In Norway IRR is not effectively preventing providers of credit to charge consumers high interest rates. However, we do have legal acts, both under criminal as well as private law, which ban the intentional exploitation of the weakness of another person at an individual level through excessive pricing. These acts are not very often enforced or plead and must in my opinion be considered not very effective. There is no absolute or relative ceiling which places an exact limitation on the highest interest rates credit providers are allowed to charge.

Below, I will make a few comments to the questions 2, 6 and 8 in the consultation document.

To question 2
The main reason for charging a consumer a very high interest rate, for instance more than 50 % p.a., will in my opinion be to compensate a considerable risk of default. Due to the Consumer Credit Directive art 8 nr. 1 the creditor, before the conclusion of the credit agreement, should assess the consumer's creditworthiness on the basis of sufficient information. In cases where this assessment shows a risk of default indicating a need for the provider to demand a very high interest rate, the provider should in my opinion, generally not offer credit to the consumer at all. One of the main reasons for obliging credit providers to make a credit assessment before the conclusion of the credit agreement is to prevent consumers from making credit agreements they probably could not service.

In Norway the number of debt-collection cases has increased the last years, especially among young consumers. An effective IRR could make credit providers more careful when lending money to consumers who have an overextended economic situation. Studies have also shown a lack of knowledge when it comes to economic understanding among young consumers. For example do many young consumers have great difficulties identifying the most favourable loan offer out of three simple offers. Such consumers may in particular need the protection an IRR represent against unreasonable expensive credit.

I find the hypothesis H1 in the report to be “plausible”. In what cases IRR will reduce credit access, in particular for low-income borrowers, will be connected with the level of the IRR. However I do not regard this as a problem, rather as a positive consequence for consumers.

Based on this I think IRR policies are justified.

To question 6
The best type of IRR would in my opinion be a system where there is a fixed interest rate ceiling. This ceiling may with advantage be based on a reference rate. 
To have an adequate IRR it is vital to focus on the effective interest rate, not nominal interest rates. Otherwise the effect of an IRR will be limited and probably rather ineffective.

In the Consumer Credit Directive it is already established harmonised rules on what costs to include in effective rate and how to calculate the rate. This will probably make it practicable to use effective interest rate as a reference in a potential harmonised IRR.

To question 8
I welcome an initiative from the EU to establish an efficient IRR. As mentioned above I think a solution with a relative interest rate ceiling would be preferable. Setting the ceilings dependent to a reference rate seems also as a flexible and preferable solution.

As an example I do find the IRR in Belgium as described in the report under 1.2.1.3.4 to be a suitable regulation to base a potential EU regulation on. As shown in the report the direct IRR in Belgium is also considered “very effective”.

I suppose a potential IRR regulation could be implemented as a new annex to the consumer credit directive.

Sincerely,

Gry Nergård
Consumer Ombudsman