case Studies .......................................................................................... 191

2.4.1 Introduction ............................................................................................... 191

2.4.2 Credit markets............................................................................................ 195

2.5 Discussion of the hypotheses.................................................................... 224

2.5.1 H1: IRR reduce credit access, in particular for low-income borrowers .................. 226

2.5.2 H2: IRR lead to a decline in the volumes of consumer credit granted .................. 238

2.5.3 H2a: Without IRR, more product types exist in the market ................................ 246

2.5.4 H3: IRR lead to credit from non-bank sources, such as paying bills late............... 263

2.5.5 H4: IRR lead to a substantial illegal market in lending ...................................... 269

2.5.6 H5: The lack of IRR leads to a higher level of over-indebtedness ........................ 274

2.5.7 H5a: The lack of IRR has particularly adverse effects on default rates/overindebtedness

in the presence of negative shocks (eg. recessions) to the economy 292

2.5.8 H6: The average consumer (or even more so: low-risk consumer) would be

granted cheaper credit in the presence of IRR ................................................. 302

2.5.9 H7: IRR lead to increased charges as providers will try to compensate the reduced

interest revenues by increased charges .......................................................... 313

2.5.10 H8: IRR represent barriers to consumer credit market integration ...................... 317

2.5.11 H9: IRR lead to lower levels of competition in the consumer credit industry ......... 319

2.5.12 H10: IRR lead to a convergence of all consumer credit interest rates at the level of

the interest rate cap .................................................................................... 323

2.5.13 Summary H1-H10 ....................................................................................... 325

XVIII iff/ZEW – Final Report on interest rate restrictions in the EU

Table 1: Definitions of key terms used in the study ................................................. 31

Table 2: Survey participation with the Stakeholder Questionnaire by stakeholder group 37

Table 3: Usury legislation in the EU....................................................................... 38

Table 4: Main reasons for introducing IRR.............................................................. 50

Table 5: Some reasons why IRR is still valid today .................................................. 52

Table 6: Member States by effectiveness of IRR ..................................................... 59

Table 7: Overview of interest rate ceilings in the EU................................................ 62

Table 8: Interest rate ceilings in the EU as of March 2010 ........................................ 63

Table 9: Interest rate ceilings in France................................................................. 67

Table 10: Interest rate ceilings in Belgium ............................................................. 69

Table 11: Interest rate ceilings in Slovakia............................................................. 70

Table 12: Interest rate ceilings in Italy .................................................................. 72

Table 13: Interest rate ceilings in Portugal............................................................. 74

Table 14: Interest rate ceilings in Slovenia............................................................. 76

Table 15: Statutory default interest rates in EU Member States................................. 84

Table 16: Default interest rate ceilings in EU Member States .................................... 85

Table 17: Overview of default interest rate regulation in EU Member States................ 89

Table 18: Borrowing rate and APRC ...................................................................... 94

Table 19: Overview of rules on anatocism in the EU ................................................ 96

Table 20: Restrictions on general fees and charges including PPI in the EU ................104

Table 21: Payment protection insurance in Germany, 2001–2008, EUR (size, claims,

claims ratio) .......................................................................................109

Table 22: Transposition of the CCD by March 2010 ................................................112

Table 23: Small credit and the CCD .....................................................................114

Table 24: Assumed problems with different credit forms/types/products ...................120

Table 25: Incidence of high-cost credit in EU Member States ...................................121

Table 26:Development of EU subprime lending markets..........................................122

Table 27: Legal and political discussions ...............................................................127

Table 28: Late payments per credit type in Belgium in 2009....................................130

Table 29: Specific types of credit, behaviour and providers in relation to overindebtedness

.....................................................................................130

Table 30: Member States facing a significantly worsening trend in over-indebtedness .132

Table 31: Adequacy of IRR regulation facing banks and non-banks...........................139

Table 32: Ranking of IRR as a policy measure alongside other alternatives ................140

Table 33: Overview of the hypotheses..................................................................163

Table 34: Countries with the highest volume of total credit to households, EUR billion.168

Table 35: Countries with the highest total credit to households per capita in EU 27;

1000 EUR..........................................................................................171

Table 36: Countries with the highest volume of housing loans; EUR billion.................173

Table 37: Countries with the highest housing loans per capita in EU 27; 1000 EUR .....174

Table 38: Countries with the highest volume of consumer credit; EUR billion .............176

Table 39: Countries with the highest consumer credit per capita in the EU 27; 1000

EUR..................................................................................................177

Table 40: Development of total credit to households as % of GDP in the EU 27; 2000-

2008 ................................................................................................182

Table 41: Lending to households: MFI interest rates (AAR/NDER) on new business .....184

iff/ZEW – Final Report on interest rate restrictions in the EU XIX

Table 42: Interest rates on lending for house purchase across the EU 27; new

business; December 2009; % ..............................................................185

Table 43: Interest rates consumer credit across the EU 27; new business; December

2009; % ...........................................................................................187

Table 44: Interest rates on overdrafts, credit cards and overrunning across the EU 27;

new business; December 2009; %........................................................189

Table 45: Market size and structure of the consumer credit market in selected

countries...........................................................................................192

Table 46: Indicators of demographic structure and financial behaviour in selected

countries...........................................................................................193

Table 47: Consumer credit market; Germany; 2009...............................................199

Table 48: Distribution of consumer credit; Germany, 2008......................................203

Table 49: Total debt burden of households; France ................................................206

Table 50: Distribution of consumer credit; France, 2008 .........................................207

Table 51: Cost structure of Flitskrediet .................................................................210

Table 52: Distribution of consumer credit; the Netherlands, 2008.............................210

Table 53: Distribution of consumer credit; Poland, 2008 .........................................214

Table 54: Distribution of consumer credit; Sweden, 2008........................................216

Table 55: Composition of consumer debt over time; UK..........................................219

Table 56: Distribution of consumer credit; UK, 2008...............................................223

Table 57: Evidence from the past – volume of credit (H2) .......................................241

Table 58: Prevalence of different product types across countries ..............................249

Table 59: Past experience with arrears on utility bills..............................................265

Table 60: Percentages of households in arrears (on mortgage or rent, utility bills or

hire purchase), 2008...........................................................................275

Table 61: Evidence from the past - over-indebtedness (H5) ....................................280

Table 62: Evidence from the past – average prices (H6) .........................................306

Table 63: Overview of measures determining over-indebtedness..............................359

Table 64: Projection of potential home (collected) lending market size......................430

Table 65: Projection of potential payday lending market size ...................................431

XX iff/ZEW – Final Report on interest rate restrictions in the EU

Figure 1: Forms of consumer credit and Forms of IRR.............................................. 34

Figure 2: History of IRR in the EU Member States ................................................... 48

Figure 3: Preferences with regard to ceiling characteristics ......................................133

Figure 4: Stakeholder preferences for regulation (% who answered yes) ...................135

Figure 5: The benefits of borrowing and saving......................................................145

Figure 6: The idea of consumption smoothing........................................................146

Figure 7: The effect of lower interest rates............................................................146

Figure 8: Disadvantage of poor borrowers without credit access...............................147

Figure 9: Effect of IRR on high-risk (left) and low-risk (right) borrower .....................152

Figure 10: Credit markets under asymmetric information........................................154

Figure 11: Total credit to households in EU 27 countries, 2008; EUR billion ...............168

Figure 12: Total credit to households in EU 15 countries, average annual real growth

rates; in %.......................................................................................169

Figure 13: Total credit to households in New Member States, average annual real

growth rates; % ................................................................................170

Figure 14: Real growth rates of total credit to households in EU countries; 1998-2008;

%....................................................................................................170

Figure 15: Total credit to households per capita in EU 27 countries, 2008, EUR billion .171

Figure 16: Housing loans in EU 27 countries, 2008; EUR billion................................172

Figure 17: Housing loans in EU 27 countries per capita; 2008; 1000 EUR ..................173

Figure 18: Housing loans in EU15, average annual real growth rates; % ...................174

Figure 19: Total credit to households per capita in New Member States, average

annual growth rates; %......................................................................175

Figure 20: Outstanding consumer credit in EU 27 countries; EUR billion ....................175

Figure 21: Outstanding consumer credit in EU 27 countries; 2008; per capita ............176

Figure 22: Consumer credit to households per capita in EU15, average annual growth

rates; %...........................................................................................177

Figure 23: Consumer credit to households per capita in New Member States, average

annual growth rates; %......................................................................178

Figure 24: Development of total credit to households in % of GDP; EU 27 and USA;

2000-2008........................................................................................179

Figure 25: Development of total credit to households in % of GDP for different EU

country groups; 1995-2008.................................................................179

Figure 26: Total credit to households outstanding, % of GDP; 2005-2008..................180

Figure 27: Consumer credit in the EU 27 and the US as a % of Disposable Income; EU

and USA; %......................................................................................180

Figure 28: Consumer credit as a percentage of final consumption; Expenditure of

households; % ..................................................................................181

Figure 29: Distribution of total credit to households by MFIs in Euro area 16; EU 27

and US.............................................................................................181

Figure 30: Lending to households by credit type, % of GDP; EU 16; EU 27 and US .....182

Figure 31: Distribution of lending to households; 2008 ...........................................183

Figure 32: Heterogeneity among relevant economic factors .....................................194

Figure 33: Consumer credit per GDP in a cross-country comparison..........................195

Figure 34: Consumer credit outstanding; Germany, EUR billion................................196

Figure 35: Consumer Credit as % of GDP, Germany ...............................................196

Figure 36: Growth of consumer credit, Germany; % p.a. ........................................197

iff/ZEW – Final Report on interest rate restrictions in the EU XXI

Figure 37: Instalment credit; Germany; EUR billion................................................198

Figure 38: Consumer credit in Germany; Dynamics of instalment credit vs. other

credit; 2006-2009; new business; EUR billion ........................................200

Figure 39: Consumer credit: Dynamics of instalment credit; Germany; 2006-2009;

new business EUR billion.....................................................................201

Figure 40: Consumer credit: Dynamics of other credit; Germany; 2006-2009; new

business, EUR billion ..........................................................................201

Figure 41: Consumer credit outstanding; France; EUR billion ...................................204

Figure 42: Consumer credit as % of GDP; France...................................................204

Figure 43: Consumer credit growth rates; France; % .............................................205

Figure 44: Evolution of the use of consumer credit and bank overdraft; France; % of

total households ................................................................................205

Figure 45: Consumer credit by type; France; 1995-2008; EUR billion........................206

Figure 46: Consumer credit outstanding; Netherlands; EUR billion............................208

Figure 47: Consumer credit; the Netherlands; % of GDP.........................................208

Figure 48: Consumer credit growth; the Netherlands; % of GDP ..............................209

Figure 49: Consumer Credit Outstanding; Poland; EUR billion ..................................211

Figure 50: Consumer credit; Poland; % of GDP .....................................................212

Figure 51: Consumer credit growth; Poland; % p.a. ...............................................212

Figure 52: Types of consumer credit; Poland.........................................................213

Figure 53: Consumer credit outstanding; Sweden, EUR billion..................................215

Figure 54: Consumer credit; Sweden; % of GDP....................................................215

Figure 55: Consumer credit growth; Sweden; % p.a. .............................................216

Figure 56: Consumer credit outstanding; UK; EUR billion ........................................217

Figure 57: Consumer credit; UK; % of GDP...........................................................218

Figure 58: Consumer credit growth rates; UK, % change p.a...................................218

Figure 59: Consumer credit outstanding: Cards and overdrafts; UK; GBP million ........222

Figure 60: Perception of easy and unlimited credit access .......................................228

Figure 61: Households without access to short-term credit ......................................229

Figure 62: Households considering credit to be useful.............................................230

Figure 63: Desirability of Credit Access for low-income borrowers, by Stakeholder Type231

Figure 64: Desirability of Credit Access for low-income borrowers, by Type of Country

of Origin...........................................................................................231

Figure 65: Level of Credit Options to low-income borrowers ....................................232

Figure 66: Effects of IRR (2x average) on credit access, for low-income borrowers .....233

Figure 67: Effects of IRR (max. of 30%) on credit access, for low-income borrowers...234

Figure 68: Effects of IRR (2x average) on credit access, for average borrowers ..........234

Figure 69: Effectiveness of different measures to increase credit access for low-income

borrowers, views of provider associations..............................................236

Figure 70: Effectiveness of different measures to increase credit access for low-income

borrowers, views of consumer organisations ..........................................236

Figure 71: Consumer Credit in EUR billion, current prices........................................239

Figure 72: Trends in Consumer Credit, End-of-Period Stocks, 1995=100%................240

Figure 73: Consumer Credit in Poland, 1996-2008 .................................................242

Figure 74: Consumer Credit per Capita in Poland, 1996-2008, in EUR. ......................242

Figure 75: Consumer Credit in the Netherlands, 1995-2008 ....................................243

Figure 76: Consumer Credit per Capita in the Netherlands, 1995-2008; in EUR 000s ..244

XXII iff/ZEW – Final Report on interest rate restrictions in the EU

Figure 77: Volume of Instalment Consumer Credit in Germany, different maturity

groups, in bn. Euros...........................................................................245

Figure 78: Distribution of loans in EU 27 Member States, 2008 ................................247

Figure 79: Prevalence of mortgages among EU-25 households, 2005........................247

Figure 80: Owner-occupation rates for the EU 27 Member States, 2008 ....................248

Figure 81: Market penetration for different consumer credit products, 2006...............251

Figure 82: Prevalence of personal loans across EU 25 Member States, 2005 ..............252

Figure 83: Prevalence of auto / vehicle loans across EU-25 Member States, 2005 .......252

Figure 84: Prevalence of personal loans across countries (0: not existent, 1:

uncommon - 5: widespread) ...............................................................253

Figure 85: Prevalence of auto/vehicle loans across countries (0: not existent, 1:

uncommon - 5: widespread) ...............................................................253

Figure 86: Prevalence of overdraft facilities across EU-25 Member States, 2005 .........254

Figure 87: Prevalence of overdraft facilities across countries (0: not existent, 1:

uncommon - 5: widespread) ...............................................................255

Figure 88: Prevalence of credit cards across EU-25 Member States...........................255

Figure 89: Prevalence of credit card credit across countries (0: not existent, 1:

uncommon - 5: widespread) ...............................................................256

Figure 90: Importance of alternative lending (higher cost small volume credit) as % of

total lending activities ........................................................................258

Figure 91: Impact of a relative/floating IRR (2x market average) on the product

variety available to low-income borrowers .............................................259

Figure 92: Impact of a relative/floating IRR (2x market average) on the product

variety available to an average borrower...............................................259

Figure 93: Effectiveness of different regulation measures with respect to wider product

variety (responses from provider associations).......................................261

Figure 94: Effectiveness of different regulation measures with respect to wider product

variety (responses from consumer organisations)...................................262

Figure 95: Cross-country comparison of households in arrears on utility bills (2008) ...264

Figure 96: Polish households in arrears on utility bills, development 2005-2008 .........266

Figure 97: Dutch households in arrears on utility bills, development 2005-2008 .........267

Figure 98: Importance of community/informal lending as % of total lending activities .268

Figure 99: Presence of illegal lending ...................................................................270

Figure 100: Impact of relative/floating IRR (2x market average) on illegal lending to

low-income borrowers.......................................................................271

Figure 101: Impact of relative/floating IRR (2x market average) on illegal lending to

low-income borrowers.......................................................................272

Figure 102: Impact of relative/floating IRR (2x market average) on illegal lending to

an average borrower ........................................................................273

Figure 103: Over-indebtedness in the EU in 2008 ..................................................276

Figure 104: Prevalence of arrears on hire purchases or loans, comparison of overall

population and low-income households in 2008 ....................................277

Figure 105: Households' ability to make ends meet in 2008.....................................278

Figure 106: Low-income households' ability to make ends meet in 2008 ...................279

Figure 107: Polish households in arrears, development for entire population 2005-

2008 ..............................................................................................280

Figure 108: Polish households in arrears, development for low-income households

2005-2008 ......................................................................................280

Figure 109: Development of over-indebtedness amongst Polish households 2005-

2008 ..............................................................................................281

iff/ZEW – Final Report on interest rate restrictions in the EU XXIII

Figure 110: Dutch households in arrears, development for entire population 2005-

2008 ..............................................................................................282

Figure 111: Dutch households in arrears, development for low-income households

2005-2008 ......................................................................................282

Figure 112: Development of the Dutch mortgage market and mortgage repayment

arrears 2005-2008 ...........................................................................283

Figure 113: Development of over-indebtedness amongst Dutch households 2005-2008284

Figure 114: Severity of over-indebtedness, by type of respondent............................285

Figure 115: Severity of over-indebtedness, by country of origin with respect to

interest rate regulation .....................................................................285

Figure 116: Severity of over-indebtedness, responses from consumer organisations ...286

Figure 117: Effectiveness of different measures to reduce over-indebtedness (view of

providers) .......................................................................................287

Figure 118: Effectiveness of different measures to reduce over-indebtedness (view of

consumer organisations) ...................................................................287

Figure 119: Effects of IRR (2x average) on over-indebtedness, for low-income

borrowers .......................................................................................289

Figure 120: Effects of IRR (max. of 30%) on over-indebtedness, for low-income

borrowers .......................................................................................290

Figure 121: Effects of IRR (2x average) on over-indebtedness, for average-income

borrowers .......................................................................................290

Figure 122: 6-Country comparison of households in arrears 2005-2008 ....................293

Figure 123: 6-Country comparison of low-income households in arrears 2005-2008....294

Figure 124: 6-Country comparison of subjective over-indebtedness 2005-2008..........295

Figure 125: 6-Country comparison of subjective over-indebtedness among low-income

households 2005-2008......................................................................295

Figure 126: Cross-country comparison of households falling behind on their mortgage

repayments 1994-2001.....................................................................296

Figure 127: Cross-country comparison of low-income households falling behind on

their mortgage repayments 1994-2001 ...............................................297

Figure 128: Trend in credit defaults by private households after the financial crisis .....298

Figure 129: Growth rates of PVI (Germany) 2004-2009 ..........................................300

Figure 130: Real interest rates on consumer credit with initial fixation of up to 1 year

in the six EU countries, 2003-2010, in percent. ....................................303

Figure 131: Real interest rates on consumer credit with an initial rate fixation of more

than 1 year and less then 5 years in the six EU countries, 2003-2010, in

percent...........................................................................................304

Figure 132: Real interest rates on consumer credit with an initial rate fixation of more

than 5 years in the six EU countries, 2003-2010, in percent. ..................305

Figure 133: Selected consumer credit interest rates in Poland, 2005-2010, in percent.307

Figure 134: Selected consumer credit real interest rates in the Netherlands, 2003-

2010 ..............................................................................................308

Figure 135: Instalment consumer credit interest rates in Germany, average cap and

bond yields (in percent), 1968-2003. ..................................................309

Figure 136: Instalment consumer credit interest rates in Germany, in percent, 1968-

2003. .............................................................................................310

Figure 137: Consumer credit interest rates in Germany, spreads and interest rate cap,

in percent, 1968-2003. .....................................................................310

Figure 138: Impact of a floating IRR on the cost of credit for the average borrower ....311

Figure 139: Acceptance of regulation of fees and charges .......................................316

Figure 140: IRR as a barrier to the cross-border provision of consumer credit ............318

XXIV iff/ZEW – Final Report on interest rate restrictions in the EU

Figure 141: IRR as a barrier to the cross-border provision of consumer credit

(divergence of opinion among stakeholder categories)...........................318

Figure 142: Competition measures by the Herfindahl-Index.....................................320

Figure 143: Competition measured by the Learner Index ........................................321

Figure 144: Competition measured by the H-Statistic .............................................322

Figure 145: Consumer credit interest rates and ceiling in Poland, 2005-2010 .............324

Figure 146: Process of the surveys for the empirical work .......................................349

iff/ZEW – Final Report on interest rate restrictions in the EU 25

In line with the dual objectives of this study, namely to identify existing interest rate

restrictions in EU consumer credit markets and to assess their effects on those markets

and society in general, this report is structured in two parts with annexed materials.

differences between underlying national legal, social and cultural traditions and

circumstances surrounding IRR and the protection of borrowers against exorbitant

charging by credit providers. It starts by providing the theoretical background and

framework for an understanding of the concrete situation in the Member States. In

Chapter 1.1, definitions are elaborated, terms of the study clarified, the philosophy of

regulation and concept of usury explained and the range of possible forms of IRR

presented. In these opening sections and throughout the report, the study applies a legal

methodology to assess the common roots, principles and conflicts of existing rules. A

socio-legal methodology is used to assess the cultural background for such rules and

their effectiveness in practice.

Chapter 1.2 details the mechanisms and levels at which interest rate ceilings are set in

those countries with such regulation. Direct regulation of credit markets through the use

of contractual interest rate ceilings are the most recognisable form of IRR and pages 64-

78 give details on the few Member States with absolute ceilings followed by those

countries here a relative interest rate ceiling (also known as a floating cap) is applied.

Country tables are provided showing the level of the ceilings for the different classes of

credits where distinctions are made on the basis of credit type or amount. This part of

the report also contains information on sanctions, enforcement regimes and an

explanation of the various ways in which ceilings can be calculated and set. In addition,

Section 1.2.2 gives a comprehensive inventory of rules governing interest rate levels in

default.

While direct IRR limit the contractual interest rate or the amount of interest that can be

charged, Chapter 1.3 presents the various forms of indirect IRR in Member States.

Restrictions on other cost relevant factors may have an equivalent effect to interest rate

ceilings. Details on such general restrictions on fees and charges are reported here. In

addition to providing information on the rules governing the use of compound interest

rates in EU Member States, there is also a section covering on the regulation of interest

rather than strict restrictions on the interest rate as such.

With harmonisation of consumer-related rules in the different Member States, the legal

survey then proceeds to discuss the EU Consumer Credit Directive of 2008 (CCD 2008)

and an extension of its scope to smaller amounts of credit in some jurisdictions in

Chapter 1.4. The study also addresses certain legal aspects related to high-cost credit

and their social impact in Chapter 1.5. The first part of the report ends with Chapter 1.6

summarising and reproducing the views of Stakeholders of European consumer credit

markets on various aspects of IRR.

A second part of the report focuses on the economic, financial, and social impacts of

towards more productive users, an outcome which he considers to be socially more

26 iff/ZEW – Final Report on interest rate restrictions in the EU

desirable. In contrast, Jeremy Bentham points out that high cost of credit will attract

economically weaker people who may rationally decide that the expenses for interest

payments are outweighed by the value of the loan to them.

Modern economics has advanced in its understanding of complex credit markets

(including the role of asymmetric information and imperfect competition). Chapter 2.1

details the reasons of differential interest rates as well as the effect of interest rate

restrictions on capital allocation. Economic theory has also refined its analysis of

consumer choices. In general, it acknowledges that consumers spend, save and borrow

money according to their individual preferences and their budget. The chapter also

demonstrates how a decision to finance consumption by credit arises from the preference

to smooth consumption over time. However, individual financing decisions are found to

have adverse individual as well as social effects such as over-indebtedness. Therefore,

Chapter 2.1 also shows the limitations of consumer rationality due to cognitive biases

and the inability to manage complex decisions. Based on these theories we state a series

of conceivable hypotheses on the impact of interest rate restrictions.

Note that, for three reasons, this study primarily focuses on consumer credit rather than

credit to businesses (eg. SMEs, self-employed, micro enterprises): firstly, interest rate

restrictions are frequently introduced as a means of consumer protection, since

consumers are the ones considered to be otherwise offered (excessively) high interest

rates. Secondly, as banks are reluctant to lend at high risk premia to small businesses to

avoid adverse selection, small enterprises (and micro enterprises) are frequently financed

by credit types originally designed for consumption purposes (eg. overdraft of the

(private) current bank account, credit card). However, it is not feasible to make a clear

empirical distinction between consumer finance and the financing of a (start-up)

enterprise. We therefore conjecture that the implications of the hypotheses derived for

consumers also hold for small and micro enterprises. Thirdly, a thorough discussion of

the financing of small and medium-size enterprises (SME) would require considering a

variety of aspects (eg. optimal leverage, moral hazard, the role of mezzanine capital and

equity) which are clearly beyond the scope of this study. We will nevertheless briefly

discuss similarities and differences between consumer credit and business credit

(including microfinance) in the context of interest rate restrictions in Section 2.1.5.

Due to the relevance of consumer credit markets and their regulation, it is not surprising

that economic impacts of interest rate restrictions have been the focus of empirical

studies, both with an academic as well as a policy-consulting perspective. Chapter 2.2

provides a comprehensive survey of this literature. It stresses that empirical evaluation

of interest rate restrictions can only be made when the counterfactual situation is

identifiable, eg. due to close similarity of countries unaffected by this regulation. As

Chapter 2.2 details, this requirement is more easily met in the analysis of the US

markets rather than European markets. However, the typical historical interest rate cap

in the US is lower than typical interest rate restrictions in European countries, which

makes the transferability of these results questionable. Chapter 2.2 therefore also takes

a closer look at more recent studies on interest rate restrictions in Member States of the

European Union.

Chapter 2.3 then turns to the description of the markets of credit to households. It

provides a comprehensive overview of the markets for total credit to households, housing

credit, and consumer credit (without housing) for all EU 27 countries. Where illustrative,

it also provides separate analyses for EU 25, EU 15 countries or the New Member States.

Chapter 2.4 presents a more detailed discussion of the credit markets in the case study

countries. These countries are Germany, France, Sweden, Poland, the UK and the

Netherlands. As detailed in Section 2.4.1, these countries are particularly well suited as

case studies as they exhibit typical features in terms of the interest rate restrictions as

well as economic circumstances.

iff/ZEW – Final Report on interest rate restrictions in the EU 27

Chapter 2.5 discusses the hypotheses stated in Section 2.1.4. To do so, we summarise

existing evidence from the literature, and derive conclusions from the collected data. In

addition, we consider the responses of questionnaires answered by particular

stakeholders in the consumer credit market, such as regulators, consumer associations,

providers, and provider associations. The survey enables us to learn from the experience

of stakeholders with regard to the effect of interest rate restrictions (or lack of thereof)

on the credit markets in the respective countries. It also allows a comparison of the

answers from stakeholders in countries with interest rate restrictions (IRR) with those

from countries without IRR, and a qualitative discussion of the differences. The inclusion

of heterogeneous stakeholders (regulators, consumer agencies, supplier associations) will

enable us to consider potentially divergent perspectives about issues in question in a

balanced way. Accordingly, we base our judgement about the hypotheses on several

sources: the interpretation of existing data, earlier empirical evidence, as well as the

information from stakeholder questionnaires.

28 iff/ZEW – Final Report on interest rate restrictions in the EU

In this section we provide the theoretical background and framework for an

understanding of the concrete situation in the Member States as described through the

reports of legal experts and the various stakeholder groups.

controls with the following short overview of the presence of interest rate ceilings:

“Many countries in both the developed and developing world have interest rate ceilings on

German Supreme Court has established a de facto ceiling through its interpretation of the

BGB. In addition, Islamic banking prohibits the taking of interest and uses a profit-sharing

The primary contemporary objective of interest rate ceilings is to protect those of modest or

low income from paying excessively high prices for credit. These ceilings often include both

consumer and business borrowers in the scope of their protection. Given the different markets

and forms of credit, countries often have a variety of ceilings. In France, interest rate ceilings

differ depending on the type and length of loan: they are established at one third above the

established a very strong presumption that interest rates that are double the relevant market

general interest rate ceilings on credit since 1854 when Parliament, following Jeremy

This reveals that there are a number of definitions of interest rate restrictions, stemming

from the fact that they have often been introduced to achieve distinct policy objectives.

We therefore begin by defining what we mean by interest rate restrictions and

considering some of the complexities that arise for the conduct of the study. A set of key

terms for use in the study is set out as a result.

4 Ramsay, I. in Howells, G., Ramsay, I. , Wilhelmsson Th. (2010) pp 397 ff.

5 There is a large literature from differing academic perspectives on interest rate ceilings. For a recent

overview, see Howell, N. (2005) and references cited. Elizabeth Warren and Amelia Warren Tyagi have

argued for the reintroduction of interest rate ceilings in US consumer credit. See Warren, E., Tyagi, A.

(2003), pp. 144-52. See references in Kraft et al. (2008), pp. 409-12. For economic explanations, see

Glaeser, E., Sheinkman, J. (1998), Posner, E. (1995), p. 283 et seq.

6 See discussion of Japan in Kozuka, S.; Nottage L. (“The Myth of the Cautious Consumer: Law, Culture,

Economics and Politics in the Rise and Partial Fall of Unsecured Lending in Japan” in J Niemi, I Ramsay and

W Whitford (eds) Consumer Credit, Debt & Bankruptcy: Comparative and International Perspectives

(Oxford, Hart 2009).

7 See Aidit bin Hazi Ghazali (1994), p. 443 et seq.

8 See Code de la Consommation L.313-3.

9 See 42(1) NCA.

10 For a brief account of the German law of usury, see Markesinis, B. et al. (2006), pp. 250-53. The German

courts may use two tests: double the average and a standard of 12 per Cent above relevant rates. The

latter was used during periods of high Inflation and consequently high interest rates.

11 Although the Moneylenders Acts 1900-1927 (abolished in 1974) did contain a presumption that interest

rates over 48 per cent were unconscionable.

iff/ZEW – Final Report on interest rate restrictions in the EU 29

We then proceed to consider the concept of usury, detailing the provisions which exist in

this regard in each of the Member States, and historical fluctuations in its application.

We then categorise existing forms of IRR, which we then use in the remainder of the

Chapter when considering responses to the survey of experts, and we conclude with

consideration of enforcement issues.

The term, ‘Interest Rate Restrictions’ in consumer credit markets refers to all rules that

limit the price of credit contracts. The study is concerned with existing law and its

application. It is not a legal study in its strictest sense, which would need to consider the

broader discussions that have taken place since the middle ages concerning how

restrictions that arose as a result. Instead, this study is concerned with interest rate

restrictions that currently exist as legally or factually binding rules that limit the amount

of money a lender can charge, directly or indirectly, for the use of capital by the

simplicity and ease of reading throughout this report.

It should be noted from the outset that there are three complicating factors of relevance

to the study:

legislation with regard to the pricing of credit, since too many variables may intervene.

From a supplier’s perspective, all legal rules require them to take special precautions or

put procedures in place, and these ultimately contribute to the overall cost of providing

credit. The study cannot take all of these variables into account and is therefore only

concerned with identifying the legal forms of IRR that exist and comparing whether, and

how far, we can attribute observed impacts on prices to them.

importance, and rules affecting the calculation and disclosure of interest have effects on

the operation and forms of IRR. For example, the interest rate defined in Article 3 of the

way (“Annual Percentage Rate of Charge”) and as a means of calculating the amount of

interest due (“Borrowing Rate”).

differently amongst them. In order to facilitate the studying of the economic and social

effects of IRR, we have adopted a broad definition as follows:

As far as self-regulatory rules exist, they are either directly or indirectly part of legal

rules because private law gives contractual consensus the status of state sanctioned law

(“freedom of contract”) or incorporates such rules as “commercial habits”, “good morals”

or “good faith” into the body of law.

13 Directive 2008/48/EC of the European parliament and of the Council of 23 April 2008, on credit agreements

for consumers repealing Council Directive 87/102/EEC. Referred to as the “Consumer Credit Directive”

or “CCD 2008”. Available at: http://eurlex.

europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2008:133:0066:01:EN:HTML.

30 iff/ZEW – Final Report on interest rate restrictions in the EU

As far as the enormous amount of historically developed moral, religious and ethical rules

are concerned these rules have mostly led to legal rules which have thus gained

acknowledgement and effectiveness. In so far those moral rules which are broadly

shared in a country are usually incorporated into the law. Those exemptions where in a

rather small and homogeneous community like for example the Scandinavian countries

moral restrictions are so widely accepted that even without legalisation they have a high

degree of effectiveness we have integrated them into our observations.

In economic terms, this is therefore a study of the impact of price controls in consumer

credit markets.

For the economic part of this study the word “consumer credit” and “interest rate” are

common, well-defined and explored. This is even true for EU law. Article 3 (c) Directive

2008/48/EU defines a “credit contract” legally by reference to the economic concept of

“consumer credit” and sets out a number of its legal forms including ‘deferred payment’

and ‘loan’, but it also adds a saving clause by introducing the term “similar financial

accommodation”.

accommodation, except for agreements for the provision on a continuing basis of services or

for the supply of goods of the same kind, where the consumer pays for such services or goods

for the duration of their provision by means of instalments;”

It thus combines the Common Law tradition - which uses economic denominations in its

credit legislation - with the civil law approach, which in the Roman tradition of formalised

Assessing the national rules on “credit” is therefore easy in those countries that use this

word as a core legal concept.

to the requirements of the rule of law. For example, France and Germany both prefer

concepts that refer to the legal forms in which the economic activity is exercised. In

private law they prefer legal forms like a “loan” (Darlehen, prêt) or an instalment

purchase (“Stundung” deferred payment).

To cover the same rule in the UK as in Germany the words credit and interest rate have

to be translated into the different legal forms used in their respective legislation. For this,

EU law provides assistance. The 1987 EU Directive on consumer credit (CCD 1987), the

original CCD, aimed at bringing about a degree of approximation of the laws, regulations

14 Especially for money terms see Ott, K.-O. (1998).

15 See for example Part II of the UK Consumer Credit Act 1974 (1974 c. 39) which is similar to the EU

Directive defining credit contracts by “credit”.

16 Section 488 (1) of the German Civil Code uses the term “loan”: “(1) The loan contract obliges the lender to

make available to the borrower a sum of money in the agreed amount. The borrower is obliged to pay

interest owed and, at the due date, to repay the loan made available to him.” Similar the French definition

in Article 1892 Civil Code: “A loan for consumption is a contract by which one of the parties delivers to the

other a certain quantity of things which are consumed by use, on condition that the latter shall return as

much to him in the same kind and quality.”

17 Council Directive 87/102/EEC of 22 December 1986 for the approximation of the laws, regulations and

administrative provisions of the Member States concerning consumer credit. This Directive was

subsequently revised twice by Council Directive 90/88/EEC of 22 February 1990 amending Directive

87/102/EEC (setting out a single mathematical formula for calculating the APRC throughout the Community

and for determining credit cost items to be used in the calculation), itself amended by Directive 98/7/EC

(focusing on the calculation of the APRC). Directive 87/102/EEC was later repealed by Directive 2008/48/EC

of 23 April 2008 on credit agreements for consumers (CCD 2008).

iff/ZEW – Final Report on interest rate restrictions in the EU 31

introduced a purpose-driven approach into the national systems of countries governed by

codified civil law. Germany incorporated the use of the word “Credit” (Kredit), formerly

unknown in Private Law in its 1971 Consumer Credit Code. It returned to the formalised

legal language (“Loan”) in 2002 when integrating credit law into its Civil Code.

The maximum harmonisation approach of CCD 2008 Article 3 is now the key to the

different legal languages. Each Member State will have to define which legal forms and

rules of their own legal order qualify for what the Directive defines as “credit” for

“consumers”.

As the Directive aims to cover all legal forms in all Member States which serve the

purpose of credit it leaves some scope for interpretation. Whilst it sets out a number of

forms of credit which must be included, such as loans, deferred payments, overdrafts,

credit cards, it remains open to other and new forms of what would be recognised as

credit or an interest rate in economic terms.

We share this open approach and seek to cover interest rate restrictions for all legal

forms which objectively function as credit, even if they have a different legal

This is why the study is focussed on all legal forms covered by the definition of the

CCD 2008 without regard to its exemptions in Article 3. We therefore cover all

regulations with reference to “credit” or its forms like “loans”, “leasing” “hire purchase”

etc where we expected that different forms of IRR might be feasible.

Definitions of the key terms used in the study are set out in the table below.

the form of a deferred payment, loan or other similar financial

accommodation” (from CCD 2008).

The borrower is provided with a fixed amount to be repaid over a given

period by a fixed number of repayments called instalments (usually

constant over time) Examples: Personal loans, car loans, and hirepurchase

agreements.

A permanent reserve of credit whose limit is authorised by the creditor;

the consumer repays the sum used according to the allowances stated

in the credit contract and the reserve reconstitutes itself as repayments

progress. Mechanism of repayments can take different forms, including

the regular repayment of a percentage of the outstanding balance, with

or without a minimum amount, the periodic payment of a fixed amount,

or the payment of interest charges regularly and the repayment of the

credit at the end of the agreement Examples: credit cards, revolving

credit accounts, and overdraft facilities. Examples: line of credit,

running account credit, overdraft, credit card credit.

18 Historically this was especially true for certain contracts which are presented in the form of a hire

agreement. Article 3 of the Directive defines as “credit” (d) hiring or leasing agreements where an obligation

to purchase the object of the agreement is (not) laid down either by the agreement itself or by any separate

agreement”

32 iff/ZEW – Final Report on interest rate restrictions in the EU

A credit in which the borrower pledges some asset as collateral for the

credit. Creditor recovery of the surety can be limited to the collateral

(non-recourse) or not. Examples: mortgage loans and home equity

loans (a form of equity release).

Absolute or relative rate ceilings (fixed administratively, by statute or

court rulings); Laws designed to prevent exploitation and unfair

competition with effects on credit cost; Capped default interest rates

and early repayment fees; Restrictions on the compounding of interest

and the use of variable rates; Other forms of restrictions to the level or

rate of interest including moral consensus; Anti-Trust regulation.

“(j) ‘borrowing rate’ means the interest rate expressed as a fixed or

variable percentage applied on an annual basis to the amount of credit

drawn down” (from CCD 2008).

“(i) ‘annual percentage rate of charge’ means the total cost of the credit

to the consumer, expressed as an annual percentage of the total

amount of credit, where applicable including the costs referred to in

Article 19(2); (g) ‘total cost of the credit to the consumer’ means all the

costs, including interest, commissions, taxes and any other kind of fees

which the consumer is required to pay in connection with the credit

agreement and which are known to the creditor, except for notarial

costs; costs in respect of ancillary services relating to the credit

agreement, in particular insurance premiums, are also included if, in

addition, the conclusion of a service contract is compulsory in order to

obtain the credit or to obtain it on the terms and conditions marketed”

(from CCD 2008).

The interest rate with which the amount of money concerning capital

due after default is calculated (ie. charges for non-compliance, late

payment or interest charged on overdue payment).

The interest rate provided by statute to be used when no contract or

agreement exists between the parties. Sometimes referred to as the

statutory interest rate (eg. a rate used by default because none has

been specified, or rate used for statutory payments such as taxes).

Though the term is sometimes used to refer to the IRR ceiling, this is

misleading and inaccurate. It is distinct from the “lawful interest rate”

(rate that falls within the limits allowed by the usury laws) and from the

contractually-agreed rate of interest (conventional rate).

charges:

The charges for interest. These charges depend on the borrowing rate,

the amount and the duration of the credit. (The borrowing rate can be

fixed or variable and its level depends on the characteristics of the

credit, the creditor and the borrower. Calculation of interest charges

could be straightforward or not when the credit includes difference

balance segments with different borrowing rates, limits, and

introductory rates and charges).

iff/ZEW – Final Report on interest rate restrictions in the EU 33

sureties and ancillary services (bank accounts, credit insurance and

payment protection insurance), but also early repayment fees and fees

for failures to comply (late payment charge, exceeding credit limit).

banks); Finance companies/mortgage specialists; Doorstep tallymen;

Moneylenders; Brokers; Insurance companies; Vendors; Mail order

companies; Service providers; Associations/coops/unions (if not

banks); State agencies (housing, welfare etc); Private persons (family,

friends etc); Pawn brokers; Other.

Statutory law; General Civil Law ; Special Credit legislation;

Competition Law; Penal Law; Procedural Law; Administrative (Public)

Law; Court decisions; Self Regulatory rules (codes of conduct, issued by

arbitration bodies, professional rules) ; General Conviction, religious,

moral, voluntary ethical rules etc.

Civil courts; Consumer courts; Consumer Ombudsmen (official or

private); Police; Central bank; Banking Authorities (supervisory); Fair

Trading Offices; Cartel Offices; Attorney General etc.

Source: iff.

34 iff/ZEW – Final Report on interest rate restrictions in the EU

A. Instalment credit

appliances, energy saving projects)

variable repayment. Not credit card)

service providers etc)

(instalment sales)

for financing consumption)

B. Revolving credit

from debit cards also called “credit cards”)

overdraft)

credit card support)

instalments with own credit facilities)

card pay-later facility is less than 3 months of

credit, also from stores)

C. Small secured credit

D. Micro credit

insurance, savings or investment contracts)

Contractual interest rates

control

connection with other items, administrative or

civil law, penal) – subjective control

Default charges

interest)

restricting interest)

(compounding interest to capital)

caps to floating or progressive rates)

Contractual charges

commissions etc)

Default charges

reduce outstanding principal, priority in reducing

interest, cost or capital)

iff/ZEW – Final Report on interest rate restrictions in the EU 35

The main source drawn on by this report is questionnaires and discussions with experts

and stakeholders. The questionnaires and discussion materials have been developed on

the basis of a number of studies iff has already conducted with regard to interest rates

and over-indebtedness in Europe. However, existing literature and research on the

specific question of IRR is still rather limited. A number of economic studies in the U.S.

few empirical studies which assess the existing modern forms IRR.

Only two studies directly using empirical data have recently been published – one in the

UK in 2004, the other in France in 2009. Other studies published in Poland, the

Netherlands and Slovakia mainly use English data, while a forthcoming study by the

Danish government has yet to be made available to the public. According to the

information from national experts, there are additional reports on interest rate

Global Market Research for Policis, a consultancy in specialist research, which conducted

was that usury ceilings in Germany and France had led to a high degree of exclusion

from small loans for poor people in these countries and created a market for illegal

lending. These findings have been referenced on several occasions but have also been

concludes that the problems of usury today are concentrated in consumer credit, and

especially in certain forms of revolving loans and small loans, which play an important

role among insolvent households in France, as opposed to mortgage loans. The report

19 See at pp 158 ff.

20 See above FN 5.

21 From the national discussion concerning IRR in a wider sense a number of publications, papers,

parliamentary motiongs and studies have been named by the experts which mostly do not provide empirical

evidence beyond those known from the main studies. Belgium : Révision du mode de fixation des taux

annuels effectifs globaux en matière de crédit à la consommation (2006) at

http://statbel.fgov.be/fr/binaries/354_tcm326-41864.pdf; Czech Republic: Ministry of the Interior of the

Czech Republic - Prevention of indebtedness study. Liberalni Institut (Schwartz, 2007): Denmark Ministerial

working group to analyze the effect of APR-ceilings in other countries (report not yet published) . France:

Rapport sur les modalités de fixation du taux de l'usure", General Inspectorate of Finance & General

Inspectorate of Social Affairs, Februray 2009. See http://www.responsiblecredit.

net/index.php?id=1980&viewid=45728; Lefebvre, M. F. (2008), Rapport d’Information sur les

emprunts immobiliers à taux variable, Paris: Assemblé Nationale Treizième Légistlature N° 744 (26 mars

2008) p 53 (II A 2 c); Germany: Report by the Bundesbank concerning the change in statistics and the

Report on its implications by Hartmann-Wendels/Spörk in 2006. See:http://www.responsiblecredit.

net/index.php?id=1980&viewid=45755; Netherlands: study on SMS-credit and pawn-brokers was

done in 2009. See Report from "Research voor beleid'. http://www.responsiblecredit.

net/index.php?id=1980&viewid=45753.; Poland: KPF commissioned a study evaluating the impact

IRR have had on the market. The report was published in March 2009 (English translation avaliable).;

Slovakia: A report by the Hayek Foundation see http://www.responsiblecredit.

net/index.php?id=1980&viewid=45753; UK: Financial Inclusion Taskforce on Access to affordable

credit (2010); OFT study on High Cost Consumer Credit (2010).

22 See Eurofinans (2010), pp 6 ff; Project Associates, Briefing Note on Interest Rate Ceilings, 2009 (made for

Provident in Poland); Information on the use of these data in the Japanese discussion was made available

by Saya Ojama at the iff-Hamburg Conference on Financial Services, July 3, 2010.

23 For a more critical evaluation see now Office of Fair Trading (2010).

24 Policis (2006b); Policis (2006a), pp 47-48; Policis (2004a); for a critical review of its methodology, sample

and legal understanding see Reifner, U., Knobloch, M. (2009). The respective part for France has not been

mentioned in the French survey on these issues in 2009.

25 Inspection générale des finances, Inspection générale des affaires sociales (2009).

36 iff/ZEW – Final Report on interest rate restrictions in the EU

cites Belgium, the Netherlands and Italy as other countries which have comparable IRR

to France and sets the focus beyond access and onto two opposing views - the positive

impact of rate ceilings on the risk of insolvency, which high cost credit entails on one

hand, and its negative impact on access to small loans for people with low credit score

In our empirical survey, a variety of different data sources were used, firstly to

comprehend the idiosyncrasies of each Member State’s credit market and secondly to

assess the possible impact interest rate restrictions may have had and the potential

effects these restrictions could have when applied to the markets in other Member

States. We have restricted the selection of data to reliable industry and public sources

that allow for comparison across the Member States and have also incorporated some

national sources for specific phenomena which are measurable.

Telephone interviews with certain stakeholders were conducted and a number of face-toface

meetings were organised with certain specific stakeholders. Though stakeholders

vary as to their usefulness and knowledge of the subject matter they have been able to

contribute to the research. Additionally to the bilateral communication with stakeholders,

part of the research team has presented the study to the Forum of users experts in the

area of financial services (FIN-USE) set up by the European Commission.

The following section gives an overview of the stakeholders contacted and having

contributed in some way to our research, however, the details of our methodology have

been included in Annex III: Methodology of the research.

The Stakeholder Questionnaire (Annex X: Stakeholder Questionnaire) has been sent to

over 330 agencies. Due to the fact that the three groups of stakeholders (public

authorities, provider associations and consumer organisations) in countries with no actual

discussion on IRR found that responding was not necessary for various reasons, iff had to

use additional time and sources to solicit stakeholder involvement. To improve the

response rates to the questionnaires, the participation of the provider associations at the

EU level in the dissemination of both the Stakeholder Questionnaire and the Provider

Questionnaire to their members and their members’ members was respectively secured.

By securing the involvement and support of Eurofinas and the European Mortgage

Federation in this way, we hoped to encourage responses from the national level.

Of the 333 agencies contacted and invited to participate in our research:

answered in each of these);

sufficiently knowledgeable or with the competency about the issues covered by

the survey;

completing a questionnaire.

26 “L'augmentation des taux d'usure, en élargissant les possibilités de pret aux catégories les plus risquees, a

pour effet d'accroitre le niveau des difficultés d'endettement des ménages, Selon Georges Gloukoviezoff, le

flux de clientèle supplémentaire permis par la hausse des taux d'intérêt pratiques correspond a l'admission

d'emprunteurs plus risques, donc davantage sujets a des défaillances de paiement.” op. cit. Annex 5 p 1.

27 See 2.2.5 at pp 161 ff.

iff/ZEW – Final Report on interest rate restrictions in the EU 37

In addition, the economic team of this research conducted a survey of individual

providers. Further details on the provider survey can be found in the Annex XII: Provider

Questionnaire. All findings are reflected in the analysis of the hypotheses (Chapter 2.5).

Table 2 gives an overview of the numbers involved in the stakeholder survey and the

respondents from the Member States that participated.

Invited Replied Invited Replied Invited Replied Invited Replied

Austria 3 0 2 0+(2) 3 1 0 0

Belgium 3 1 5 2+(1) 3 1+(1) 0 0

Bulgaria 2 0 6 1 2 1 0 0

Cyprus 2 0 2 0 5 3 0 0

Czech Rep. 3 3 4 1+(1) 3 1 2 2

Denmark 4 1 2 1 3 1 1 1

Estonia 1 0 2 0 5 2+(2) 1 1

Finland 1 1 4 2 3 2 1 1

Greece 1 0 5 1+(1) 1 1 0 0

Hungary 3 0 5 1+(1) 3 1 0 0

Ireland 4 0+(1) 4 0+(1) 2 1 1 0

Italy 6 2 8 2+(1) 2 2 1 0

Latvia 2 0 3 1 3 1 0 0

Lithuania 3 0 3 0 3 1+(1) 0 0

Luxembourg 1 0+(1) 1 0+(1) 2 1 1 1

Malta 2 0 2 0 3 1 0 0

Portugal 3 0 5 2 1 0+(1) 2 1

Romania 2 1 1 1 1 0+(1) 1 0

Slovakia 1 1 2 0 2 1 0 0

Slovenia 1 1 1 1 3 2 0 0

Spain 5 0+(3) 5 2+(1) 1 1 2 0

EU Institutions 8 0+(1) 2 0 0 0 2 0

Source: Stakeholder survey. Note: The Stakeholder group Public Authorities (comprised of Regulators and

Government) and Other (comprised of debt advisors, scientists and other experts) have been merged together

for the purposes of analysis of the effects of interest rate restrictions in the later Chapters evaluating the

impact on stakeholder groups. The number in brackets refer to additional responses that were not sent in the

form of a completed questionnaire, thus are not part of the quantitative analysis in later Chapters of this report.

Some authorities have responded to one questionnaire together ie. have submitted one response to which the

different bodies have contributed. Furthermore, individual provider responses to the provider questionnaire are

not included in this table (see: Annex XIII: Provider Questionnaire - Methodology and feedback).

38 iff/ZEW – Final Report on interest rate restrictions in the EU

iff contacted all national bankers’ associations, bank supervision authorities and central

banks, as well as consumer organisations in each Member State, using various channels.

The level of non-response may in some cases indicate relative low levels of interest in

this area in the country concerned (eg. some German providers), but a lower than

expected response rate is primarily down to limited resources by the participants invited

to contribute their views (eg. especially the consumer associations). The response rate

from regulators was also more difficult to obtain than expected. Feedback would tend to

suggest that other priorities have meant that a prompt and dedicated response to our

survey was not always possible, though a public authority from every Member State was

contacted, called and a statement of their views collected.

inclusion of heterogeneous stakeholders (regulators, consumer agencies, provider

associations) enabled the economic team to consider potentially divergent perspectives

about issues in question in a balanced way. These responses to the Stakeholder

Questionnaire were taken into account when describing the hypotheses used to analyse

the impact, which interest rate restrictions can have. Alongside these written

contributions, some oral communication helped clarify certain details and helped assess

the strength of certain responses received from those respondents that completed a

questionnaire. Chapter 2.5 reports on the quantitative evaluation of the responses from

the questionnaire in light of the hypotheses. In addition Chapter 1.6 Stakeholder views

on IRR contains further material and a selection of qualitative answers are provided in

Annex XI: Tables of stakeholder responses and Annex XV: Stakeholder general feedback

on IRR.

To favour transparency of the research content and methodology, the findings in this

report were subject to verification ahead of its final version. This primarily took the form

of forwarding our understanding of the legal situation, but also the economic or market

information we had, to the public authorities to ensure that the content of the answers

collected, primarily from our legal experts for the legal details, is accurate.

There is one term that seems to summon up all forms of existing IRR: usury. It is used

to describe a fixed rate cap in France (taux d’usure); governs the German Austrian model

of “Wucher” (usury); and is the term underpinning those systems where the exploitation

of market failure by the stronger party, which results in excessive prices, is seen as a

contravention of good morals. The following table summarises sum indicators which are

described more in depth in the following text.

Austria Wucher Art. 879 alinea 2 4th

sentence und alinea

3 Civil Code (ABGB);

Articles 154 and 155

Criminal Code Article

1 Law on Usury

Belgium Woeker/usure Article 494 of the

penal code

Article 1907ter

BW

Article 87 No 1

WCK (ceiling)

28 See 2.1.4 Resulting Hypotheses on page 155 for the hypotheses that were tested by the survey responses.

iff/ZEW – Final Report on interest rate restrictions in the EU 39

Obligations and

Contracts Act

(default interest)

Art. 294

Commerce Act

(anatocism)

Tokoglifia

Czech

Republic

Lichva/dobré

mravy

Section 3 of the

Czech Civil Code

(Act. No. 40/1964)

also in the criminal

code (Act No.

40/2009 Coll)

“Four times the

average” (court

rule)

Denmark åger Yes

Estonia liigkasuvõtmine “good morals” (Civil

Code)

Finland Kiskominen/

Koronkiskonta

Penal Code

France Usure L313-3 of

consumer code

Germany Wucher Art. 138 al. 2 Civil

Code; Art. 291

Criminal Code

Art. 138 al. 1 Civil

Code (“good

morals”, double of

the average)

Code

Hungary Uzsorakamat Yes

Ireland Excessive “excessive”

Consumer Credit Act

1995 section 45

Italy usura Art. 644 Criminal

Code

201 “deprivation of

liberty”

Lithuania lupikavimas

Luxembourg usure Art. 1907-1 of the

Civil Code Article 494

penal code; article

1154 Civil code

anatocism

Judge can lower

interest.

40 iff/ZEW – Final Report on interest rate restrictions in the EU

Malta usury Illegal but with many

exemptions for

professionals

Netherlands Woekeraar/

wettelijke rente

No legal term. Usury

is deemed a criminal

offense

Fixed ‘legal

interest rate’

Poland Lichwa Usury for all

transactions

Portugal Usura cf. article 282 of the

Civil Code (“Código

Civil”) and article

226 of the Criminal

Code (“Código

Penal”)

cf. article 1146 of

the Civil Code –

non banking - and

article 28 of

Decree-Law nr.

133/2009

Romania camatarie Criminal Code of 28

June 2004, published

in the Official

Gazette, Part I no,

575 of 29 June 2004

“usury” in art.

450 Criminal Code

unauthorized

lending if interest

is higher than

allowed or

anatocism or for

less than one

year.

Slovakia úžera,

úžerníctvo,

úrok

Criminal offence

according to art. 235

of The Act No.

300/2005 Coll. - The

Criminal Code.

>30% pa (Decree

Ministry of

Justice)

Slovenia oderuštvo Article 119 of Code

of Obligations;

Obligacijski zakonik,

OZ-UPB1, OJ 97/07.

Article 214 of Penal

Code; Kazenski

zakonik, KZ-1, OJ

55/08)

Spain Usura Abusively high

interest rates Law on

Usury of 23rd July

1908 «Ley

Azcárate».

Art. 19 Consumer

Credit Law (2,5

times “legal

interest rate” for

overdrafts’

(Banks/Financial

Inst.)

Sweden Ockret Contracts act

(Avtalslagen 1915:

218) section 31

paragraph 2.

Swedish Penal

Code/Brottsbalken

chapter 9 s 5 p 2:

credit in a

business activity

or habitually or on

a large scale, and

extortionate

iff/ZEW – Final Report on interest rate restrictions in the EU 41

United

Kingdom

Usury/unfair Lending at excessive

or exorbitant interest

(not defined in

legislation

For Credit Unions

Source: Stakeholder and Expert survey.

und alinea 3 Civil Code (ABGB). It means exploiting a disadvantage (such as

inexperience, carelessness, or financial distress) to exact a larger than usual benefit. This

exploitation is necessary for a situation to qualify as usury. The same definition can also

be found in Article 1 Law on Usury (WucherG); similar to Articles 154 and 155 Criminal

Code (StGB).

could lead to a reduction of the contractual interest rate to the statutory interest rate. A

usurer can also be penally sanctioned, according to article 494 of the penal code (Sw).

The usury ceilings are laid down in article 1907ter BW. For its application an objective

element (ie. an abnormal high interest rate) as well as a subjective element (ie. the

abuse of one’s financial subordination) should be present. This applies to all types of

credit. The Belgian legislator has also adopted specific rules on usury in the Belgian

consumer credit regulation (“WCK”). According to article 87, 1° WCK the interest is not

payable by the consumer if the APR exceeds the legally determined APR.

of the Obligations and Contracts Act in so far as it is charged on default interest

determined in accordance with Bulgarian National Bank regulations. Anatocism is allowed

between commercial entities but has to be stipulated according to Art. 294 Commerce

Act.

interest rate ceilings for over a decade. Though lending transactions between private

individuals have never been regulated, a usury bill called ‘the Penal Code (Amendment)

Law of 2010’ is currently being proposed which will contain a definition of what usury

actually is, including a reference rate which is likely to be stipulated.

is inappropriate to the profit obtained through it. In most cases it is being understood as

a credit with high interest. The duty not to apply usury interest arises from Section 3 of

the Czech Civil Code (Act. No. 40/1964 Coll. as amended) which governs “good morals”

(in Czech: “dobré mravy”). A court ruling of the Highest Court of the Czech Republic No.

22 Cdo 1993/2001 from 08. April 2003 defines usury contracts (in Czech: “Lichevní

smlouvy”) as contracts which involve abusing the inexperience, intellectual weakness or

distress of a party to the contract, and whereby the contract arranges for the other

party, or others, to be provided or promised to be provided with a performance which is

in gross disproportion to the mutual performance. Usury contract under civil law is a

contract where the party knew or should have known from the circumstances of the case

that the other party is affected by the circumstances mentioned above, and utilized this

fact. It is not required for this conduct to have been simultaneously identified as an

offence in criminal proceedings. Usury contracts are null and void. A court ruling of the

Highest Court of the Czech Republic from 15. December 2004, No. 21 Cdo 1484/2004,

defines when an interest rate is considered to violate good morals and thus a credit

contract as null and void (in Czech: “neplatný”). This is when the interest exceeds

quadruple of an ordinary interest provided by commercial banks for the given credit type

(a violation of good morals results in principle in nullity of legal action).

42 iff/ZEW – Final Report on interest rate restrictions in the EU

This matter is also covered by the current criminal law (the Czech Penal Code, Act No.

40/2009 Coll., as amended): Anyone who arranges for themselves or others to be

provided or promised to be provided with a performance which is in gross disproportion

to the mutual performance, or if he enforces or transfers the receivables arising with the

intent to enforce them, commits a criminal act. This applies to cases when someone

takes advantage of another’s weakness, distress, inexperience, carelessness or

disturbance only. Higher penalties are awarded to those who acquire for themselves or

others considerable profit or a profit of significant amount, or who commit this crime as

members of an organised group, or who by committing this crime cause a state of severe

need to others, or if this crime is committed during the state of emergency or state of

war or during a natural disaster or other circumstances seriously threatening the life or

health of people, public order or property.

the term is used to describe the criminal action. During the financial turmoil there has

been a tendency to use the term more generally for high interest rates.

the current activities of many moneylenders, which offer easy ways of borrowing money

(either through mobile phone, internet) but which charge unreasonably high interest

rate. Legally it would fall under good morals a principle of the General Part of the Civil

Code Act (Tsiviilseadustiku üldosa seadus).

Legally it is in the penal code and refers to abusively high interest rates of a loan. Usury

means either charging very high interest because of the borrower’s weak situation or

charging in general such high interest that it is disproportionate compared to the lender's

risk and costs.

annual percentage rate which, at the time of its granting, is more than one third higher

than the average percentage rate applied by the credit institutions during the previous

quarter for loans of the same type presenting a similar risk factor, constitutes a usurious

loan (L313-3 of consumer code).

(2) as a special example for a breach of “good morals”: (1) A legal transaction which is

contrary to public policy (public morals) is void. (2) In particular, a legal transaction is

void by which a person, by exploiting the predicament, inexperience, lack of sound

judgement or considerable weakness of will of another, causes himself or a third party, in

exchange for an act of performance, to be promised or granted pecuniary advantages

which are clearly disproportionate to the performance.” In the German Criminal Code,

section 291 states: “Usury”: “(1) Whosoever exploits the predicament, lack of

experience, lack of judgment or substantial weakness of will of another by allowing

material benefits to be promised or granted to himself or a third person 1. for the rent of

living space or additional services connected therewith; 2. for the granting of credit; 3.

for any other service; or 4. for the procurement of one of the previously indicated

services, which are in striking disproportion to the value of the service or its

procurement, shall be liable to imprisonment of not more than three years or a fine.

taken the German BGB as the basis for its legislation is identical with the above cited

Article 291 of the German Criminal Code.

neighbour's loss, rather than profit from a loan. This is why usury concerns a party’s

excessive benefits through exploitation of another party’s situation.

iff/ZEW – Final Report on interest rate restrictions in the EU 43

are “excessive”. However, this provision remains largely untested in the courts. In any

event, it does not apply to “credit institutions” as defined in section 2 of this act.

money and ask for an excessive interest. There is no legal definition of usury in civil laws

but it is covered by the definition of usurious interests. The criminal code describes the

crime of usura at art. 644, as to obtain, or to obtain the promise of interests or other

profits that are usurious under the law. It is specified that only law can determine when

judge can establish that interests (or other forms of benefits) are usurious if they are

disproportional to the situation considered, or if the debtor is in need or in economic

difficulty. When this is committed by a bank or another financial intermediary it is always

usury, and the sanctions are more severe.

loans, in whatever form, and knowingly takes advantage of the grave economic situation

of the borrower, to impose terms and conditions that are excessively burdensome for the

borrower. The applicable sentence is deprivation of liberty for a term not exceeding five

years, or custodial arrest, or community service, or a fine not exceeding one hundred

times the minimum monthly wage (Criminal Law Section 201).

interest.

abuses from the inexperience of the borrower in order to obtain from his/her the promise

to pay an excessive interest rate or any other obviously excessive benefits according to

the risk coverage, the Judge can lower the interest up to the reimbursement of the

principal plus the legal interest rate. Article 494 of the Luxembourg penal code states

that whoever had provided another person with any kind of values, to an amount rate

exceeding the legal interest rate, by abusing the weakness or the passion of the

borrower can be sentence to imprisonment (from1 month to 1 year) or to pay a fine from

€500 to €25,000). Apart from that article 1154 forbids anatocism applying for a period of

less than one year (exception to this rule: when this anatocism is performed on a current

account between a bank and its consumer).

exemptions apply from its rate ceiling. It therefore concerns mainly non-professionals

who prey on the desperation of other individuals who have gambling, drug or other

substance abuse problems.

license and they risk legal sanctions if they charge more interest than the legal

maximum. In the public discussion about the benefits of selling linked products like

insurances which are not transparent to the borrower are labelled as usurious. Also

short-term credit with high costs are deemed to be usurious.

professionals and consumers.

conduct of someone who charges extremely high interest rates. Legally, usury is slightly

more complex than that. On one hand, interest rates above the maximum allowed by law

44 iff/ZEW – Final Report on interest rate restrictions in the EU

hand, businesses where someone, with intent to achieve a pecuniary benefit for himself

or for another person, exploiting a personal situation of need, mental illness, incapacity,

incompetence, inexperience or weakness, causes the debtor to undertake to grant or

promise to grant, in any way, benefits which are manifestly disproportionate, excessive

of “usury” was provided in art. 450. It was defined as : a) the operations of lending

money or bonds as a profession by unauthorised persons, directly of through camouflage

papers, if the interest is higher than the interest established by the law; b) the

operations of lending money or bonds, carried-out by unauthorised persons directly of

through camouflage papers, if they establish an interest capitalization for interests owed

for a period of time shorter than a year. Usury is also defined by practices like interest on

interest (anatocism) and is also mentioned in connection with a maximum interest rate

or legal interest.

Coll. The Criminal Code says usury is committed by the one who, abusing anyone's

pressure, inexperience or rational weakness or any distress, receives (himself or for

anyone else) a performance or a promise, and its value is in gross disproportion to the

value of mutual fulfilment. Furthermore, usury is committed by the one who transfers

such a claim with the purpose to exercise it or who exercises such a claim. To pay more

than 30 percent for a loan, including fees for the year, was seen as usurious, according

to a decree of the Ministry of Justice of Slovakia.

position by charging too high interest rates or by setting too high price. A usurious

contract (“oderuška pogodba”) in private law is a contract, where one party takes

advantage of the other party’s emergency, difficult material position, his lack of

experience, frivolity or dependence and assures to himself or to someone else a benefit

that is in obvious disproportion to his own obligation (Article 119 of Code of Obligations;

Obligacijski zakonik, OZ-UPB1, OJ 97/07). In criminal law usury (“oderuštvo”) means the

taking or assuring of a disproportionate benefit by taking advantage of weak party’s

difficult material position, lack of housing, need, lack of experience or frivolity (Article

214 of Penal Code; Kazenski zakonik, KZ-1, OJ 55/08).

are – generally speaking - free, subset to the agreement among the parties. However,

Case Law and some specific Acts – namely the Usury Act of 1908 - establish that, the

freedom to agree upon a certain level of interest rates should be analysed in the light of

a number of issues like the relation between rates set in contracts and legal cost of

money (legal interest rate), market practices, whether contractual or default interest.

The contractual clause can be qualified as abusive clause in the sense of the Abusive

Clauses Directive if the contract is concluded in relation with urgent necessities of the

consumer. Failure to pass the test of the above criteria, may lead to the contract been

declared void.

sorts of claims. The Swedish Penal Code (Brottsbalken) chapter nine section 5 paragraph

29 Cf. article 1146 of the Civil Code – only for non banking operations - and article 28 of Decree-Law nr.

133/2009.

30 Cf. article 282 of the Civil Code (“Código Civil”) and article 226 of the Criminal Code (“Código Penal”).

31 Criminal Code of 28 June 2004, published in the Official Gazzette, Part I no, 575 of 29 June 2004.

iff/ZEW – Final Report on interest rate restrictions in the EU 45

2 states: “… A person shall also be sentenced for usury who, in connection with the

granting of credit in a business activity or other activity that is conducted habitually or

otherwise on a large scale, procures interest or other financial benefits which is

manifestly disproportionate to the counter-obligation. If the crime is gross, imprisonment

for at least six months and at most four years shall be imposed.” In private law, usury is

regulated in Contracts act (Avtalslagen 1915: 218) section 31 paragraph 2. Usury arises

when a party unjustly exploits a contract situation, for example where the other party is

in desperate straits, is in a dependent relationship or more vulnerable due to a lesser

understanding. In addition an obvious imbalance must exist between the performances

under the contract, for example, that the services rendered are not worth the amount

charged. Usury can be seen in contrast to duress and fraud, where the wrongful party

created the situation. In the usurious context, the wrongful party exploits an already

existing situation.

exorbitant interest, but it is not a term defined in legislation and there are no legal

sanctions for the behaviour provided the lender is licensed by the regulator. However, a

ceiling on the permitted level of interest that can be charged by Credit Unions in the UK

does exist, and courts have the power to intervene in consumer credit contracts where

the relationship between borrower and lender is considered to be ‘unfair’.

Usury exists as a legal concept in the criminal and/or the civil codes of twenty-one

Member States:

within their criminal codes.

civil codes.

Poland, Sweden, and Italy have incorporated usury within both their criminal and

civil codes.

As a legal concept, usury commonly refers to the exploitation of another person’s need,

inexperience or weakness, for personal gain that is disproportionate, excessive or

unjustified, although the precise position varies between states. For example, although

no specific mention is made of the term usury in Luxembourg law, both its civil and

criminal codes do contain provisions that prevent the charging of excessive interest as a

result of the weakness of the borrower. In contrast, the law in Spain prohibits usury but

does not define it. In Lithuania it is also possible that protection similar to usury law is

afforded by a general prohibition of abuse of a person’s rights contained in its civil code.

Penalties for the offence of usury within criminal codes vary. For example, Austria

provides for the imprisonment of usurers for up to three years, whilst Latvia provides for

terms of imprisonment of up to five years, community service, or a fine not exceeding

one hundred times the minimum monthly wage. In practice, however, some of the usury

legislation is not considered to be effective. For example, case law in Denmark has

indicated that the courts are reluctant to intervene and that only an extremely high rate

of interest would qualify as usury.

There are also variations in approach in respect of usury laws contained in civil codes.

Some countries provide for usurious contracts to be voided in their entirety (eg.

Hungary), while others provide only for a reduction in the interest rate payable (eg.

Luxembourg).

46 iff/ZEW – Final Report on interest rate restrictions in the EU

Aside from the incorporation of usury into legal codes, few Member States have adopted

legal definitions for other terms such as ‘sub-prime’, ‘last resort loans’, ‘fringe lending’

etc., even though these are often in common use in their countries more generally.

The exceptions to this are:

credit agreement given to persons, whose income is not sufficient to repay the

credit, but who receive the credit due to the supposed increase of the asset value

of their immovable property”.

granted for purchasing mainstream goods; and which defines moneylenders

(‘camatar’) as people offering loans with very high rates of interest compared to

the interest rates established by law.

and Spain.

In the UK, the terms sub-prime and non-status lending have been used by regulators

when conducting market investigations and setting out guidance for use by lenders in

those market segments, and it is also possible to find case law which sub-divides the

mortgage market into ‘primary lenders’, ‘secondary lenders’, and ‘tertiary or non-status’

All these forms seem to reflect one single historical objective: the restriction of interest

rates on credit as outlined in the historical review which follows below. However, as this

overview reveals, these forms have quite distinct historical roots and serve different

purposes even today.

law and civil law. The wording of Article 138(2) of the German Civil Code (BGB) is

typical. It identifies usury as the intentional exploitation of a weak person or

situation to make excessive profits. Such models can be found in Germany,

Austria, the Baltic as well as the Scandinavian states, in Greece, the Netherlands

and Slovakia.

Portugal, France, Belgium, Spain but also in Slovenia, Czech Republic, Slovakia,

Hungary, Ireland, the UK and in German case law. Instead of exploitation this

form of usury falls under civil law and relates only to the excessive level of the

interest rate charged, in comparison with the average market rate.

sense, describing conduct in which ancient rules governing the calculation of

interest calculation, and specifically anatocism, have been disregarded.

seems to be reversed. All illegal credit activities are styled usurious, including

32 Lord Justice Dyson in Broadwick Financial Services Ltd. v. Spencer [2002] 1 AER (Comm) 446.

iff/ZEW – Final Report on interest rate restrictions in the EU 47

illegal money lending, loans from unauthorised persons, and dubious lending

procedures.

West's Encyclopaedia of American Law summarises the historical development of usury

regulation as follows: “The charging of excessive interest in exchange for a monetary

loan has been considered reprehensible from the earliest times. Chinese and Hindu law

prohibited it, while the Athenians scorned persons who charged more than a moderate

rate of interest for a loan. The Romans at one time abolished the practice of charging

interest. Although they later revived it, the rates were strictly regulated.

During the Middle Ages in western Europe, the Catholic Church censured usurers, and

when they died, the Crown confiscated their lands and property. In England, until the

thirteenth century charging any interest was defined as usury. As commerce and trade

increased, however, the demand for credit grew, and usury was redefined to mean

exorbitant interest rates. In 1545 the English Parliament set a legal maximum interest

rate. Charging higher interest constituted usury…. Organized Crime has traditionally

The following chart has been constituted from literature and the answers of the experts

century.

33 See West's Encyclopedia of American Law on “Usury” http://legal-dictionary.thefreedictionary.com/usurer.

48 iff/ZEW – Final Report on interest rate restrictions in the EU

19th

Century 1900-39 1940-69 1970-89 1990's 2000-04 2005-10

Today

mid2010

Future

post-

2010

Austria -

Belgium I ceiling ch

Bulgaria -

Cyprus -

Czech Rep - I

Denmark - I

Estonia I ceiling

Finland -

France I ch ceiling ch

Germany I R I ch ceiling

Greece I ch ceiling

Hungary I R -

Ireland I ch ceiling

Italy I ch ch ceiling

Latvia -

Lithuania I R -

Luxembourg -

Malta I ch ceiling

Netherlands I ch ceiling

Poland I ch ceiling

Portugal I R I ceiling

Romania I ch ch R -

Slovakia I ceiling R

Slovenia I ch ceiling

Spain I Overdrafts

Sweden -

UK I R I Credit Unions

Source: Expert survey and various literature. Note: I=introduction, R=removal, ch=change in IRR method.

Answers in the “post-2010” column refer to those Member States where discussions are ongoing and where a

potential change could take place. No noteworthy history or current discussion on ceilings in: AT, BG, CY, FI,

LV, LU, SE.

From this we can identify the following five historical waves of IRR:

Examples are mentioned in the Bible, the Koran, and the doctrine of Buddha and

other religious figures. The charging of interest as such is criminalised. These

restrictions appear to have reflected the concerns of agrarian and pre-commercial

economies in which trade and money was seen as a threat to the agricultural

basis of society. Aristotle still thought that taking interest for lending money was

theft and should be punished. It should come as no surprise that interest on

interest (anatocism) was regarded as the worst form of unearned benefits,

especially where this was charged to people already in default.

and finally to the money (credit) society has gradually abolished these ancient

attitudes, although they were still upheld by Canonical law until the end of the

(ie. Article 248 BGB) and default (ie. Article 289 BGB), as well as in a number of

legally determined interest rates (ie. Article 246 BGB (4% p.a.)).

facilitate commerce and banking resulted in a side effect in the form of the

iff/ZEW – Final Report on interest rate restrictions in the EU 49

emergence of usurious moneylenders, as described in the works of Dostoyevsky.

While some countries reacted with a general bank monopoly on credit (ie. France,

Germany, Netherlands, Italy), other states developed supervision and admission

rules which legalised private moneylending while often subjecting it to specific

restrictions in terms of the level of interest rates (eg. the UK Moneylenders Act,

1927).

the economic depression, the Keynesian idea that consumers should save money

that industry could then borrow to support growth became a cornerstone of

economic activity. Consumer credit, on the other hand, was seen as a threat to

overall economic productivity for which savings were needed as a source of

investment in production. Credit for consumption was seen as destructive. Stricter

supervision also resulted in a number of IRR which were gradually removed when

the money supply was liberated and consumption was identified as a motor of

economic development from the late 1950’s onwards (when, for example there

was a significant and progressive relaxation of restrictions in the UK, and personal

loans for consumption purposes were introduced at this time) and particularly

following the Keynesian crisis of the 1970’s.

onwards, the explosion of consumer credit and the corresponding phenomena of

life-long debt and over-indebtedness stimulated a public debate about credit and

debt. Catholic countries in particular argued that less credit for the poor would be

better while Protestant cultures favoured easy access to what they considered an

essential service. Meanwhile, the principle of “responsible lending” and restricting

access to credit in some circumstances has been established. Rate caps are seen

as part of this.

To adapt these findings to the different legal systems we have to take into account that,

in civil law in particular, the same rules may persist but will have changed their purpose

over time, which also in turn changes the way in which they are applied. Many of the

ancient rules which tried to ban or at least restrict interest have been revitalised for

credit altogether have been rediscovered as rules to limit over-indebtedness and

poverty, especially in Romance countries. Furthermore, ancient rules in relation to

exploitation are being revitalised as a means to cap interest rates, particularly with

regard to consumer credit. As such old ideologies still persist and sometimes are upheld

as a moral background, the true functions of this legislation may sometimes be obscured

and excluded from the debate. In any event, the revitalisation of IRR within the last 30

years in Europe and more recently in America shows that not only do they have an

economic impact, but their moral and cultural significance should also be taken into

account.

Based on the questionnaire responses received from stakeholders and details from the

legal survey, Table 4 shows some of the main reasons identified for which Member States

have decided to introduce interest rate restrictions.

34 As an example for the principle of anatocism see Reifner, U (1992), pp 227-343.

50 iff/ZEW – Final Report on interest rate restrictions in the EU

Belgium Consumer protection to prevent excessive rates and to prevent

excessive volatility of variable rates in order to protect customers.

Estonia Consumer protection, the need to control over-indebtedness and mainly

to prevent SMS loan providers from collecting unreasonably high

interest rates.

France Other than the interest rate ceilings in the 19th century that were

abolished in civil transactions in 1918, France has had interest rate

ceilings from 1935. However they were modernised in 1966 in order to

prevent abusive practices due to the market power of French banks.

Ceilings were used to prevent the development of predatory lending to

households in financial difficulty and were motivated by the problem of

over-indebtedness and unfair practices of the banks that do not give all

information needed to the consumers when they grant credit. They were

also introduced to balance the relations between consumer and lender to

prevent le lender from imposing conditions on the borrower at any price.

Germany When in 1976 interest rates in instalment loans dropped significantly the

press revealed that some specialist instalment banks, which were mostly

subsidiaries of well-known commercial banks or savings banks, still sold

instalment credit at the old high prices. This led notably to a court

decision by the Stuttgart Court of Appeals which actively publicised its

decisions based on the Roman principle of the laesio enormis. When the

Supreme Court was finally seized of the question in 1981, public

pressure and support for the Stuttgart court was so high that the

Supreme Court sought a compromise rejecting the price control

approach of the Stuttgart court but introducing an unrebuttable

presumption that a bank abuses its power when selling overpriced credit

to inexperienced consumers.

Greece The Monetary Commission has issued a large number of decisions as far

as the essential banking activities, deposits and provision of credit were

concerned defining the interest rates, sometime providing a fixed

ceiling, sometimes providing for a minimum or a maximum rate.

Gradually, within the framework of the overall effort to liberate the

function of the financial market, banking interest rates are also freely

negotiable among banks and their clients either on the basis of decision

of the Bank of Greece either on the basis of the lack of any relevant

provisions. Such freedom led to abuses. This was the reason why the

Bank of Greece intervened again, introducing a restriction regarding the

default interest rate in the Act of the Governor of the Bank of Greece

2393/15.7.1996.

Ireland The interest rate ceiling that exists for moneylending in Ireland,

currently just below 190% APR, is a de facto ceiling in practice as it is

the rate at which the highest charging moneylender is licensed to trade

by the Financial Regulator (with annual applications for renewal of

licences). With regards to the ceiling for credit unions (1% p.a.) this is

largely to ensure the creation of sources of credit for the mutual benefit

of its members at a fair and reasonable rate of interest.

Italy The usury threshold has been introduced to prohibit credit where

providers can apply excessive interest rate to people with poor credit

histories and consequently to counter the crime of usury, which was

very widespread in the past.

iff/ZEW – Final Report on interest rate restrictions in the EU 51

Malta The maximum rate of interest has always been fixed by the Civil Code

since its promulgation in 1868.

Netherlands Controlling illegal financial activities, protecting consumers by

preventing the charging of excessive interest rates and decreasing risktaking

behaviour on the part of credit providers.

Poland To protect borrowers from excessive interest charges.

Portugal The main purpose of IRR in Portugal is consumer protection which arises

from two different types of reasons: i) ethical reasons; and ii) protection

of the weakest party. The recent APR usury ceilings on consumer credit

agreements (introduced following discussions concerning consumers’

rights in 2009) are related to both types of reasons and were

particularly established to avoid the charge of especially high interest on

agreements entered by consumers who are not entitled to obtain credit

in traditional banks. Likewise, the main goal of restrictions on unilateral

changes of interest rates and restrictions on rounding interest rates is to

protect the weakest party which is, in the overwhelming majority of

cases, the consumer. The main reason was the economic situation/crisis

and a concern to ensure that financial service providers did not distort

the market with absurd interest rates from some institutions at

unacceptable cost. The interest rates charged by credit institutions in

consumer credit exceeded 30% because they used predatory lending in

credit to expand the circle of debtors in order to compensate for rising

numbers of bankruptcies and competition in the credit market; this

reveals the 'reverse Robin Hood effect’ of lending to the poor to

maintain low interest rates for the wealthy. Excessive rates give rise to

further breaches, thus maintaining people perpetually hostage to

adverse credit scoring.

Slovakia Excessively high interest rates on consumer credit and the popular

perception that there are many people whose property is taken into

possession by loan sharks as a result of high credit prices, which they

can not repay.

Slovenia While rules on usurious interest rates are relatively old, the rules on

maximum APR for non-bank providers were introduced because of

usurious practices of these providers in the past. Adoption of the Euro

was also seen as a reason for revising the IRR regime.

Spain Consumer protection was considered in the past as necessary for

current account holders, who are in some cases unaware of the high

cost of occasional overdrafts (ceiling on overdraft only). The abuses of

financial institutions in a fully liberalised market, the ineffectiveness of

the supervisory bodies and the systematic violation of the rights of

consumers.

Austria The in-built economic imbalance of suppliers and consumers (for rules

on default interest only).

Cyprus The objective of the existing “usury bill” is to extend the basic penal

code to criminalize the lending of money between private individuals at

an unreasonably high interest rate (usury executed by loan sharks). In

1999, the interest rate ceiling was abolished in order to allow full

liberalization of the interest rates in Cyprus in an effort to enhance

competition in the banking sector.

Czech

Republic

To bring more clients into the system, more stable deposits, less risky

loans and cheaper resources for granting loans (for the state subsidy of

building savings only).

52 iff/ZEW – Final Report on interest rate restrictions in the EU

Latvia To protect the average consumer and to reach a balance in the financial

and capital markets between industry and consumers.

Romania The Gov. Ordinance 60/2009 established a governmental fund to

support young people to obtain a loan to buy a home. The State

guarantees the credit offered by the bank and imposes a maximum limit

on the interest rate (though access to such a fund is difficult). In respect

of civil agreements, the limitation on legal interest was due to public

concern, but no economic modelling was produced, therefore it was

deemed a populist measure.

United

Kingdom

Default/risk-based re-pricing - these restrictions were introduced mainly

in connection with customers in financial difficulty. The Government

decided that restrictions would take into account circumstances where

defaults occurred. These provisions were agreed following consultation

with the lending industry and do not seek to restrict pricing beyond

default cases.

Source: Stakeholder survey.

In almost all Member States, the reasons mentioned above are still seen by stakeholders

in those countries as valid. Comments from the minority of stakeholders tending to

disagree with the original reasons for ceilings included “too restrictive regulation has

counterproductive effects such as closure of the market, less innovative products”

(Belgium) or that the credit market is much more competitive now than it was when the

legal usury rate was introduced (France). This same respondent nevertheless went on to

say “still, the financial crisis led the French government to consider that IRR are an

effective protection against excessive exposure to risk by lenders and borrowers. Indeed,

sub-primes and near-primes do not exist in France. The interest rate of revolving credit

in France is relatively lower than in other countries, though it approaches the usury

ceiling with an average APR of around 16-17%”. Similarly, another French respondent

mentioned that the current level of competition and state of the property market did not

make the debate on IRR particularly topical with regards to mortgage credit but

confirmed that, in the area of revolving credit (especially that combined with and

accessed through a bank card), the need for ceilings was much more pronounced

because of the particularly high cost of funds to lenders.

Table 5 gives some views on whether those reasons are still valid today:

IT Provider

Association

We don't think that these reasons are still valid. In fact it has to

be underlined that the limitation on the cost of credit has been

ineffective in combating the illegal use of credit and has resulted

in an instrument that has prevented the development of the

credit market.

NL Other They are still valid; coverage will be extended to loans with

duration of less than 3 months, which have been exempt in the

past. The extension of coverage has been decided because

misconduct was apparent in relation to short-term loans.

SI Consumer

Organisation

They are very valid and call for further improvements. In the

new act on consumer credit, the above-mentioned rule will also

be valid for credit below the limits on maturity/amount of the

CCD, while membership fees" will now be part of the APR"

iff/ZEW – Final Report on interest rate restrictions in the EU 53

PL Other Positives of IRR regulations were discovered, and now it is well

established as pro-consumer regulation.

PT Other Leaving the markets unregulated means that the situation is still

very fragile.

RO Provider

Association

There is no evidence as to their effectiveness. Research shows

they are not effective; they drive illegal lending and restrict

access to regulated sources of credit. Furthermore, they

encourage loan sharks and credit into non-taxable

environments. Personal security issues also arise.

SK Provider

Association

We have never been provided with hard data from state

institutions or regulators as to the reality. We believe that there

were only tens of people suffering from a loss of property who

complained to state institutions. So there were and are no real

reasons for IRR regulations. What was really needed was the

regulation of illegal lending.

ES Consumer

Organisation

Some view ceilings as more valid than ever in the context of the

current crisis. Others consider that the maximum ceiling on

overdrafts does not vary and is not suited to the reality of credit

or to the reality of the Spanish family economy. This existing

ceiling will presumably be suppressed once the transposition of

the CCD 2008 is completed in Spain.

UK Provider

Association

The reasoning was reviewed extensively in 2009 after the credit

crisis but remained unchanged. In the current uncertain

economic climate there is no impetus to change the provisions in

place for default fees and when risk-based re-pricing can be

undertaken.

Source: Stakeholder survey.

The underlying philosophy of IRR may be reduced to five legal notions which roughly

correspond to three distinct goals:

(1) the ethical and religious concept aimed at preventing the exploitation of need and

weakness (“Do not exploit the poor because they are poor” Spr 22,22); (2) the market

concept, aimed at regulating prices where competition either does not suffice or where it

produces unwanted impacts on more vulnerable parts of society (“The poor pay more”

(Caplovitz); (3) unwanted credit products seen as detrimental for the national economy

(“Unearned bread” Eucken).

These aspects apply to all forms of IRR since the threat of circumvention of purely

interest rate-related regulations leads to a number of additional rules concerning

variability, compounding methods, annexed products, penalties and fees.

(1) Exploitation

the exploitation of a weaker party. These exist in both private and criminal

law. It presupposes ill intention, knowledge of the situation of the debtor

and its active exploitation through exorbitant interest rates. These

regulations are, however, not applied to commercial consumer credit

providers, which target high risk groups with predefined interest rates and

which thus escape the definition of “exploitation”. It is a broad concept,

however, in that it encompasses all charges or methods of calculation, and

not interest charges alone.

54 iff/ZEW – Final Report on interest rate restrictions in the EU

(2) Market regulation

restricted in some countries on the grounds of morality. This has now

developed into a principle of market evaluation. It provides objective rate

ceilings through court rulings in which, instead of individual exploitation,

lack of market strength on the part of certain groups in society leads to

pricing which operates as cartel practice. Like special regulation in other

countries, the average market rate is used as a competitive “as if price” ,

which can be compared to the contractual interest rate. A limit is set at a

the average market rate”, as is still cited in the Austrian Civil Code, has

been cited as a justification.

ministry (Italy), or a royal decree (Belgium), such ceilings no longer have

any moral connotations. They simply assume that for certain types of

consumer credit prices have to be kept within a certain acceptable limit.

(3) Product regulation

were fixed by the central banks in order to curtail credit extension to

consumers. These were all abolished by 1990 and are no longer in force.

set of common legal foundations which also provide restrictions on the freedom to

contract. As far as these common foundations are concerned, it may be expected that all

EU Member States have some form of principles in private consumer or commercial law,

as well as in administrative and penal law restricting levels of interest.

The similarity of the way in which Roman law treated interest on money (“specialis”) to

the way it treated rent for things (“res”) and labour income (“operarum”), all of which

were attributed to one unified rent contract, the locatio conductio (specialis, operarum or

rei), suggests that existing principles governing wage and rent restrictions in all Member

labour law have been kept separate. Credit law is treated as an integral part of contract

governed only by restrictions common to all prices, and especially those in relation to

sale contracts.

35 See Reifner, U., Nogler, L. (2010), pp 365 - 407; Reifner, U., Nogler, L. (2009) pp 437–455.

36 In Roman law the loan contract was still split into two separate agreements one for the “free” loan and an

additional agreement (stipulation) for the interest.

iff/ZEW – Final Report on interest rate restrictions in the EU 55

Within the general principles of contract law, based on sales law principles, only few

exemptions to the principle of the freedom to fix of prices exist. These apply to goods of

first necessity, such as water, electricity and telephone. The setting of prices is seen as

the heart of a market economy and it should come as no surprise that EU Directives

governing general consumer and contract law refrain from making general price

The notion of “unfairness” could be misunderstood as a basic principle which covers both

commercial practices and pricing. This is, however, only the case if the notion of

unfairness is used as in continental European law, where the notion of “good morals”

(gute Sitten, bonnes moeurs) or “good faith” (Treu und Glauben, bona fide) apply.

Fairness is a procedural category which does not affect the substantive elements of the

“The Unfair Commercial Practices Directive 2005/29/EC (UPCD) is not used to control

costs or charges. This is dealt with through the prohibition on Unfair Relationship

provisions of the Consumer Credit Act. We are not aware of any attempt to use the UK's

implementing law in this way, but direct control of credit costs - as the question seems to

envisage - is not what the Unfair Commercial Practices Directive set out to achieve.

Instead this is a law aimed at outlawing practices that distort normal market function,

by, for instance, misleading the consumer. UK version of these regulations have been

used to impose some control on credit card default charges but not bank charges (which

were held not to be default charges and part of the 'price'.

The Unfair Terms in Consumer contracts Directive 93/13/EEC (UCTD) is implemented in

the UK by the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs). The

UTCCRs protect consumers against unfair standard terms in contracts they make with

businesses. The FSA is one of several named bodies who can take legal action under the

UTCCRs to prevent the use of such terms. Our ability to control the cost of credit under

the UTCCRs is limited due to the exemption from the assessment for fairness of the

adequacy of the price in exchange for goods or services (Regulation 6(2)(b)). Following

the Supreme Court decision in the recent bank charges test case in the UK (OFT v Abbey

National plc and Others [2009] UKSC 6), it is clear that this exemption means that the

level of a charge cannot be assessed for fairness under the UTCCRs where that charge is

levied in exchange for goods or services; this means the UTCCRs can not generally be

used to restrain the cost of credit.

We understand that the current negotiations around the [draft] Consumer Rights

Directive could change the effect of the exemption in the UCTD (and consequently in the

UK implementing legislation), which could allow the level of a charge to be assessed for

fairness but only for charges that are not part of the essential bargain (ie. only those

charges which are not the main price). Even if this change were to happen, it is unlikely

that interest rates could be assessable for fairness, as interest rates are likely to be seen

as part of the essential bargain" of a contract, and hence not assessable for fairness.”

The question of fairness apart, prices are not totally exempted from restrictions under

contract law. The principle of good faith and good morals, which is partly referred to as a

37 See below 1.4 Effects of the CCD 2008 on IRR at p 111.

38 See for the procedural use of fairness in the Draft Common Frame of Reference III. – 1:103: Good faith and

fair dealing (1) A person has a duty to act in accordance with good faith and fair dealing in performing an

obligation, in exercising a right to performance, in pursuing or defending a remedy for non-performance, or

in exercising a right to terminate an obligation or contractual relationship.

39 See Annex V: Legal Experts for names of the country experts.

56 iff/ZEW – Final Report on interest rate restrictions in the EU

weakness which underpins the moral usury principle. “Unconscionable”, “excessive”,

contrary to “good morals” and more specifically to “usury”. With its principle of “laesio

enormis” it ultimately provides one single principle of IRR.

This principle appears to have lost its significance where individual exploitation is no

longer the problem. Instead, lenders are not reproached for systematically overpricing

products targeted at poor customers for the same reasons. Only Germany and Estonia

have used this individual principle and extended it to such systematic overpricing. Of

course individual usury remains a principle under all general contract law and it may

under extreme conditions also be applied to a specific credit contract if individual

exploitation can be alleged.

What in Germany and Lithuania has been developed from the legal doctrine of

“Individualwucher” to a legal doctrine of “Sozialwucher” can probably better be explained

by the two aspects of competition law: unfair competition and cartel law. While unfair

competition is purely procedural, cartel law is focussed on the mechanisms of price

generation in a competitive market as laid down in Articles 101 ff Lisbon Treaty. Under

Art. 101 (1) (a), “purchase or selling prices” are subject to restrictions if competition has

been excluded intentionally by consent. But the common justification for interest rate

ceilings and objective applications of IRR refer to the systematic misuse of power in

certain market segments, where vulnerable consumers pay high interest placing them at

risk of overindebtedness. This comes closer to the idea of Article 102 (ex Article 82 TEC),

according to which “any abuse by one or more undertakings of a dominant position

within the internal market or in a substantial part of it shall be prohibited as incompatible

with the internal market in so far as it may affect trade between Member States. Such

abuse may, in particular, consist in: (a) directly or indirectly imposing unfair purchase or

selling prices or other unfair trading conditions”. Similar prescriptions exists in all

national cartel law.

This principle does not, however, seem to be applied to IRR. Instead, one case was

reported from Italy in which anti-trust law was invoked to void high interest rates for

overdraft credit. Unlike typical antitrust cases, the lack of competition cannot be

attributed to a mono- or oligopolistic offer structure, nor does it systematically affect

general competition in these markets. Consumer credit markets are highly competitive.

The existence of uniformly high prices close to the ceiling in revolving small credit, as

borrowers’ behaviour. It is the borrower who accepts disadvantageous prices or

additional costly products because he or she does not seem to be able to make proper

decisions in either -refraining from borrowing or in the choice of a more appropriate

product. These problems are typical for consumer law but not for cartel law.

With the increase of interventions into the pricing of consumer credit for low-income

consumers, a general principle is about to develop in which the ideas of “basic services”

and of “price cartels” merge into something that could be called a compensatory pricing

mechanism for fair competition.

The question has now been decided by the European Court of Justice (EJC Dec. of June 3,

2010 C-484/08) in the case Caja de Ahorros y Monte de Piedad de Madrid v Asociación

de Usuarios de Servicios Bancarios (Ausbanc) decided first by the Supreme Court of

Spain on the question whether the Spanish law on general contractual conditions can

40 Reifner, U. (1999) pp 269 ff.

41 See for example Financial Services Authority (2009).

42 See IGF/IGAS (2009).

iff/ZEW – Final Report on interest rate restrictions in the EU 57

declare prices as unfair in the sense of Directive 93/13/EEC and with regard to Articles 2

EC, 3(1)(g) EC and 4(1) EC.

Advocate General Trstenjak in his opinion on this case delivered on 29 October 2009

(62008C0484) provides the following information on the Spanish law:

“8. Article 10a(1) of General Law 26/1994 of 19 July 1984 for the protection of

consumers and users (Ley 26/1994 general para la defensa de consumidores y

usuarios), which was added by Law 7/1998 of 13 April 1998 on general

contractual conditions, provides as follows in relation to the definition of unfair

terms: ‘All those terms not individually negotiated which, contrary to the

requirement of good faith, cause a significant imbalance in the parties’ rights and

obligations arising under the contract, to the detriment of the consumer, shall be

regarded as unfair terms. In any event, the terms listed in the additional provision

of this Law shall be regarded as unfair.”

In his decision of June 3, 2010 the ECJ concluded in a way which allows the inclusion of

IRR into the fairness principle of the EU-Directives on a national level:

“1. Articles 4(2) and 8 of Council Directive 93/13/EEC of 5 April 1993 on unfair

terms in consumer contracts must be interpreted as not precluding national

legislation, such as that at issue in the main proceedings, which authorises a

judicial review as to the unfairness of contractual terms which relate to the

definition of the main subject matter of the contract or to the adequacy of the

price and remuneration, on the one hand, as against the services or goods to be

supplied in exchange, on the other hand, even in the case where those terms are

drafted in plain, intelligible language.

2. Articles 2 EC, 3(1)(g) EC and 4(1) EC do not preclude an interpretation of

Articles 4(2) and 8 of Directive 93/13 according to which Member States may

adopt national legislation which authorises a judicial review as to the unfairness of

contractual terms which relate to the definition of the main subject matter of the

contract or to the adequacy of the price and remuneration, on the one hand, as

against the services or goods to be supplied in exchange, on the other hand, even

in the case where those terms are drafted in plain, intelligible language.”

The Spanish example is not isolated. In relation to the Unfair Commercial Practices

Directive 2005/29/EC (UPCD), some experts identified indirect interest rate restrictions,

including unfair changes of interest rates (UK), unethical business practices (Hungary),

illegally high interest rates on default and in provisions preventing legal proceedings

against a debtor when he has reached more than the accrual of arrears of three

instalments.

IRR are regulated under private or administrative law, have penal or administrative

sanctions, lead to reduced claims on interest and are enforced either by special

authorities, the attorney general or the civil courts. Our chapter on existing legal

sanctions shows the greatest diversity, and this aspect should not be under-estimated. In

in fact part of the law. The implementation of a legal rule therefore depends on the way

sanctions are structured and whether they have the ability to threaten the addressee

effectively. It also requires accessible institutions sufficiently equipped to prosecute

43 Geiger, T. (1964), p 44.

58 iff/ZEW – Final Report on interest rate restrictions in the EU

circumventions of the law. Because in private law consumers have to mobilise these

sanctions, the effectiveness of the law also depends on access to the existing courts, the

incentives to sue, and the expectation they have that the court will act in a reasonable

time at reasonable transaction cost.

Moreover, administrative rules often lack effectiveness due to poor staffing of the various

institutions. This is why sanctions that give consumers an incentive to sue their creditors

or oppose their enforcement activities in court can sometimes be much more effective. If

for example in Germany and Belgium a lender has higher interest rates than legally

permitted he loses all the interest, while in the Netherlands only the element of the

interest which is above the ceiling is void. But additional penal or administrative

sanctions will again change the picture of effectiveness.

Finally, only countries with high levels of banking supervision, which are subject to

ongoing duties to provide information on the loans they provide and have a legal

monopoly over consumer credit provision, are in a position to produce valid data that

could enable sound interpretation of economic effects. Even when reliable data exists,

there will nevertheless be a need for assumptions to be made. This was evidently the

difficulties that exist in this respect.

Another important factor is the applicability of the IRR. If, as we have seen for Malta, the

rules have many complex exceptions, consumers will probably not be able to apply the

law to their individual case. This may also be true for ceilings that are fixed on a case-bycase

basis by the court system as in Germany and Hungary, and where the outcome of

the case is not predictable. Administratively fixed and adjusted interest rate ceilings such

as those that exist in France may also be easier to publicise than ceilings that are fixed

by law as a proportion of market rates, such as those that still currently exist in relation

to overdraft credit in Spain.

The legal experts either underlined that IRR should be made effective or indicated that

IRR had been “effectively” incorporated into the body of law. From their answers we

therefore cannot derive any conclusion on how effective these regulations are in general,

since this information is normally dealt with in economic or social science, while lawyers

understand effectiveness mostly as enforceability.

Perhaps some insight can be derived from the opinions of all those interviewed experts,

consumer organisations, providers and regulators. They were asked to assess the

effectiveness of the existing IRR on a scale between 1 (not effective at all) and 5 (very

effective) for their country.

One might have assumed that since these opinions are purely subjective, regulators

responsible for effectiveness and providers, who take a more critical view of IRR would

tend to overstate effectiveness while consumer organisations would have more doubts.

Instead the average ranking consumer organisations gave to the effectiveness of the

relevant IRR was even slightly higher than that of regulators and government officials.

Only in the Netherlands, Austria, Finland and Poland did answers differ by more than two

2 grades, while for example in Cyprus, Italy and France the different respondents

provided identical replies.

44 See: Policis (2004b)

45 Eg. Helfgott, J.B. (2008), pp 13 ff.

iff/ZEW – Final Report on interest rate restrictions in the EU 59

The following ranking should be taken with caution. Only half of the respondents gave

this rough evaluation and they are not representative by country. It gives, however, at

least an indication that countries with strict IRR are seen as having the most effective

regulations.

France, Belgium, Portugal 4.5

Cyprus, Denmark, Finland, Italy,

Netherlands

4.0

Poland, Austria, Bulgaria, Czech

Rep, Estonia, Latvia, Lithuania,

Slovakia, Slovenia, Sweden,

Romania

3.0

Spain, Germany, Greece, Hungary,

Luxembourg, Malta, UK

2.1

Ireland 1.0

Source: Stakeholder and Expert survey.

The propositions with regard to IRR give some hints as to existing cultural and economic

differences as well as to existing problems with IRR. We have refrained from sorting

them according to the different groups.

The scope of application has been recently extended to small loans with a term of less

than three months and the interest rate ceiling has been lowered recently in the

Netherlands as a response to the ineffectiveness of the previous one. Similarly a Latvian,

a Lithuanian and a French respondent argued that the system should be changed from

product-specific ceilings (revolving, instalment credit, etc.) to a ceiling related only to the

amount of credit.

French, Czech and German respondents criticised the fact that the price of the loan does

not include all possible costs. The interest rate ceiling should have a clear relationship to

the market price.

Better supervision was wanted in Hungary and Belgium. Supervision should include

regular testing. A stricter licensing system instead of interest rate ceilings could

overcome illegal lending in Italy. In France, it was suggested that a register of credit

agreements would be better than the existing rate ceilings.

Some respondents asked for a focus on factors which are not sufficiently taken into

account. In Italy, the charges made by debt collection agencies, in Ireland and Lithuania

mortgage loans and variable interest mortgage rates were mentioned. It was felt that

traders should be more closely monitored.

Some Italian and French respondents asked for a complete removal of IRR, others, for

example in Hungary, assumed that their markets are either not prepared for them or find

them unnecessary. Respondents in the Czech Republic, Ireland, Finland and Lithuania

would favour their introduction.

60 iff/ZEW – Final Report on interest rate restrictions in the EU

In conclusion, the effectiveness of IRR regulation depends largely on the existing national

culture of law enforcement and the degree of bank regulation which leaves more or less

space to high-priced credit. In general small loans, revolving credit and variable interest

rates are seen as a problem. The choices for effectiveness lie between stricter

supervision and private law approaches. Harmonised forms of IRR would probably have

to take questions of enforcement and sanctioning into account in order to achieve

comparable results with similar rules in all countries.

It also makes clear that the mere existence of IRR rules cannot be related to the

questions of access to credit without taking into account their effectiveness. For a deeper

insight, an in-depth study of two countries with opposing systems could help to clarify

what the most effective forms of regulation could be.

iff/ZEW – Final Report on interest rate restrictions in the EU 61

An ordinary credit contract often has two lives: the contractual state where the parties

have set prices and terms, and the post-contractual state where a credit is in default

after cancellation. The applicable interest rates between both periods may differ: the

contractual interest rate and the default rate. While the first is at the core of the principle

of freedom of contract, for the second, most legal orders either provide a legal regime or

at least regulate these rates since the assumption that they have been freely convened is

weaker even where this has been done in advance.

A further clarification is also necessary. The CCD 2008 distinguishes between the APRC

for price disclosure and the borrowing rate for interest calculation. This distinction is due

to the fact that the APRC does not allow for a comprehensive calculation of interest (it is

on the other hand the borrowing rate which allows for a much easier form of interest

relevant factors like different compounding periods or the inclusion of upfront fees and

charges. Both forms are therefore in use. Though they do not lead to much differences in

non-bank and short-term credit, it should nevertheless be kept in mind that historical

interest rate ceilings, especially absolute interest rate ceilings or IRR designed for nonbanks

where computers have been or are still not available, use the borrowing rate. This

is particularly the case where the “legal interest rate”, which is no IRR but a rate which is

applied in such cases where no interest rate has been set by the contracting parties, is

still regulated in the form of a borrowing rate. This is also true for all regulated default

interest rates (for which the CCD 2008 also fails to prescribe the form of an APRC). On

the other hand, modern IRR in the form of a relative ceiling for contractual interest rates

in loans extended by professional money lenders, use the form of the APRC which is less

prone to circumvention. In the following text we have tried to clarify this by using the

distinctions of the CCD 2008.

As shown in Table 7, in thirteen member states there are no ceilings in place that limit

However, the remaining fourteen states do have some form of ceiling for this purpose.

Of these, three Member States use absolute ceilings (fixed nominal rate caps) and eleven

Member States have relative ceilings (ie. the ceilings are calculated in relation to a

variable such as the average market rate or base rate), although Estonia and Germany,

have only de facto ceilings.

There are four different institutions which can be involved, either alone or in combination

with another institution, in fixing the maximum interest rates: the Central Bank,

Government Administration, Legislator or Courts. While in Italy, Portugal and Malta the

legislator fixes rate ceilings, in France, Belgium, Estonia and Poland (Lombard rate) it is

the central banks that fulfil this task. Likewise, in Greece and Spain, the central bank is

the core institution in so far as it fixes the legal interest rate upon which the IRR is

based. This is in contrast to Bulgaria or Ireland where the government and a special

46 In the UK, there is a limit on contractual interest rates that can be charged by Credit Unions, but these

constitute less than 3 per Cent of the total consumer credit market, and there are no ceilings in place in

respect of other types of lenders, so for the purposes of the classification, we have treated the UK as having

no ceilings.

62 iff/ZEW – Final Report on interest rate restrictions in the EU

administration is respectively in charge. Finally, in Germany, the courts fix such general

rate ceilings while in Hungary and the Czech Republic courts may fix individual limits.

Ceilings are set for a variety of periods. Poland and Germany set ceilings each month

whilst over a third of Member States do not determine the period at all and do not review

their ceilings at regular frequencies. Ireland reviews its ceiling on moneylender rates

annually, but Belgian ceilings have only undergone four revisions since 1992. However,

quarterly adjustments are the most common.

Differences also exist in respect of the number of decimal places that the APR ceiling

contains (for example, in Belgium this ceiling is rounded up to the nearest half a percent

whereas in Slovakia, two decimal places are shown).

Interest rate ceilings are, of course, only one form of IRR. In the remainder of this

report, we refer to interest rate ceilings irrespective of whether or not the ceilings are

absolute or relative. Table 8 on the following page thus sets out further details of interest

rate ceiling levels in operation across the EU as at March 2010 and shows that for

example high priced doorstep credit extended in the UK would face barriers to enter the

market in those countries where IRR exist (see Section 2.5.3 discussing hypotheses

H2a).

Greece*; Ireland;

Malta*

Belgium*;France; Germany;

Estonia*; Italy; Netherlands;

Poland; Portugal; Slovakia;

Slovenia; Spain*

Austria; Bulgaria; Cyprus;

Czech Rep; Denmark;

Finland; Hungary; Latvia;

Lithuania; Luxembourg;

Romania; Sweden; UK*

Source: Expert survey. *Notes: This table does not report on other IRR forms (such as default interest ceilings,

anatocism or specific limits affecting specific forms of credit such as state housing loans etc.). BE: Calculation

method for the ceiling specifies the adjustment mechanism based on a reference index (Euribor), but the initial

interest rate ceilings that served as a base were set by the government when the ceilings were first introduced

in 1992; GR: Ceiling is for non-banks only; MT: Subject to exceptions (enacted by Legal Notice 142 of 2009);

ES: Only concerns overdraft in current account; EE: Ceiling rates are published but no strict limits exist. We

have included Estonia in this category because we consider the ceiling as a defacto ceiling as it is based on a

similar court based system as that used in Germany); UK: Credit unions do face a ceiling but in view of their

very small share of lending, we have classified the UK as having no IRR.

iff/ZEW – Final Report on interest rate restrictions in the EU 63

of credit (12 categories). From 10% (Revolving Credit

Account with no credit card for more than €1250) to 19.5%

(for instalment loan agreements less than €1250). Credit

term is not a discriminatory factor anymore.

central bank (21.3%*3 =63.9%). Reset Monthly.

21.63%

8.12%-

16.6%

All Maximum APR equals a relative 133% of average APR

computed by the Central Bank every 3 months depending

5.72% (variable rate credit for home purchase) 21.63 %

(Consumption credit for < 1524 €). Separate ceiling

category for mortgage credit.

16.4%

4.09%-

8.2%

All Maximum APR equals 200% of average APR computed by

from 8.18% (new business/housing loans with an initial

rate fixation of >5 years and <10 years) to 16.4% (new

business/consumer credit with an initial rate fixation of >5

years). A further ceiling condition alongside double average

is a maximum of 12 percentage points over average rates.

6.75%

On non bank

credit only

Greece abandoned the system of setting limits by

administrative provisions in 1989. Hence, bank interest

rates are free. But their non-bank credit rates are limited to

absolute rate of 6.75% per annum.

187%

Moneylenders

only

Moneylenders are assigned maximum APR when getting

their annual license. Credit Unions cannot charge more than

1% per month (12.68% APR).

27.20%

4.38%-

16.97%

All Maximum APR equals a relative 150% of average APR

computed by Ministry of Economy and Finance every 3

4.38% (variable rate mortgage) to 27.20% (other family

loans). There are 23 different ceilings.

8%

Many

exemptions

All type of credits. Exemptions exist for banks.

Credit <€200

(to be included)

Maximum APR ceiling is equal to 12%pts + the legal

interest rate (non contractual interest in case of default. As

of march 2010: 3%). Legal IR reset every 6 months.

Bank Lombard Rate (5%, monthly reset). No distinction

made by category or size of credit.

31.6%

5.03%-

23.75

Maximum APR equals to 133% of the average APR

computed every 3 months by Central Bank depending on

renewable energies credit) to 31.6% (Credit cards, credit

lines, bank current accounts and overdraft).

79.8%

Maximum APR equals 200% of the average APR for the

exceed the amount equal to 400% of the weighted average

APR for all types of consumer credits.

change), social

housing loans

The APR cannot exceed 2.5 times the legal interest rate.

For social housing loans interest is set by reference to

indexes based on the legal interest rate.

453%

6.6%-

226%

On non bank

credit only

Maximum APR equals 200% of average APR computed by

month 200€).

Source: Expert Survey and national websites. Notes: *For greater detail on the usury ceilings in place, please

refer to the respective country section in the following chapter. **The usury ceilings apply to all consumer

credits (mortgage and non-mortgage) unless specified.

64 iff/ZEW – Final Report on interest rate restrictions in the EU

All three Member States with absolute ceilings limit the application of these to specific

types of credit provider or place significant limitations on their scope. In Greece, the

ceilings do not apply to banks, and Malta also provides banks with significant

exemptions, whilst Ireland limits the interest rates that can be charged by moneylenders

and credit unions only.

There is a maximum contractual borrowing rate in Greece for non-bank credit only. The

ceiling is currently 6.75% per annum. Bank credit is exempted in its entirety. The

maximum contractual interest rate is regulated by administrative law and the

government sets the interest rate, more specifically by Acts of the Council of Ministers on

the basis of proposals from the Monetary Committee of the Bank of Greece.

Generally speaking there are no interest rate caps on loans in Ireland. However, there is

a maximum borrowing rate and this controls the level of interest rate that Credit Unions

can charge (1% per month of the outstanding balance, so 12.68% APR). This figure is

Regulator is able to specify maximum interest rates that can be charged by

moneylenders in Ireland as part of the licensing process. Moneylender licenses are

reviewed annually and the current maximum level of interest that the regulator allows

institutions and who are mostly involved in car finance and hire purchase agreements are

only prescribed for the purposes of the consumer credit legislation to charge an APR of

up to 23%.

We will however, consider Ireland as a country without IRR for the purposes of our

analytical work as there are no restrictions on interest rate pricing effectively in Ireland

at present. Though there is no focus on restrictions on interest rate pricing at the current

time, there are nevertheless certain prescribed scenarios (eg. where a fixed interest rate

is set there are provisions that the fixed rate must be correctly applied etc.. with

breakage applicable on early settlement of the agreement by the customer).

Furthermore, under the Consumer Protection Code for Licensed Moneylenders of January

2009, prior to entering the agreement, the moneylender must

“prominently indicate the high-cost nature of the loan on all loan documentation where the

APR is 23% or higher. This disclosure must take the following form: ‘Warning: This is a highcost

loan’.”

The maximum borrowing rate in Malta is set by law and has always been fixed by the

Civil Code since its promulgation in 1868. According to Article 1852(1) of the Civil Code,

the rate of interest on loans cannot exceed the interest rate of 8% per annum. Between

1868 and 1974 it was 6 % per annum. This rule however is subject to exemptions which

47 Section 38 of the Credit Union Act 1997.

48 See following link for the procedure: www.financialregulator.ie/industry-sectors/moneylenders/

Pages/authorisation.aspx. Moneylenders apply for renewal of their licences annually from the

Financial Regulator and this can be denied in case of infringement. Up until the Consumer Credit Act 1995,

Moneylenders were licensed under the Moneylenders Acts 1900 and 1933. They were not allowed to charge

more than 39% interest per annum (although this ceiling was often exceeded in practice).

iff/ZEW – Final Report on interest rate restrictions in the EU 65

that the misuse of such exemptions by “artificial, fictitious or simulated” “contract,

arrangement, scheme, transaction” will void such arrangements. The exemptions can be

summarised as follows:

that no party to the financial transaction may be a natural person;

or the Civil Aviation Act;

compounding of interests are in accordance with international market conditions

and the payer of interest is not a natural person;

undertakings, pledges, privileges, hypothecs, mortgages and any other collateral

arrangements, whether by way of title transfer or otherwise) which is governed by

Maltese law and which is entered for the purpose of, or in connection with, any

transaction specified in paragraph (c);

Although eleven Member States have relative interest rate ceilings which besides Spain

are all provided in the form of an APRC there are considerable differences between them

in respect of the way that these operate. For example, some implement different ceilings

according to the amount of credit that is being extended, some impose different ceilings

according to credit type, and some distinguish levels of ceilings on the basis of the

duration of the credit agreement (see Table 7 on p63 for the overview). Portugal stands

out with its new 2009 ceilings as it regulates them based on the purpose of the credit (ie.

with separate categories of ceilings for education loans or auto loans). Four of the eleven

Member States (Netherlands, Spain, Poland, and Estonia) have one unique ceiling level.

It should also be noted that in Slovenia ceilings only apply to non-banks as it was judged

that the banks face sufficient competition to not warrant such regulation. However, in all

of the other Member States there is no distinction made between bank and non bank

credit as regards the scope of ceilings (although sanctions may differ as for example in

Portugal where the rules of procedure and amounts of fines will be different depending

on the creditor’s nature ie. financial institution or not). Whereas all systems based on an

absolute ceiling calculate their ceiling from an exogenous source, of the eleven that have

a relative ceiling that can fluctuate over time, only Belgium, Poland, and the Netherlands

do not rely on prevailing market rates alone.

German court based jurisprudence limits lenders' flexibility by requiring them to charge

no more than double the average market rate. It also imposes a second condition limiting

the ceiling to a fixed pre-determined maximum margin set at 12 percentage points over

49 The Interest Rate (Exemption) Regulations 2009 enacted by Legal Notice 142 of 2009 issued in exercise of

the powers conferred on the Minister of Justice by article 1855A of the Civil Code further defines the special

law: According to Article 3(1) thereof.

66 iff/ZEW – Final Report on interest rate restrictions in the EU

the average interest rate. This means that when the average market rates move above

12.1% APR, the ceiling level applied will no longer be twice this (ie. 24.2%) but instead

be limited by the second condition to 24.1%. To illustrate the potential significance that

the extra moderating effect of the second condition contains, imagine average market

rates reach as high as 30%: this would lead to an authorised ceiling level set at 42%

instead of 60% if only the first rule existed.

The average interest rates are related to real market developments. The banks had to

report their interest rates and their spread to the German Central Bank, which then

calculated the average. These average market rates were published by the German

central bank (formerly referred to as the “Schwerpunkt Zinssatz”) for overdrafts and

instalment credits separately. In June/July 2003, there was a change because the

“Schwerpunktzinssatz” were replaced by the average interest rates reported by the

European Central Bank. Therefore, the ceilings lowered in July 2003 by approximately 7

percent. Interest rates exceeding the limits cause contracts to be held as usurious and

declared void by the court.

There are no fixed interest rate ceilings regulated in the law, however the latest court

practice has shown that the court will intervene if the level of interest payments in

comparison to the principal is unreasonably high. In a similar approach to the German

system this has been found to be the case where the interest charged is three times

more than the market average.

The Estonian central bank publishes the average APRs for all consumer loans granted by

credit institutions to individuals on their website every month. There is no official

publication of the ceilings but the current average is available on the central bank

compared to the German system it is as yet uncertain as to how relevant and how much

of a credible deterrent this ceiling is in Estonia.

France has a long history of using interest rate ceilings. Other than the interest rate

ceilings in the 19th century that were abolished in civil transactions in 1918, the interest

rate ceilings introduced in 1935 were modernised in 1966 and its system is once again

undergoing change. It currently specifies a relative maximum APR of 133% of the

providing separate ceilings for revolving and instalment credit and for small and large

sum credits. This led to a system of twelve separate ceilings, including six ceilings

applicable to consumer credit. The rates as of the end of the first quarter of 2010 are

50 The fixed rate ceiling (concerning the annual percentage rate of charge) is published on the website of Bank

of Estonia. These values are publicly available on a historical basis at

http://www.eestipank.ee/dynamic/itp/itp_report.jsp?reference=152&className=EPSTAT&lang=en.

51 As opposed to the average interest rate statistics calculated by the ECB, the French central bank does not

assign a weighting based on the size of the loan when calculating its average for the market segments.

52 See: http://www.banque-france.fr/fr/statistiques/taux/usure.htm.

iff/ZEW – Final Report on interest rate restrictions in the EU 67

average APR)

L312-36 of the Consumer Code)

Fixed rate loans 4.72% 6.29%

Variable rate loans 4.29% 5.72%

Bridge loans 4.69% 6.25%

Loans of less than or equal to € 1524 (1) (2) 16.22% 21.63%

Overdrafts, loans and permanent financing of

purchases or instalment sales over €1,524

mortgage and loan Life (1) (2)

14.59% 19.45%

Personal loans and other loans of a greater

amount to 1524 €

6.64% 8.85%

Loans for purchases or instalment sales 7.15% 9.53%

Loans with an original maturity exceeding 2

years, variable rate (4)

3.99% 5.32%

Loans with a maturity over 2 years, fixed rate 4.31% 5.75%

Overdrafts (3) 10.00% 13.33%

Other loans with original maturity up to 2yrs 4.30% 5.73%

industrial, commercial, craft, agricultural or professional non-commercial.

Overdrafts (3) 10.00% 13.33%

Source: Bank of France. Notes: (1) Expressed as an APR as stipulated by the Consumer code; (2) Only the

amount of credit actually used is considered when assessing the APR of an overdraft or a permanent loan; (3)

Rates do not include the commissions on the highest overdraft amount reached during the month - the average

rate of such fees actually collected in January 2010 amounted to 0.05%; (4) Average APRs of corporate loans

with an original maturity greater than two years, variable rate, and an amount of less than €152,449 (rate is

used by the tax authorities for calculating the maximum deductible interest on linked current accounts and was

3.99% for this category of loans in Q1 2010). Also not that the French ceilings do not apply to hire purchase

agreements (unlike the Belgian regime).

53 The concern with usury ceilings (as they are referred to in France) mainly concerns consumers. This is due

to Article 32 of Law No. 2003-721 of 1 August 2003 for the economic initiative, which eliminated the crime

of usury for lending to commercial, industrial or financial entities. An analysis is available on

http://www.mediateur-republique.fr/fic_bdd/pdf_fr_fichier/1237289023_Modification_du_taux_d_usure.pdf.

68 iff/ZEW – Final Report on interest rate restrictions in the EU

The reform law on usury ceilings in May 2010 brought the following changes:

Article 1 (amended Articles L. 313-3 of the Consumer Code) on usury rates states that

the maximum interest rates (‘les taux de l'usure’) will no longer be classified by credit

type. Before the changes, specific usury ceilings were allocated to specific loan categories

(cash/treasury loans, overdrafts, term loans, hire purchase financing, lifetime mortgages

(equity release scheme), personal loans and mortgages). These usury ceilings are now

defined only according to the amounts borrowed (with the exception of mortgage loans

(home loans), loans to local authorities and business loans). A new decree will specify

the new usury ceilings. Transitional measures will be introduced (over a maximum

transition period of 8 consecutive quarters) by the Government to promote the

implementation of the reform. In addition, to measure the impact of this reform

(potentially only the first on usury ceilings) the Government has established a committee

chaired by the Governor of the Bank of France in charge of 1) monitoring and analysing

the effects of the changes made to the method of determining the rates (‘mode de

fixation’) applicable to the level and the evolution in interest rates on consumer credit; 2)

examining the methods and ways of financing (modalités de financement) available and

being used by credit institutions doing the lending; and 3) analysing the level,

developments and components of provider lending margins. The Committee, made up of

the Governor of the Bank of France, an elected deputy, a senator and the Director

General of the French Treasury, will meet at the initiative of its president at least once

per quarter for two years. It will produce an annual report, which will be submitted to

Parliament and Government.

For consumer credit there are provisions on the maximum APR. The maximum APR is

determined by Royal Decree (art. 20, § 1 WCK - Consumer Credit Act). But the APR is

only the representation of the total cost of credit. It is nowhere used to calculate these

cost for which other parameters especially the borrowing rate is used. In so far the

government can determine the maximum total costs of credit, it can also set the

maximum borrowing rate and, in the occurring case, the maximum recurring costs and

the maximum non-recurring costs vis-à-vis a revolving credit account (art. 20, §2 WCK).

Consumer credits with a credit term of more than 5 years can be sold with variable

interest rates. In this case additional rules apply the change of the APR according to

article 9 WHK (Mortgage Credit Act) stipulating the rules on variable rate mortgage loans

- art. 30, §2 WCK. For revolving credit accounts there is a specific rule providing for an

absolute maximum interest rate. Art. 4, §4 of the Royal Decree of 4 August 1992 on the

costs, percentages, the duration and the terms of repayment of the consumer credit

stipulates that “if the revolving credit account foresees various borrowing rates

depending on the drawdowns or on the instalments, none of these borrowing rates may

be higher than the maximum APR determined in function of the amount of credit”.

Overdrafts on bank accounts, which fall outside the scope of the WCK, are regulated by

the law of 14 May 2001. This law applies to every bank account opened by a consumer at

a bank or at the Postal Office and on which a debt balance occurs to which the WCK does

not apply (art. 2 of the aforementioned law). The annual borrowing rate is capped to the

maximum APR applicable pursuant to the WCK on open-ended revolving credit accounts

where the total amount of credit does not exceed EUR 1,250. The costs linked to the

credit cards do not need to be included in the total cost of the credit (art. 3).

The maximum APR for consumer credit in Belgium is based on a hybrid of mechanisms.

While initially set as absolute rate ceilings, through a rather sophisticated ceiling setting

mechanism, the ceilings are now relative ceilings since the setting of the ceiling level is

dependent on changes to determined reference rates. The reference indices, which

determine changes made to the ceiling, and the calculation method for mortgage loans

iff/ZEW – Final Report on interest rate restrictions in the EU 69

are set by the King (by Royal Decree) after consulting the Banking, Finance and

Insurance Commission (“CBFA”) (art. 9, §1, 3° WHK). Using monthly computed reference

indices for variable rate mortgage loans on the basis of a constant-maturity yield curve,

published by the Securities Regulation Fund (“Rentenfonds”), if significant changes have

been registered, the maximum APR is then adjusted by an administrative procedure (by

Royal Decree). Article 21 WCK further detailed by the Royal Decree of 4 August 1992 the

relevant costs, percentages, duration and terms of repayment are taken into account.

The ceiling depends on the credit type and the credit amount. For all consumer credit

types 12 different maximum APR’s are determined. Instalment loans, deferred payments

in sales contracts, financial leasing, revolving credit card accounts and revolving credit

accounts without cards are distinguished. A simplification in 2006 abolished a further

distinction according to the duration of the credit.

The maximum APR is calculated on the basis of a reference rate. For all consumer credit

agreements, with the exception of revolving credit accounts, the reference rate is based

upon treasury certificates for 12 months (for credit amounts up to €1,250), linear bonds

on 2 years (for credit amounts between €1,250 and €5,000) and linear bonds on 3 years

(for credit amounts above €5,000). The reference index for revolving credit accounts is

linked to the monthly average of the 3 month Euribor. The reference rates are calculated

by Belgostat. The applicable maximum APR corresponds to the respective rounded

reference rates.

Recently the maximum APR, applicable to all consumer credits, was adjusted for the 4th

time since 1992. The maximum APR is published in the Official Journal. It is analysed

every 6 months, to see if reference rates (Euribor term rates) have changed beyond 75

basis points in which case reference indexes and then APR ceilings will be adjusted

accordingly, with a rounding to the nearest half a percentage point for the ceiling.

For consumer credit Table 10 shows the APR limits currently in place:

> €1,250 up

to €5,000

Index B 15.0% 13.0% 10.0% 11.0%

> €5,000 Index C 12.5% 12.0% 10.0% 10.5%

Source: Official Journal. Note: Changes in the indices, when they are greater than 0.75 points, determine the

adjustment mechanism of these rates. *These indices do not apply for revolving credit, the changes to the

ceilings of which are based on the changes in the 3-month Euribor.

An opinion from the consumer council on changes to the fixing of maximum APRC was

were to: 1) simplify the existing IRR system by reducing the number of different ceilings

(which stood at 28 before the change) and bringing the product categories in line with

prevalence in the market; 2) introduce an automatic system for adapting the ceilings

going forward (moving from the previous dependency on the King to make a decree to a

method of objective adjustments based on evolution of a reference index from the

54 Conseil de la Consommation, Belgique (2006).

70 iff/ZEW – Final Report on interest rate restrictions in the EU

financial markets); and 3) to reach a reasonable balanced solution acceptable to all

parties involved (consumer associations and providers).

Finally, the maximum borrowing rate for overdrafts on bank accounts, which are

regulated by the law of 14 May 2001 on overdrafts on bank accounts, is currently 11%.

The maximum APR’s are also published in the Official Journal. For variable rate mortgage

loans, the reference indices are published monthly in the Belgian Official Journal. The

current reference indices are also publicly available on the websites of the Securities

Regulation Fund and of the Banking, Finance and Insurance Commission.

Slovakia introduced interest rate legislation only very recently (in its Consumer Credit Act

2008). Government Regulation No. 238/2008 Coll. sets the maximum APR to serve for

the purpose of a usury ceiling). It is currently 79.08% (until 15th of May 2010). The

Ministry of Finance of the Slovak Republic in cooperation with Národná banka Slovenska

set these reference rates. The source data to inform this decision is provided by creditors

who are obliged by art. 7a sec. 1 of the Act on to submit data on their interest rates to

the Ministry and to the national central bank.

According to art. 1 sec. 1 of Regulation No. 238/2008 Coll., the maximum interest rate

allowed is twice the average value of APR for the type of consumer credit being lent, and

at the same time it cannot exceed four times the value of the weighted average APR cost

and average interest rates for all types of consumer credits valid at the date of

concluding the contract (Table 11).

The fixed rate ceiling is adjusted quarterly and the level is published on the webpage of

Ministry of Finance of the Slovak Republic. The values of interest rate APR ceilings are

also has rules concerning default interest regulation, which are set out later in this report

(Chapter 1.2.2.3).

However, there is currently a discussion taking place and a new Proposed Act on

consumer credit. All the interest rate caps related legislation could be repealed by this

with alternatives suggested by increasing price transparency and improving the financial

literacy of consumers. The interest rate ceilings do not apply to mortgage credit

contracts. These are provided by mortgage banks according to general terms and

conditions stipulated in art. 75 sec. 1 letter e) of the Banking Act. General terms and

conditions of the mortgage credit and municipal loans may include some IRR.

Type of consumer credit Contractual maturity

Value 3 to 6

months

6 to 12

months

1 to 5

years

5 to 10

years

Over 10

years

Credit cards - the average

interest rate (not APR)

39.00 x x x x x

Consumer loans with

security or lease of up to

€1,500 inclusively

x 76.00 45.24 48.58 35.06 21.38

55 See http://www.finance.gov.sk/Default.aspx?CatID=6865.

iff/ZEW – Final Report on interest rate restrictions in the EU 71

Consumer loans with

security or lease ranging

from €1,500 to €6,500

inclusively

x 68.60 44.54 37.60 28.56 12.86

Consumer loans with

security or lease of more

than €6,500

x 47.74 34.50 22.78 20.48 11.52

Other consumer loans (not

included above) amounting

up to €1,500 inclusively

x 76.00 76.00 76.00 48.28 0.00

Other consumer loans (not

included above) ranging

from €1,500 to €6,500

inclusively

x 51.58 49.08 41.44 37.18 32.86

Other consumer loans (not

included above) of more

than €6,500

x 24.22 20.50 27.54 30.50 13.32

Four times the weighted

average of the average

values of the APRC and the

average interest rate for

all types of consumer

loans

76.00 x x x x x

Source: Ministry of Finance of the Slovak Republic. Note: The ceilings are those of the first quarter 2010 and

are valid for credit agreements concluded from 16 May 2010 to 15 August 2010. The maximum ceiling level in

% is set at an accuracy of two decimal places.

Usury is a criminal offence in Italy and it provides a detailed system of usury ceilings

based on 50% above calculations of the average charges in the market (APR or ‘TEGM’)

for different types of credit and different credit amounts. While Italy, along with all other

countries with relative IRR with exception of Poland, use the APRC of the CCD 2008, a

big debate is taking place concerning the treatment of insurance costs which this

Directive did not include if concluded “voluntarily”.

The ceilings are effective for every kind of transaction or financial/credit operation, and

for every kind of subject. Civil/contractual remedies, which include voiding the contract

and/or substituting new interest rates into the contract can also be combined with

criminal sanctions. The different types of credit, amounts, and ceilings put in place by

72 iff/ZEW – Final Report on interest rate restrictions in the EU

Savings and bank account (secured

or unsecured)

12.85% + 50% 9.59% + 50%

Anticipations and corporate loans 10.26%+50% 5.43%+50%

Consumer Credit (instalment loans) 12.53%+50%

Revolving credit (credit card) 16,97%+50% 12.79%+50%

Special purpose credit (finalizzato) 14.18%+50% 12.17%+50%

Mortgage loans 5.36%+50% (if fixed rate loans) 2.92%+50%

(if variable rate loans)

Salary and pension loans 15.53%+50% 12.46%+50%

All other family loans, finalized or

not finalized including pawnbroking

18.13%+50%

All other family loans if provided by

non-banks companies

14.41%+50%

Auto leasing (and aeronautic

leasing)

Ceiling for credit under

€25,000:

14.31%+50%

Ceiling for credit over

€25,000:

12.67%+50%

Equipment leasing 10.34%+50% (under

€25,000)

6.56%+50% (over

€25,000)

Factoring Ceiling for credits

under €50,000:

6.14%+50%

Ceiling for credits over

€50,000: 4.05%+50%

Overrunning on bank account Ceiling for credit under

€1,500: 19.96%+50%

Ceiling for credit above

€1,500: 13.12%+50%

Real estate leasing 4.39%+50%

Source: Bank of Italy.

The types of credit are decided every year by Banca d’Italia, which collects data from all

the credit providers. The rate ceilings are adjusted every three months by the Ministry of

Economy and Finance, who approves the rates by decree and are published in the Italian

Official Journal (Gazzetta Ufficiale). Furthermore, Italy has now explicitly harmonised the

calculation of the APRC in usury with the APRC in price disclosure according to CCD 2008.

A 2009 Decree of the Ministry of Economy and Finance involved changes to the statistics

iff/ZEW – Final Report on interest rate restrictions in the EU 73

behind the interest rate series on which the ceilings are based clarifying the classification

release of Banca d'Italia the new regime is especially important with regard to the

calculation of the contractual interest rate. The comprehensive review of costs to be

included in the calculation of the TEGM (APRC) and revision in the calculation of the

interest rate series was part of the efforts by the authorities and legislators to harmonise

the basis of calculating the APRC. Alongside changes in the statutory calculation and

reporting scheme, the law has led to the inclusion of certain costs previously excluded

from the Italian interest rate series used to determine the ceilings, such as the

introduction of overrunning fees (commissione di massimo scoperto, CMS), of all kind of

Italy collaborated with the Ministry of Economy and Finance in order for the new series of

rates (and thus average rates) to be reported by providers starting in the third quarter of

2009 with changes to the ceilings based on the new methodology starting in 1 January

2010. The new APR and interest rate ceilings for Italy are now more comparable with the

APR rates stipulated by the CCD 2008.

business transactions and one for transactions with consumers. The consumer rate is

currently 3% per year and this is the maximum that can be charged on default. An

administrative ceiling is then set which governs the maximum APR that can be charged

on contractual agreements as x% in addition to the legal rate. This is currently 12%, so

the ceiling is 12% plus 3% = 15% for consumer credit agreements.

The level of the ceiling is set by the Minister of Justice and is published in the offical

Staats courant (an official bulletin of the State).

This 12% extra interest was lowered in 2006 from 17% to make it harder to charge high

interest rates. However, some types of credit are not regulated, including credits that last

for less than 3 months. Over the past 2 years, there has been a growth in payday loans

(in Dutch better known as “flash credits”) which are not regulated, and which have APRs

However, when implementing the EU CCD 2008, these forms of credit will become

regulated and the interest rate caps will apply. It is expected that this move will lead to

the demise of payday lending in the Netherlands.

Other forms of credit are also not subject to the general interest rate ceiling, including

business loans, mortgages, pawn broking, stick financing, and government loans.

However, there is a code-of-conduct for Dutch mortgage suppliers, which allows

contractual rates to be used to calculate loan-to-income ratios for mortgages where

these are set to last for at least 10 years. If a mortgage is set to last for less than 10

56 Decree with regard to "transitional provisions with the application of Article of Law on March 7 No .2 108"

(published in G.U. of 29 July 2009), see: http://www.bancaditalia.it/vigilanza/contrasto_usura/ doc_cons/

istruzioni_teg/ istr_usura_doc_consultazione.pdf.

57 “Verranno, tra l’altro, considerati ai fini della definizione del tasso soglia le polizze assicurative, i compensi

per i mediatori, nonché tutte le forme di remunerazione diverse dal tasso di interesse, come le commissioni

di massimo scoperto e quelle per la messa a disposizione dei fondi nei limiti e alle condizioni consentiti dal

legislatore. Per i compensi di mediazione è stata introdotta anche un’apposita rilevazione al fine di fornire un

parametro specifico per valutare l’usurarietà di una componente di costo di rilievo e variabilità considerevoli,

ma sinora priva di limiti definiti”, from August 2009 press release at

http://www.bancaditalia.it/media/comsta/2009/cs_usura_120809.pdf.

58 A June 2009 report (in Dutch) looked at the issue of flash credits and the usury ceiling, available here:

http://www.responsible-credit.net/media.php?t=media&f=file&id=3872.

74 iff/ZEW – Final Report on interest rate restrictions in the EU

years then the contractual rate is not used for this purpose but the lender must instead

calculate the loan to income ratio using a set minimum interest rate. This is intended to

prevent excessive mortgages from being offered based on low contractual initial rates.

Rate caps in Poland are subject to regulation in the Civil Code and in the Consumer

Credit Act. The maximum interest rate in Poland is a relative rate ceiling for all types of

credit, calculated by reference to the central Lombard rate multiplied by four. The current

for limiting interest rates was introduced in 2005 and, in contrast to the other Member

State ceilings, the ceiling is set on the borrowing rate, and thus just on the interest rate,

not the rate representing the total cost of the credit (ie. the APR). In line with this

distinction, in addition, fees and additional charges related to the concluding of the credit

contract are separately regulated as well, and cannot exceed 5% of the amount of the

credit.

The rule applies to all credit types, depending only on central bank decisions (Monetary

Policy Council) and the rates are reviewed monthly. Decisions concerning changes are

published in the statements of the Central Bank’s Monetary Policy Committee.

The recent transposition into the Portuguese law of the CCD 2008 (June 2009) has

established an interest rate cap on credit operations based on the APR. Maximum interest

rates are only applicable to credit granted to consumers, are set quarterly by the

Portuguese Central Bank and are based on the average of the interest rates applied by

credit institutions in the preceding quarter. If these caps are exceeded, the credit is

considered to be usurious and gives rise to criminal liability.

Decree-Law nr. 133/2009 establishes usury ceilings for: Instalment credit; Financial

leasing; Hire purchase financing; Point-of-sale financing (the vendors/service providers

act on behalf of credit institutions); All categories of revolving credit with the exception of

overdraft facilities where the credit has to be repaid within one month.

The rate ceilings also vary in accordance with the purpose of the credit and are currently

set at the levels shown in the table below:

Education, health and renewable energy 6.7%

Leasing 7.3%

Other personal credits 18.9%

Auto leasing or hire purchase financing (new vehicles) 7.7%

59 A history of the Lomabrd rate can be found under the following link:

http://www.nbp.pl/home.aspx?f=/dzienne/stopy_archiwum.htm.

iff/ZEW – Final Report on interest rate restrictions in the EU 75

Auto leasing or hire purchase financing (used vehicles) 9.9%

Secured auto loans (new vehicles) 11.1%

Secured auto loans (used vehicles) 15.6%

Credit cards, credit lines, overdraft facility, overrunning 31.6%

Source: Bank of Portugal. Note: These APR usury ceilings shown apply to credit and financial institutions, other

civil and commercial usury ceilings also exist but are not shown.

The ceilings are determined and disclosed by Bank of Portugal, and are set quarterly and

published in the Official Bulletin of Bank of Portugal. However, the ceilings apply only in

respect of credit amounts of between 200 EUR and 75,000 EUR. It is nevertheless

important to point out that the subtypes of credit defined by the Bank of Portugal in

order to fix APR usury ceilings raise a problem of concepts. In fact, there is no definition

or list of “Education/Health” products or services except for tax purposes. Although, in

what renewable energies concern, and also for tax purposes, there is a list (Regulation

nr. 303/2010, from 8 of June 2010), treatment is complicated by the fact that electric

vehicles will fall under the “auto” loan category. The APR usury ceiling that was

introduced in the beginning of 2010 was the result of discussions concerning consumers’

rights that took place during the early months of 2009 and which led, in June 2009, to

the approval of Decree-Law nr. 133/2009 which was in some opinions, seen as hasty and

a little careless. By transposing the CCD 2008 and introducing a new APR usury ceiling

applicable to financial institutions, there is now some ambiguity since there are presently

three usury ceilings in Portugal: (i) civil interest rates usury ceiling; (ii) commercial

interest rates usury ceiling and (iii) APR usury ceiling. Only the APR usury ceiling is

applicable to credit provided by financial institutions, however, it is not entirely clear if

other creditors have to submit consumer contracts to more than one ceiling.

There are several interest rate related restrictions present in Slovenian legislation. Some

of them are general and refer to all types of credit contracts (contained in the Code of

Obligations, although some of these provisions are further limited to parties to noncommercial

contracts), while others protect only consumers (contained in Consumer

Protection Act and Consumer Credit Act).

Caps of penalty and contractual interest rates are set in the Code of Obligations (and

breach of this provision can lead to contracts being voided). For consumer credits the

interest rate ceiling (expressed as an APRC) is set at twice the average APRC charged by

banks and savings banks (Article 18a) and is published in Official Journal by the Bank of

Slovenia twice a year. The central bank calculates the level of APRs of credit institutions

in accordance with Article 17 of the Consumer Credit Act and the ceiling is legally set by

the Parliament.

Average effective rates are calculated for, and therefore ceilings set for, consumer credits

for the following maturities and amounts: 2 months, 4 months, 6 months, 12 months, 36

months, 10 years; and 200, 500, 1000, 2000, 4000, 20000 Euros.

76 iff/ZEW – Final Report on interest rate restrictions in the EU

2 200 226.5% 453.0%

4 500 44.3% 88.6%

6 1,000 21.3% 42.6%

12 2,000 12.4% 24.8%

36 4,000 9.6% 19.2%

129 20,000 6.6% 13.2%

Source: Bank of Slovenia. Note: The maximum rate is set at 200% of average consumer credit APRs charged

by banks and savings banks (as of 1. 12. 2009, published by Bank of Slovenia on 31. 12. 2009, OJ 113/2009).

Credits are put in the lowest category possible.

There is also a ceiling on default charges, which is set by statute as 50% above the sum

are also specific IRR for housing loans. The national housing saving scheme loan interest

rates are fixed at 75% of the market yield from Republic of Slovenia bonds of maturities

above 9 and a half years. The interest rate changes when the yield differs from base

value by more than 10%. These differences are inspected twice a year (15th May and

15th November), while interest rates are accommodated once a year if in two

consecutive tests yield differs from basis by more than 10%.

Finally, Slovenia also provides a cap on interest rates relating to ecological credits, which

are currently set at 3.20% for maturities of less than five years and at 3.90% for

maturities from five to ten years.

concept courts have sometimes overruled certain loan agreements, if they find that they

breach the law on usury. The Spanish Supreme Court has declared that in the

60 Default interest rate ceilings as opposed to contractual rate ceilings are reported on for all the EU Member

States in a subsequent section.

61 Law of Usury of 23rd July 1908 “Le «Ley Azcárate».

62 26th March 1993 (RJ 1993, 2241).

63 Supreme Court 30th December 1987 ( RJ 1987, 9713), 24th April 1991 (with individual vote) ( RJ 1991,

3025); 8th November 1991 ( RJ 1991, 8148) and 29th September 1992 ( RJ 1992, 7330) among others.

For a contract between a bank and a consumer see Supreme Court 26th March 1993.

64 I.e Audiencia Provincial of Girona, Sección 2ª, (auto) 15th December 2009, Judge Rapporteur: José Isidro

Rey.

iff/ZEW – Final Report on interest rate restrictions in the EU 77

In general there is only the exemption for overdraft credit. Art 19 Consumer Credit Law

1995, provides that current account overdrafts cannot charge more than 2.5 times the

level of the legal interest rate. The legal interest rate is set each year in the Budget Law

and is currently 4%. ACT 7/1995, of March 23, on Consumer Credit (Article 19.4) holds:

The interest applicable to overdraft facilities on consumers' current accounts shall not

exceed, in terms of APR, 2.5 times the legal interest on money. Since Spain refers to the

ancient legal interest rate of the civil codes which is disclosed in the form of a borrowing

rate and since anyhow CCD 1987 did not require an APRC for overdraft credit this is the

only known relative direct IRR which uses the borrowing rate.

There are some special sector specific rules. For instance some caps to applicable interest

rates are found in relation with social housing acquisition (grant aided home purchase of

homes). These form part of special programmes “Plan de Vivienda” which consists in a

subsidised way of home acquisition. All autonomous communities have such

programmes. Spain has a sophisticated system to regulate these interest rates on

APRC and are set by reference to indexes, of with the “interés legal” is the index

applicable to default.

The ceilings for protected housing are fixed by the National Minister on Housing, and /or

by the competent regional ministry. As those caps are related to the “legal interest rate”

the Budget Law which sets each year the applicable “legal interest” or “statutory rate”

which currently is set at 4% until 31st December 2010 has to be taken into account. In

long term contracts, the adjustment is done annually.

To fix these rates the Mortgage Loan Order (following order of May 5, 1994 on

transparency of mortgage loans), requires the official setting of the following indexes or

reference rates by the Bank of Spain and published monthly in the "Official Gazette". Its

definition and way of calculation can be found in Annex VIII of the order.

purchase, granted by banks.

purchase, granted by savings banks.

purchase granted by other credit institutions.

If the rate effectively imposed is higher that the rate described in the contract, there

would be sanctions on the lender.

65 Law 2/1994, of 30th March on subrogation and modification of mortgage loans; Law 41/2007, that modifies

Law 2/1981, of 25th March, for the regulation of mortgage market and other laws of the Mortgage and

Financial Systems, for the regulation of reverse mortgages and dependency insurance and which establishes

tax regulations; Law 2/2009, of 31st March that regulates mortgage loan contracts and intermediary

services with consumers.

78 iff/ZEW – Final Report on interest rate restrictions in the EU

Because of the possible complexity involved in attempting to control the pricing decisions

of the credit markets, it is important to understand the various mechanisms and

modalities open to regulators which determine how the interest rate restrictions operate

and at what level the ceiling or ceilings will be set.

A system based on an exogenous reference point is often suggested for a unique ceiling

whereby an appropriate reference should be an index or rate representing the cost of

resources for lending institutions. This can be done by having the system based on the

addition of a flat predetermined margin in percentage points on top of a reference rate

which could either be to the base rate of say the European Central bank (eg. as in the

Netherlands) or to an interbank refinancing rate (eg. as in Belgium). The advantages of

such a system are its simplicity and the level playing field it provides in terms of

competition between different credit types. Proponents of such a system argue that it

would solve the potential problem of the ratchet effect over time that is inherent in

endogenous systems (phenomenon whereby the calculation of the usury ceiling based on

average observable rates in time period t leads to further automatic increase in the

ceiling in t+1 when providers seek to provide credit at prices as close to the ceiling as

possible). A possible variation of such a regime would be to target specific credits with an

extra exogenously referenced condition.

The majority of Member Sates (see below) have a system that sets the interest rate

ceilings relative to those rates observed in the credit markets in practice. Generally the

preferred method of setting the ceiling is using a multiplication coefficient applied to the

average rates in the market (or more often to sub credit markets), however there is also

the possibility to apply a fixed interest rate margin to the average market rates as

opposed to a multiple. One advantage of specifying a margin fixing the number of basis

points above which a credit is considered usurious is that it limits the proportionality

effects and thus allows providers of small-sized credit to have a more favourable

treatment of their proportionately higher fixed costs vis-à-vis those extending larger

loans.

A possible variation combining both systems of ceiling fixation is a model that

superimposes a second ceiling condition on top of another eg. credit markets or specific

credit categories would see a ceiling set on both average market rates and an

exogenously determined limit. A host of other possible structures could exist. The French

government report investigating possible revisions of the existing system in France also

conducted simulations on a system of authorised coefficient ranges which would then

allow the regulator to decide which categories get allocated which multiplication

coefficient from within the range (with the advantage of allowing some steering in usury

ceilings across categories).

The majority of Member States with interest rate ceilings have chosen to determine their

ceilings based on a multiplication coefficient. This coefficient varies from country to

country. For those that apply the coefficient to average credit market prices, the

following coefficients are being used: Portugal and France (x1.33); Italy (x1.5);

Germany, Slovakia and Slovenia (x2); and Estonia (x3).

Poland also uses a calculation method based on a multiplication coefficient (of x4) but

this is applied to an endogenous reference rate, namely a central bank rate as opposed

iff/ZEW – Final Report on interest rate restrictions in the EU 79

to rates contracted on the credit markets themselves. Likewise, Spain’s ceiling applied to

overdraft credit (which is being reviewed) uses a coefficient of the Spanish legal rate

(x2.5).

Two countries with relative interest rate ceilings which do not have a system using a

multiplication coefficient are Belgium and the Netherlands. In Belgium where the ceilings

are calculated by category of credit based on their nature and amount, a complex system

using initial absolute ceilings determined at one point in time in the past then uses

diverse elements of reference for each category of credit. These references are

exogenous to the credit market itself and are derived from fluctuations in specified

financial market indexes of either the 3-Month Euribor, or the 1 year or 2 year

government bond rates. In the Netherlands, the usury ceiling corresponds to the legal

interest rate (set on the basis of the ECB base rate) plus a fixed margin irrespective of

the amount of the credit. This margin currently stands at 12 percentage points (reduced

from a previous 17%). The German mechanism of setting the ceiling also has a fixed

nominal margin of 12 percentage points and this serves as a second control to the

relative floating cap by limiting the dispersion of the ceiling from the mean. This is an

extra constraint for times of high market rates which impose the average market rates

plus 12 pp instead of the usual double the average of market rates. Slovakia has also

implemented a double criterion for limiting the ceilings in order to restrain an excessive

spread between the interest rates observed for the different credit categories, namely by

having one unique overarching ceiling for all credit types together and set at four times

the average for all credits (x4).

Under Chapter 1.1.4 we have dealt with the general questions of effectiveness with

regard to any regulation of IRR in the law. In this part we will more specifically focus on

those rules which directly affect the contractual interest rate. While it shares the

importance of effective sanctions with all other legal rules, its specific problem lies in the

fact that an interest rate is only a parameter which should “reflect” the true cost of credit

and its burden onto the consumer.

Three types of sanction exist: civil, criminal and administrative.

obligations under the contract.

Some Member States, for example Belgium, France and Italy specifically include all three

66 For example Poland and Portugal (nr 3 art 28 Decree Law nr 133/2009).

67 Belgium: Restriction to cash price or borrowed amount (art. 87, 1 WCK): criminal sanctions (art. 101,§, 4

WCK): administrative sanctions (art. 106,§ 1, art.107§ 1). France Arts. L 313- 4, (reduction of interest to

legal limit, application of excessive payments to interest due and then to capital remaining due: contract not

a nullity) L313-5 (fine up to €45,000 and or/imprisonment for two years with publication of the decision and

temporary or permanent closure of the business). Slovakia: contract is voidable by consumer if interest rate

ceilings contravened; Slovak Trade Inspection may impose a fine up to 500,000 SKK: Poland, excessive

80 iff/ZEW – Final Report on interest rate restrictions in the EU

In civil cases in some Member States the invalidity of the contract must be alleged by the

borrower (eg. Slovakia), but in others it is a matter of ordre public.

A distinction might also be drawn between those Member States that prohibit usury in

the form of judicial interpretation of a general clause. These include Germany, the Czech

Republic, Estonia, Hungary, and Slovenia. In these Member States the consequences of a

finding that an interest rate is “contra bonos mores” may be that the court will declare

the contract null and void. In Germany the courts will permit the borrower to keep the

loan but be absolved from repaying, thus acting as a deterrent to predatory lending more

Consumer credit institutions may be subject to a variety of public regulators in Europe.

These include:

institutions licensed by the bank.

(UK, Germany, Netherlands, Estonia).

(Slovenia).

Countries may have a number of agencies. The Ministry of Economic Affairs in Belgium

authorises consumer credit institutions but mortgage companies are controlled by the

Banking, Finance and Insurance Commission. Financial institutions in Ireland are licensed

by the Central Bank, money lenders by the Financial Regulator. In France the new

Autorité de contrôle prudential (2010) will co-operate with the DGCCRF (Directorate

Générale de la concurrence, de la consommation, et de la repression des Fraude) in

policing consumer financial services.

credit market (and this will increase after implementation of the CCD 2008) with the

possibility for the regulator in some countries to stipulate minimum capital requirements

(France), a viable business model (Germany, UK) and to scrutinise the contracts of a

company. The regulator may also have power to suspend the licence of the provider, as

occurred recently in Italy where the Bank of Italy suspended Amex’s licence to issue new

and unregulated non-banks in Poland.

The UK also has a special illegal lending project dedicated to prosecuting loan sharks in

England’s very poor neighbourhoods. A study of illegal lending in the United Kingdom

estimates its prevalence to be about 165,000 or 0.44 per cent of the population,

although the methodology used in this study has been called into question recently. The

interest is void and maximal rate replaces the contract rate. Italy: consequences of illegal rate is reduction

to legal maximum (art 1419 cod.civ-1815 c.c.), possibility of pecuniary sanctions and possible suspension or

revocation of authorization for supervised institutions (see eg. recent case of Amex suspension of licence).

68 MS Germany see jurisprudence under art § 138.2; Czech Republic (contract void) court rulings 15

December, 2004, no 21 Cdo 1484/2004 and Nr 22 Cdo 1993/2001 from 08. April 2003 No.22 Cdo

1993/2001.

69 See: http://www.financialexpress.com/news/american-express-credit-cards-stopped/602332/.

iff/ZEW – Final Report on interest rate restrictions in the EU 81

average amount lent in the UK illegal lending market is estimated to be very low, at only

Ombudsmen are not generally viewed as an alternative means of addressing problems

with high cost credit in those countries with ceilings (eg. Portugal, France, Italy,

Belgium). Although the use of financial ombudsmen seems to be growing throughout the

EU (eg. Slovakia, Slovenia, Spain) there was either not enough experience of these to

comment on whether or not they had an impact on price, or where comments were

forthcoming these indicated that only a modest impact could be discerned. The UK

appears to have the largest Financial Ombudsman service.

This power exists in both countries with ceilings (eg. Belgium) and those countries

without ceilings (eg. Denmark, UK). The conditions for doing this generally require a

(Germany, Estonia), that the terms are “flagrantly unfair” (Denmark), or unconscionable

(Sweden). Slovakia provides for the possibility of court intervention if the amount of

interest “substantially exceeds the normal interest rate” and the Supreme Court of the

Czech Republic struck down an agreement where the interest was more than four times

the usual interest (Supreme Court of Czech Republic sp. Zn. 21 cdo 1484/2004). A

similar decision can be found in Spain (eg. for a mortgage agreement of 20% when

similar agreements are at 5%: Audiencia Provincial de Madrid, Seccion 12a, Sentencia de

14 July 2009, rec. 634/2007).

Much however depends on the circumstances. An interest rate that is twice or three

times over the average rate charged by financial institutions might not be held to be

unfair. Courts look to all the circumstances of the case and decide based on the fairness

of the term and the market situation of the parties (eg. if the person lacks experience, or

is vulnerable: Sweden, UK, Slovenia).

In Germany it appears that the courts apply an almost irrefutable presumption that one

party is in a weak position where an interest rate is double the average. In the UK

ss140A-D of the Consumer Credit Act 1974 (added in 2006), confer very broad powers

on the courts to reopen and vary terms where there is an “unfair credit relationship”.

However, early case law suggests that very high interest rates will be upheld if the rates

are not different from those in the particular market (see Robert Shaw and Nine Regions

(Log Book Loans) Ltd, where a log book loan of £3000 used to pay for a consumer

vacation at APR of 119.6% was upheld because this was similar to charges made by

pawnbrokers and others operating in the high cost sub markets).

High interest rates might also be challenged under legislation implementing the Unfair

Terms in Consumer Contracts Directives in those Member States that have not included

the limitation in the Directive on review of price clauses.

When the loan – or the interest - is declared void in Spain according to the 1908 law on

usury, the debtor is required to return the principal, but is not required to pay any

interest. This regime is an exception to Art 1303 Spanish Civil Code which, upon default,

imposes full restitution with interests. This interpretation of the usury law as an

exception to the Civil code was upheld by a Decision of the Supreme Court on January

9th 1933, and later Court Cases.

70 See: Policis (2006b) pp 57, 76.

82 iff/ZEW – Final Report on interest rate restrictions in the EU

According to the opinion of the legal experts as well as the responses given by various

stakeholders, thirteen Member States do not have something that could be called a direct

and targeted intervention into the price of credit apart from what has been described by

reference to the general principle of good morals and fairness. These principles as

described above in Section 1.1.3 forbid extortionate pricing in contracts in general if it

amounts to the exploitation of the weakness of the contractual partner. While all Member

States have a potential for IRR only 14 presently use this potential. Whether IRR will be

introduced in the other Member States in the near future depends on political discussions

that are presently taking place, and which are especially strong in the UK. While cultural

and political reasons may play an important role in these discussions, much of it is due to

the state of development of consumer credit in these countries which is discussed under

Chapter 2.3.

Apart from Latvia, Lithuania, and Cyprus, all Member States are reported to have some

form of doctrines which may be used to limit high cost credit in contracts. Romania,

Denmark and the UK use concepts of fairness or unfairness and Austria uses the concept

of unconscionability. Other either discuss its introduction or have a history of regulation

and deregulation in this area.

Romania, following a decree law of 5 May 1938 set the level of the interest rate caps at

4% above the National Bank discount rate (with the possibility of different ceilings set for

different periods and regions). By the decree of 9 August 1954 this was then repealed

and the concept of a “legal interest rate”, which was set at 6%, was introduced in its

place. This law was further amended in 1998 and 2000 when the Romanian Government

decided that the legal interest rate would not be applied to the interest due on any

financial obligations charged or paid by the National Bank of Romania, other banks, the

Office of Savings and consignments, credit cooperative organizations and the Ministry of

Finance. This decision to exclude banks and credit lenders from a legal ceiling has been

criticised on the basis that excessively expensive credits may be used to exploit debtors

and might affect the re-launching of the national economy.

In Denmark, which has historically not been in favour of using IRR as a form of

regulation, there has been debate since early 2009 when the opposition declared that it

would introduce a bill concerning a rate cap corresponding to the central bank base rate

plus 15 percentage points. The bill has not yet been introduced. The discussion has been

reopened in February 2010 (not the least due to the so-called SMS-loans with APR’s at

more than 2,000 percent) with the Danish Consumer Council having expressed a wish for

IRR.

In the UK there have been a number of attempts by consumer advocates to introduce

rate ceilings, including the submission of amendments for this purpose during the

passage of the recent Financial Services Act 2010. However, these were not passed and

Government instead commissioned the Office of Fair Trading to review the case for

ceilings as part of a wider review of high cost credit markets, whose final report was

In Cyprus an intense debate took place in 2010 on a legal cap on bank interest rates to

rates and usury is not qualified as a criminal offence. The Central Bank of Cyprus in one

of its statements had pointed out that usurious interest rates cannot be regulated and

71 See: Office of Fair Trading (OFT) (2010).

72 Eg. see following media link (in Greek): http://www.mykypros.eu/cgibin/hweb?-A=60149&-V=ikypros&w.

iff/ZEW – Final Report on interest rate restrictions in the EU 83

sources (legislation, jurisprudence) are available on the issue however information

Though reality shows that interest rates in credit markets in Cyprus are not regulated

(following the previous regime that had a 9% limit which has been abolished pursuant to

the liberalization of interest rates), it is nevertheless legally interesting, since the

phenomenon, which is considered to be a criminal offence in other jurisdictions (usury) is

not currently sanctioned. This however may change pending discussions on a bill that has

currently been drafted to criminalise the lending of money at an unreasonably high

interest rate. The transposition of the CCD is expected to be transposed into national Law

in October 2010. Furthermore, this liberalization of consumer credit was seen by our

expert as not having led to a generalised social problem and is not considered to be a

social issue of high concern. One reason put forward for that is the client due diligence,

as applied by the credit institutions, before the credit decision and the self-binding

conduct of credit institutions during the life of the consumer credit contract appear to be

working rather well.

An important tool for keeping credit contracts alive and for enabling consumers to

resume normal payment of instalments, instead of an acceleration of payments and the

resulting over-indebtedness, are regulations which cap default rate to take away the

incentive of additional earnings in default. This discourages the creditor also from

cancellation of the contract. The same applies for any late payments where default

interest is due. The basic dogmatic assumptions about default interest vary according to

the different legal systems. In the majority of Member States, default interest rates

result either directly or indirectly from negotiations between the contracting parties. In

some Member States, the contracting parties may negotiate freely on default interest

rates and set them in the contract. Some Member States limit the right to define the

default interest rate unilaterally but link its level to the agreed contractual rate plus a

margin fixed by law. Other Member States consider default interest as part of a claim for

damages and therefore limit it by market parameters and not by contractual parameters.

In some Member States, both approaches are used. A legal default rate is applicable

unless the parties agree on a higher default interest rate.

A majority of Member States provide statutory default rules with regard to default

interest rates. These interest rates apply when the contracting parties do not agree upon

the interest to be paid upon default and when the law provides for the right of the

contractor to claim (additional) default interest. Statutory default interest rates and

default interest rate ceilings should not be confused. Member States such as Latvia and

Lithuania make use of statutory default interest rates but do not have explicit default

interest rate ceilings. Conversely, in Bulgaria, the Czech Republic, Estonia, Germany,

73 News report produced by Cyprus’ major electronic news site (Sigma) and accompanied by a statement of

the Director of the Legal Department of the House of Representatives Mr. Jonas Nicolaou and other

parliamentarians explaining that liberalization of interest and non penalization of usury are related (in

Greek). See: http://www.sigmalive.com/news/local/170121.

74 Announcements in September 2009 of the works on transposing the EU Directive show that the expected

Directive is considered to ensure common banking practice, which shows that consumer credit interest rates

are decided and agreed upon on a case- by case basis available here in Greek:

http://www.philenews.com/main/75,1,29,0,17335-.aspx.

84 iff/ZEW – Final Report on interest rate restrictions in the EU

Malta and Slovakia the statutory default interest also provides the default interest rate

ceiling. In Austria and Hungary, default interest rate ceilings and statutory default

interest rates exist, but are calculated differently.

No statutory default interest rate Ireland, Romania, UK

Fixed statutory default interest rate Austria, Belgium, Latvia, Lithuania,

Luxembourg, Malta, Spain

Statutory default interest rate based on a

reference rate

Bulgaria, Czech Rep, Estonia, Finland,

Germany, Hungary, Italy, Portugal,

Slovakia, Slovenia, Sweden

Source: Expert Survey.

Statutory default interest rates based on a reference rate are the most common among

Member States. Eight Member States use an objective reference rate, while in Portugal

alone the statutory interest rate is based on the contractual interest rate.

interest rate based on the contractual interest rate and the rate is determined by

the addition of 2 percentage points to the contractual interest rate (cf. Decree-

Law no. 344/78.) The parties may stipulate higher rates if they do not exceed the

usury limits as defined under the applicable legal provisions. The relevance of

statutory civil default interest rates is therefore limited.

lending and to other forms of consumer credit. Both are based on an objective

reference index. Under section 288, 497 German Civil Code, the statutory default

interest rate for consumer credit other than mortgage loans is five percentage

points above the base rate as published by the German central bank. The Base

Rate is based on the main refinancing operation rate as published by the ECB. For

consumer mortgage loans the margin applied is 2.5 percentage points.

Seven Member States provide for fixed statutory interest rates.

interest rate of four percent per year. This interest rate is only applicable to

consumer credit. With regard to commercial contracts, the statutory default

interest rate is stipulated by the Austrian commercial law code, section 352, as

eight percentage points above the base rate published by the Austrian Central

Bank.

consumer debtor, must pay default interest at the legal rate of five percent per

annum unless any other rate of interest has been established by law or under the

contract.

Ireland, the UK and Romania do not make use of statutory default interest rates. Though

the UK does control default interest through eg. the penalty doctrine, possibly under

licensing, 140A-D, Unfair Terms in Consumer Contracts Regulations 1999, and FSA

conduct of business rules. Though Romania has got provisions on legal interest rates,

these provisions shall not be applied to the legal interest due for any financial obligations

iff/ZEW – Final Report on interest rate restrictions in the EU 85

charged or paid by the National Bank of Romania, other banks, the Office of Savings and

consignments, credit cooperative organizations and the Ministry of Finance, as regulated

under art. 10 of Ordinance no. 9 of 21 January 2000 of the Romanian Government on the

legal interests due for financial obligations, about the legal interest rate.

Default interest may be capped either by explicit default interest rate ceilings or by the

ceilings provided by general usury legislation. In only a few Member States, there are

neither explicit nor general ceilings applicable to default interest rates. The majority of

Member States uses explicit default interest rate ceilings. Explicit default interest rate

ceilings provide expressly for the upper limit of default interest rates the lender may

apply. Explicit default interest rate ceilings may be relative or fixed. Relative default

interest rate ceilings are based either on an objective reference rate or on the agreed

contractual interest rate. In Member States were there is no explicit default interest rate

ceiling, or in Member States where the explicit default interest rate ceiling depends on

the agreed contractual interest rate, there may be an (additional) limit set by general

usury legislation. In cases where the default interest rate is fixed or based on an

objective market reference rate, there is no room for an additional usury ceiling, because

the explicit ceilings supersede general usury legislation or jurisprudence.

No explicit default interest rate ceilings

(usury supervision might be applicable)

Ireland, Latvia, Lithuania, Romania,

Sweden

Explicit default interest rate ceiling based

on contractual interest rate (usury

supervision might be applicable)

Austria, Belgium, Denmark, France,

Finland, Greece, Hungary, UK

Explicit default interest rate ceiling based

on an objective reference rate

Bulgaria, Czech Rep, Denmark, Estonia,

Finland, Germany, Italy, Luxembourg,

Poland, Portugal, Slovakia, Spain

(overdrafts only), Slovenia

Fixed explicit default interest rate ceiling Malta

Source: Expert Survey.

In Ireland, Latvia, Lithuania, Romania and Sweden there are no explicit default interest

rate ceilings. Apart from Ireland, general usury legislation of individual Member States

applies in this context. Subject to this legislation, the contractors may negotiate the level

of interest due in the event of late payment.

contract but the courts have the right to reduce unreasonable or obviously excessive

default interest rates under art 6.73 of the Lithuanian civil code. Until 2008, it was

practice for the courts typically to reduce default interest rates to 0.02% per day.

Currently, there is a trend to move away from this practice and increase the level to

which default rates are reduced

86 iff/ZEW – Final Report on interest rate restrictions in the EU

Even if legislation or the courts do not provide for explicit default interest rate ceilings,

there are often stipulations as to the information required on default interest and the

legal consequences of failure to provide such information. If the default interest rate is

not agreed in the contract, a statutory interest rate is often applied:

precisely stipulated in the document or transaction. If this has not been done, and in

cases where the law requires the calculation of interest set by law, the interest rate

must be fixed at six per cent per year However in the event of delayed payment in

relation to the purchase of goods or the provision of services where the consumer

interest rate is not set by law, the interest rate is seven percentage interest points

above the basic interest rate set by Central Bank of Latvia on January 1 and July 1.

Sometimes the creditor loses the right to charge default interest at all if there is no

provision in the contract for default interest.

event of breach of the agreement by the consumer. Failure to do so renders the

agreement unenforceable against the consumer under section 38 Consumer Credit

Act.

In Austria, Belgium, Denmark, France, Finland, Greece, Hungary and the UK, there are

default interest rate ceilings based on the contractual interest rate. In some Member

States the default interest rate is limited by the agreed contractual rate:

interest may not be increased on default:

In France, default interest rates are regulated correspondingly. According to Article

L311-30 Consumer Code, in the event of default by the borrower, the lender may ask

for immediate repayment of the capital outstanding, plus accrued interest which is

due but unpaid. Until the actual settlement date, the outstanding sums are liable to

interest on arrears at the same rate as the loan. A similar provision is applied on

Consumer Mortgage Credit in default and not yet cancelled (Article L312-22 of the

Consumer Code).

In addition, the lender may ask the defaulting borrower for compensation which,

depending on the length of contract still left to run, is fixed according to a decreed

scale.

There are also legal systems that relate the default interest rate ceiling to the contractual

interest rate by increasing the contractual rate by a margin.

15, the default interest rate in credit contracts may not exceed the contractual

interest by more than 2.5 percentage points per year.

iff/ZEW – Final Report on interest rate restrictions in the EU 87

maximum for default interest rates. According to section 6 paragraph 1 Z 13, the

default interest rate on consumer loans can not be more than 5 percentage points

per annum higher than the contractual interest rate.

The legal systems in Bulgaria, the Czech Republic, Denmark, Estonia, Finland, Germany,

Italy, Luxembourg, Poland, Portugal, Slovakia, Spain (only for overdraft) and Slovenia

provide for an explicit default interest rate ceiling that is based on an objective reference.

Sometimes like in Bulgaria, Estonia or Germany, the default interest rate ceiling is

conformant to the statutory interest rate that is to be provided when no agreement upon

the default interest rate has been made.

exceed the amount stipulated by the Law of Obligations Act. The Law of

Obligations Act provides the basis for calculating the legal default interest: the

last interest rate applicable to the main refinancing operations of the European

Central Bank before 1 January or 1 July of each year + 7 per cent per year is the

interest rate on late payment (hereinafter referred to as the legal default interest

rate).

Civil Code. Section 497 (1) “Treatment of default interest, crediting part

performance”, states:

quoted above, but not to the disadvantage of the consumer.

late payment or late fulfilment of an obligation to the legal interest or statutory

interest rate set each year by the Budget law. It is currently 4% until 31st

December 2010. The Law 58/2003 on taxation fixes default interest in relation

with tax (currently at 5%). Law 3/2004 of 29th December to fight against late

payments in commercial transactions, following Directive 35/EC of 29th June 2000

on combating late payments in commercial transactions says that the level of

interest for late payment ("the statutory rate"), which the debtor is obliged to

pay, shall be the sum of the interest rate applied by the European Central Bank to

its most recent main refinancing operation carried out before the first calendar

day of the half-year in question ("the reference rate"), plus at least seven

percentage points ("the margin"), unless otherwise specified in the contract.

There are also Member States where the default interest rate ceiling is calculated on the

basis of the statutory default interest rate, which itself is based on a reference index.

of default interest rate by 50 %, it is considered usurious, unless the creditor

88 iff/ZEW – Final Report on interest rate restrictions in the EU

proves that he did not use the debtor’s emergency or difficult material position,

his lack of experience, frivolity or dependence or that the benefit that he or

someone else received did not significantly exceed the benefits of the other party

(Presumption of usury, Article 377). The statutory default interest rate is basically

17 %, but the Government is authorised to change the statutory default interest

rate, if the economic situation changes (Article 2). The government has so far

carried out several reductions of the default interest rate based on the decision to

change the statutory default rate (OJ 1/07); after the introduction of the euro it

was decided that the default interest rate should be set at 8 % (real interest rate,

determined in Code of Obligations) + ECB’s main refinancing rate.

The default interest rate ceiling may also be based on the usury ceiling which in turn is

based on an objective reference index.

contractual interest rates, but also for default interest rates. As mentioned above,

Banca d’Italia calculates the average contractual rates – TEGM – for various types of

credit. Afterwards the Ministry establishes officially the average additional value of

default interest rates in the credit market. The default interest rate ceiling is

therefore based on the TEGM and then increased by the average additional value of

default interest rates in the credit market provided by the Ministry of Economy,

multiplied by 1.5. (TEGM+extra value given as a percentage point; majored by

50%).

Explicit default interest rate ceilings that are neither based on the contractual interest

rate nor on an objective reference point are not very common in Europe.

that if the obligation has as its object the payment of a determinate sum, the

damages ensuing from a delay in its execution may consist only of interest on the

capital sum due calculated at the rate of eight per cent per annum.

A full breakdown of the levels of default interest rate ceilings as well as of the levels of

statutory default interest rates (that are applied when the contracting parties do not

agree upon the default interest rates) across the Member States is provided in the table

on the following pages. The table does not provide information regarding the average

default interest rates applied on default. However, since default interest rates other than

contractual IRR provide for a rate which is seen as an adequate expression of the

damage the creditor incurs providers in general use the legal default rate as their

contractual default interest rate. This is why the average default interest rates

correspond to the ceilings given in the table. The table also contains calculated examples

for a non-mortgage instalment loan, using reference data as of March 2010, and

assuming contractual interest rate of 8 percent.

iff/ZEW – Final Report on interest rate restrictions in the EU 89

percent; ie. APR * 1.1

3.25 % (fixed) 8.8 %

3-month-Libor + 10 pp

Credits in Levs:

BR BCB + 10 pp

EURO Credits:

3-month-Libor + 10 pp

Credits in Levs:

Base rate + 10 pp

10.6 % BRBCB =Base Rate Bulgarian

National Bank

overrunning on the

current account are

limited. Also early

repayment fees in

mortgage loans (3%)

no no

Repo-rate 2T CNB + 7pp Repo-rate 2T CNB + 7pp 8.0 % CNB = Czech National Bank

IR;

whichever is higher

n/a 8.05 % LR = Lending Rate Danish

National Bank

Operation rate European

Central Bank

BR + 7pp or contractual

IR;

whatever is higher

Default from the 7th

month:

BR + 7pp

BR + 7pp 8.0 % BR = Base Rate European

Central Bank

Contractual IR + 3pp

None Mortgage credits:

Contractual IR

n.a. 8.0 % There are other stipulations

with regard to rescheduled or

cancelled contracts.

BZ + 2.5pp

None Mortgage credits:

BZ + 5.0pp

Mortgage credits:

BZ + 2.5pp

None Mortgage credits:

BZ + 5.0pp

5.12 % BZ “Basiszinssatz” = Basic

Rate German Federal Bank,

based on Main Refinancing

Operation rate ECB

BRHNB

BRHNB 9.8 % BRHNB = Base Rate

Hungarian National Bank

must be agreed and

stated in contract.

/ / Usury legislation might be

applicable

by 50 %;

ie. (TEGM+ extrapp)*1,5

MRO + 7pp 21.9 % TEGM = Basic average IRs

Italian Central Bank

(differentiated by credit

types)

Extrapp = average additional

value of default interests in

the credit market

MRO = Main Refinancing

Operation rate European

Central Bank

75 Non-mortgage instalment credit; contractual interest rate set by 8 percent, reference rates as of March

2010.

90 iff/ZEW – Final Report on interest rate restrictions in the EU

must be agreed and

stated in contract.

6 % (fixed) /

must be agreed and

stated in contract.

5 % (fixed) / Usury legislation might be

applicable

judgement)

3.5 % (fixed, yearly

amended)

6.5 %

times since 2002)

15.0 % Default IR ceiling is the same

as Contractual IR Ceiling

Bank of Poland (“Stopa

Lombardowa”)

Default IR ceiling is the same

as Contractual IR Ceiling

33 %;

ie. Average APR * 1,33

Contractual IR + 2pp 18.9 % APR computed by central

bank

(differentiated by credit

types)

Default IR ceiling is the same

as Contractual IR Ceiling

Ceilings are not applicable for

banks according to art. 10 of

Ordinance no. 9 of 21

January 2000 of the

Romanian Government.

Operation rate European

Central Bank

Legal IR * 2.5 =10.0 %

4 % (fixed, annually

amended)

/ Legal IR determined on the

basis of financial market

trends

majored by 50 %;

ie. Statutory Default IR *

1.5

Statutory Default IR =

Statutory IR (8 %) +

MRO

13.5 % MRO = Main Refinancing

Operation rate European

Central Bank

The calculation method of

Default IR Ceiling is legally

disputed.

must be agreed and

stated in the contract.

RRI + 8pp / RRI = Reference Rate of

Interest, based on Main

Refinancing Operation rate of

the Central Bank of Sweden.

Usury legislation may be

applicable under penal law

Source: Expert Survey.

iff/ZEW – Final Report on interest rate restrictions in the EU 91

The question of which costs payable by a consumer should be incorporated into the credit

price under EU consumer credit regulations has been dealt with in another project report

study confirm that there has been an ongoing shift from interest to other cost factors in

consumer credit.

Although a minimum standard in the calculation of the APR has been reached Europewide

there are general systems which allocate cost elements outside the in so far

unchanged definitions of the APRC in Directive 87/102/EEC and 2008/48/EC. While in all

Member States payments concerning services which are directly connected to the credit

like administration and brokers’ fees insurance fees irrespective of the purpose of the

insurance, fees for bank accounts and bank cards are not included in practice.

Endowment life insurance credit has no integrated APRC in which the premiums and

payments concerning the endowment are incorporated. Such products are nearly

unknown in consumer credit as regulated by the CCD 2008 but concern primarily

mortgage loans. In this area EU-law does not require inclusive pricing neither does

national law.

In some countries like Austria, France and Greece, taxes are imposed on the extension of

credit.

Payment Protection Insurance premiums in consumer credit have generally to be

advanced in one single payment. This opens the product for additional financing since the

consumer needs a credit to be able to pay this premiums in a lump sum. This practice

has raised concern especially in the UK. But still the general exemption if the insurance is

not ”non obligatory“ from its integration into the APRC also counts for these finance

charges. Payment Protection Insurance has thus developed into a general outsourcing of

credit risks at the cost of the consumer. The products are disadvantageous, extremely

costly and applied inappropriately and to that extent, far too often. It seems as if the

provisions paid to the banks for the extension of insurance products have become a main

source of additional income for credit providers, escaping competitive forces.

Instead specifically charged bank account fees are not yet an economic problem. But in

credit card credit the enormous fees charged for cash withdrawal with these cards can be

seen as an additional cost for those customers who have no own bank account and use

the cash withdrawal facility to get an easy and immediate short term instalment credit

form the credit card issuer. If for example the fee for cash withdrawal is 3% of the credit

amount this fee adds to the cost of the credit if (a) the credit card account has no assets

and (b) it provides for own credit. Since only a few credit card accounts allow assets and

since those credit cards are most used by low income households for access to small

amounts of money (“payday loans”) such cash withdrawal fees increase the cost of credit

for these borrowers without leaving traces in the APRC.

Combined, endowment products which divert repayments of the credit into a form of

savings agreement with lower interest returns in the savings than is charged in the credit

like „endowment capital life credit“, „secured credit cards“, instalment or overdraft credit

where assets are requested as a security may increase the amount of interest due

through artificial additional demand for credit which the yield of the investment product

does not compensate for. Such products may be as usurious as other products although

its APRC will look significantly better.

76 Reifner, U. et al. (1998).

92 iff/ZEW – Final Report on interest rate restrictions in the EU

Another form of circumvention is zero interest credit extended by banks owned by

automobile companies. They hide that the buyer of the financed cars looses the cash

payment premium which may amount to as much as 15%. One could call this a reverse

cost element similar to a disagio in which interest is defined as capital and thus made

invisible.

Already the 2002 Draft of a Consumer Credit Directive tried to address these problems

In its recital to Art. 12 of the draft a vast definition of all cost that should be included into

the APRC had been favoured: “The total cost of the credit must include all costs,

including borrowing rate plus all the other indemnities, commissions, taxes and charges

of any kind that the consumer is required to pay for the credit regardless of whether

these costs are payable to the creditor, to the credit intermediary, to the competent

authority levying the taxes or to any other third party authorised to receive payments

following the brokering or conclusion of a credit agreement or surety agreement.”

Instead Directive 2008/48/EEC referred back to Directive 87/102/EEC where the question

which cost from ancillary services had to be included was made dependent on whether

credit and bank account fees had been taken into account.

Price disclosure and price restrictions have to refer to a price which is uniformly and

objectively defined by law. In price disclosure law as well as in price restrictive law

providers would have an unjustified advantage if they could use a price definition which

would allow them to show a lower price than their actual cost structure would justify.

Especially the possibility to split prices onto different contracts, to exclude certain cost

elements, to use mathematical formulas which lead to incomparable prices etc. are of

concern both for price disclosure law and IRR.

This problem has been acknowledged in all consumer related Directives with a wording

similar to Art. 22 (3) of the CCD 2008 where it reads: “3. Member States shall further

ensure that the provisions they adopt in implementation of this Directive cannot be

circumvented as a result of the way in which agreements are formulated, in particular by

integrating drawdowns or credit agreements falling within the scope of this Directive into

credit agreements the character or purpose of which would make it possible to avoid its

application.” This general principle of all consumer protection law either substantive or

procedural has been further elaborated in the Directive itself with its gradual

improvements in 1998 and 2008.

IRR stand in the legal tradition of price regulations expressed in the laesio enormis.

Usury and good morals as well as substantive fairness principles focus on the

comparatively high amount of money a consumer has to pay for a service or a good. But

77 Proposal for a Directive of the European Parliament and of the Council on the harmonisation of the laws,

regulations and administrative provisions of the Member States concerning credit for consumers (2002/C

331 E/39) COM(2002) 443 final — 2002/0222(COD) (Submitted by the Commission on 11 September 2002)

OJ C331 E/200; for other drafts and alternative proposals see http://www.responsiblecredit.

net/index.php?id=1884.

78 Art. 3 (g) of Directive 2008/48/EEC includes all cost “which are known to the creditor, except for notarial

costs; costs in respect of ancillary services relating to the credit agreement, in particular insurance

premiums, are also included if, in addition, the conclusion of a service contract is compulsory in order to

obtain the credit or to obtain it on the terms and conditions marketed”. Art. 2 (g) of the 2002 Draft read:

(g) ‘total cost of credit to the consumer’ means all the costs, including borrowing interest, indemnities,

commissions, taxes and any other kind of charge which the consumer has to pay for the credit;” and Art. 12

(2) stated: “Costs relating to insurance premiums shall be included in the total cost of the credit if the

insurance is taken out when the credit agreement is concluded”.

iff/ZEW – Final Report on interest rate restrictions in the EU 93

in credit the price in money units is incomparable because it depends on two other

factors which differ from contract to contract: borrowed capital and time. This is why the

price of the credit has to be represented by the interest rate which incorporate time and

capital amount and offers thus a standardised from of prices.

The interest rate is therefore not the price of the credit but a parameter which in the

form of the borrowing rate has been created in practice to calculate those parts of the

credit cost which depend directly on the time of the loan.

Since other fees and obligations add to these costs, CCD 2008 has regulated a second

parameter, the APRC, to give consumers a basis for comparing the different prices of

credit on the market. Recital 19 states: “To ensure the fullest possible transparency and

comparability of offers, such information should, in particular, include the annual

percentage rate of charge applicable to the credit, determined in the same way

throughout the Community.” It should according to recital 20 of CCD 2008 “comprise all

the costs, including interest, commissions, taxes, fees for credit intermediaries and any

other fees which the consumer has to pay in connection with the credit agreement,

except for notarial costs.” Since also the method of calculation can be used to represent

the same cost differently in the APRC also the method of calculation has been

compounded.

The table below shows the differences between both rates and reveals that effective IRR

should focus on the APRC instead of the borrowing rate. The table also reveals that this

process from the borrowing rate to the APRC has not yet been fully accomplished.

Traditional civil codes use borrowing rates for their historical regulation of the legal rate

of borrowing rates in practice so that its regulation is adapted to it. Old fixed rate ceilings

are mostly related to the borrowing rates since the emergence of a growth rate related

form of calculation as it is present in the APRC has only emerged together with the

spread of computer and their ability of approximations through iteration as described in

the mathematical formula to Annex 1 of the CCD 2008.

79 The growth formula can be written in the form of C1 = C0 * (1 + i)t wherein the initial capital C0 has been

grown into C1 aduring the time t at a rate of (1+i) where i represents the interest rate. The compounding

period of 1 year is hidden in the exponent t since the calculation is based on years and therefore t is divided

by 1 to mark this compounding period.

80 Instead the borrowing rate is mathematically wrongly calculated in the form of i = cost/( C0 *t).

81 See ie. section 246-248, 289 German Civil Code.

94 iff/ZEW – Final Report on interest rate restrictions in the EU

No Mostly no

No Yes

No No

payment periods

Standardised one year