National policies on lending, borrowing and personal insolvency across Europe fail to deal with the complex problem of over-indebtedness, say researchers at Brunel University London.
An increasing number of EU consumers are facing extreme debt problems. At least one in nine people across the EU struggle to repay their debts and are over-indebted.
Fresh research recommends a fairer, more dynamic and efficient legal regime at EU level should address all the complex causes of consumer debt and different stages of financial difficulty.
The study by Brunel University’s Dr Federico Ferretti and universities in Germany, Italy and Greece calls for changes to the EU legal framework to better address the integration of EU retail financial markets, consumer protection, responsible lending and social and economic cohesion.
Most causes of consumer indebtedness do not depend on the legal agreement between lender and consumer at the time of contracting a loan. Macro-economic or personal life-time events beyond the consumer’s control, such as the recent financial crises, job loss, and illness are the main reason for financial distress.
A comparison of the UK, Germany, Italy and Greece revealed preventive measures based on informing consumers, sharing consumer information between financial institutions and focus on the creditworthiness assessment by lenders for decision-making are ineffective. It also found national personal insolvency legislations as a cure for over-indebtedness fall short, unless reformed at EU level, because they are uncoordinated national initiatives in a common market.
“A reformed common system for consumer insolvency at EU level should be created, departing from the current approach of mutual recognition of the law between countries,” said Dr Ferretti.
“The EU developed consumer credit and mortgage legislation by delivering a responsible credit market which encourages competition, innovation and choice. However, the other side of that same credit market is the problem of dealing with consumers unable to repay their debts and becoming insolvent. This is left to the uncoordinated competence of national legislators.
“The EU only provides for the legal instrument of mutual recognition of the law, which means that they clarify only the rules which determine where insolvency procedures take place in cross border matters.”
