Dag Jørgen Hveem and Tanja Jørgensen
The formal regulation of
financial counselling
© SIFO 2013
Project note no 21 – 2013
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Project note no. 21 - 2013
Tittel
The Formal Regulation of Financial Counselling
Antall sider
20
Dato
20.09.2013
Title ISBN ISSN
Forfatter(e)
Dag Jørgen Hveem & Tanja Jørgensen
Prosjektnummer
11201014
Faglig ansvarlig sign. Oppdragsgiver
NFR
Sammendrag
Dette notatet går gjennom den formelle reguleringen av finansiell rådgivning og gjelsrådgivning i Norge og Danmark. Det foretas enkelte sammenligninger mellom de to landene. Notatet inneholder også en oversikt over relevante lovverk i de to landene. Notatet har blitt utarbeidet innenfor det NFR-finansierte prosjektet "Financialisation of Social Welfare."
Summary
This working paper walks through the formal regulation of financial counselling and debt councelling in Norway and Denmark. Comparisons between the two countries are made. The paper also contains an overview of the relevant legislation in the two countries. The working paper has been prepared within the NFR-funded project "Financialisa-tion of Social Welfare."
Stikkord
Økonomisk rådgivning, gjeldsrådgivning, regulering
Keywords
1
The formal regulation of financial counseling
By Dag Jørgen Hveem & Tanja Jørgensen
Aim
This report looks at legal regulations of money advice services in the private and public sectors in Norway and Denmark. The main question is: What are the principal regulative differences between the sectors and across the country contexts?
The analysis has a particular focus on the legal status and relationship between the counselor and the receiver of the service. A central working hypothesis is that advisor-customer relations in the private sector are more well-defined in terms of rights and duties than what are advisor-client rela-tions in the public sector. The data for the analysis are Norwegian and Danish law, regularela-tions and public debates in each country on legal aspects of financial counseling.
Method
As for the Scandinavian model, the production and distribution of welfare in Norway has developed in different directions than in Denmark. This is particularly noticeable in the area of financial coun-seling, which is defined as a state responsibility in Norway, but not in Denmark. This makes a com-parative analysis relevant between the two countries.
The “Länderberichtmetode”, where the law of each country is described separate, is relevant. However, most interesting is to compare the legal solutions for each kind of advisor. The analytical method is therefore used more comprehensive.
Financial counseling
There are various kinds of subject areas that financial counseling is connected to. The two main fields are lending and investment. Even though the same conflicts of interests in general might oc-cur, lending gives special considerations about over-indebtedness. The main focus is on lending in the following.
Neither in Denmark or in Norway there is a standard definition of financial counseling. What fi-nancial counseling is considered, depend upon the situation and the actor.
On the whole, credit-related advisory services are offered in two main situations; before loans are taken out (financial advice) and after payment problems have occurred (money advice).
As for borrowing, financial advice is typically offered in the private sector by lenders as part of a sales process. These are occasions where risk is transferred to the household.
As for problem solving counseling, it falls into two categories; as a way for each creditor to se-cure their own claims and more broadly as a comprehensive strategy to design solutions where all claims directed towards the defaulter are accounted for. The public sector is first and foremost asso-ciated with the latter type of counseling – and so is research.
However, it is paradigmatic to this study that only considering one type of service falls short of properly understanding money advice in a welfare perspective. In order to avoid a transportation of problems from one type of counseling context to another, the welfare state has vested interest in the full range of provision – from borrowing decisions are made to problems are solved. Thus, the or-ganizing contexts of the service must also be taken into account: it can be private, public and/or semi-public, the latter being services that are funded from public budgets and provided by private agencies or civil organizations, or vice versa. This project is the first that adopts a cross-sectional perspective on the provision of financial counseling.
2
Area 1. Financial advice
Before loans are taken out, the traditional focus of the law has been to give the consumer infor-mation. The rationale has been to correct information asymmetry, broaden consumers’ knowledge about the terms of the credit agreement and expand lender shopping (in EU cross border shopping). Especially the information about the annualized per percentage rate (APR) should help consumers to compare loans and therefore expand lender shopping.
Financial advice often rest upon the same considerations. The market and the information can be too difficult for consumers to get an overall view of. This is one reason that consumers seek the help of advisors. As credit intermediaries advisors can help consumers finding the most favourable loans.
However, financial advice does not only help consumers understand external circumstances such as the loan market and terms of the credit agreement. Financial advice also helps consumers to overview internal circumstances, especially their own economy. Financial advisors can help to make a financial plan (a budget), estimate if the consumer can afford taking up credit, and if con-sumers can replace an existing expensive loan with a more favourable one. These elements relates to avoiding getting into over-indebtedness, which is unique for the financial advice concerning credit.
Replacing an existing expensive loan with a more favourable one both relates to financial advice (pre-contract) and money advice (post-contract). It suggests that there is not a clear distinction be-tween financial advice and money advice. Even though the main focus of money advice is getting the consumer out of debt, the most crucial is that the advice rest upon the situation of the individual consumer. Financial counseling (including financial advice and money advice) overall helps con-sumers to manage their economy. With other words the consumer should be enabled to make a qualified choice that mach the consumer’s need and financial situation.
Private sector
Traditional advisors such as lawyers and accountants only serve the interest of the clients, except for the interest of getting the salary for the service. Certain providers of credit, such as banks, also name groups of their employees as advisors. Often the advice is offered to the customer as part of the sales process. Both been a lender and an advisor imply an inherent conflict of interest. Since the advisor also has an interest of serving the creditor as an employee, the interest of the customer will not solely be maintained. Even though this is not advice in its traditional definition, the banks’ use of the words advice and advisors have caused that the traditional advisors now is called independent advisors.
Looking at prevalence, the “dependent” financial advice of the banks is most frequently used. “Independent” advisors are seldom used (see area 2, private sector, below). The seemingly free de-pendent advice may course the customer not seeking indede-pendent advice or the consumer may not be aware of independent advice or does not find it necessary.
Both in Denmark and Norway financial undertakings are supervised by the Financial Services Authority (Finanstilsynet). In both countries no explicit competency requirements regarding advice about loans can be found. In Denmark the Executive Order on Competency Requirements (Order No. 346 of 15 April 2011) only has its focus on employees in banks giving advice on certain investment products. The Executive Order interact with the Executive Order on Risk-Labelling of Investment Products (Order No. 345 of 15 April 2011). Contrary, advice about loans does not have similar competency requirements even though a quite similar risk classification regime can be found for certain loan products in the Executive Order on Information on the Risk Classification of Certain Loan Products (Order No. 1457 of 18 December 2012). In Norway The Authorisation Pro-gram for financial Advisers (AFR) set competency requirements regarding financial advice, defined
3 as “personal guidance and recommendations relating to the placement of the clients financial as-sets”. AFR is owned by FNO (Finance Norway), Norwegian Mutual Fund Association and The Fi-nance Sector Union. It is in principle voluntary for a bank to be member of AFR, but except two small banks, all banks are AFR-members.
Both in Denmark and Norway all advisors – in practice, their employer – can be held liable, when the ordinary tort conditions are present. Talking about a negligent behaviour (culpa), it has been suggested that the liability for the profession is strict, see Rt-2000-679 (DNB vs. Ideal Eien-dom/Nordby) and Rt-2013-388 (DNB vs. Røeggen) according to Norwegian law. However, a pro-fessional shall only act according to the good norms at the specific propro-fessional area they are acting, see U 1991.903 H according to Danish law about a trade union’s liability for incorrect advice and Rt-1994-1430 according to Norwegian law: “Attorney C´s limited experience, in my view does not mean that they pose less demands on him than what you want to make a general experienced law-yer” (p. 1437).
In Denmark financial advice regarding loans are beside the ordinary tort and contract law regu-lated in the Executive Order on Good Business Practice for Financial Undertakings, Investment Associations etc. (Order No. 1406 of 20 December 2012), which complements the general principle that financial undertakings and financial holding companies shall be operated in accordance with honest business principles and good practice within the field of activity, see the general clause in art. 43(1) in the Act on Financial Business (Consolidated Act No. 705 of 25 June 2012). The Execu-tive Order contains a very broad definition of advice in art. 7(1) and vague obligations for banks compared to the Executive Order on Investor Protection in connection with Securities Trading (Or-der No. 768 of 27 June 2011). Art. 7(1) states that: “Advice shall mean recommendations, guidance, including information on the risk associated with a transaction, and information on the immediate consequences of the customer's options”. The latter Executive Order on Investor Protection in con-nection with Securities Trading from 2007 implemented part of the MiFID-Directive (2004/39/EC). This Executive Order only relates to credit in the matter of debt-financed (geared) investments. The Executive Order on Good Business Practice covers other advice concerning credit. This Executive Order can be criticized for being too bank friendly, since the banking association had an influence on the original drafting. According to the general provision in the Executive Order a financial dertaking shall act honestly and loyally towards its customers (art. 3). More specific a financial un-dertaking shall as a main rule (art. 7(2)) provide advice, if the customer so requests and provide advice at its own initiative, where circumstances indicate that this is required. Alternatively, the financial undertaking may refer the customer to seek advice elsewhere. A financial undertaking may also offer products with standardised information with little or no associated individual advice and instead draw special attention to these limitations (art. 7(4)).
Dealing with conflict of interest art. 7(3) states: Advice shall take into consideration the interests of the customer and provide the customer with a good basis for making decisions. Advice shall be relevant, correct, and complete. The financial undertaking shall provide information on the risks relevant to the customer. However, this provision does not state, that the advice only should be in the interest of the consumer. That the advice is strongly connected to product selling in the financial undertaking is explicated in art. 10 and art. 11:
10(1) A financial undertaking shall provide sufficient information on its own products and ser-vices, including differences in prices and terms of alternative products that can meet the custom-er's requirements.
(2) If there are general differences between customers in determination of interest rates, fees, or other remuneration to the financial undertaking for a given product, said financial undertaking shall inform the customer of this fact before entering into an agreement to supply the service. At
4 the request of the customer, information shall be provided on the customer's conditions that may determine the position of the customer within a given price differentiation.
(3) A financial undertaking shall, on the basis of its general knowledge of the market, inform the customer about relevant types of product on the market. Information shall not, however, contain information about competing products or specific prices.
11(1) In the event that a financial undertaking or its employee/advisor, when providing advice, has a special interest in the result of the advice beyond normal earnings of the undertaking, said undertaking shall, before giving advice, inform the customer of the nature and scope of such spe-cial interest.
(2) If the financial undertaking receives commission or other remuneration as a result of provid-ing products or services, the customer shall be made aware of this fact. The same shall apply if the attending employee/advisor receives commission or other remuneration and there is a direct link between the specific sale of services or products and the remuneration of the attending em-ployee/advisor.
Dealing with housing, a bank or mortgage-credit institution shall according to art. 14(1) inform the customer about the relevant types of product on the market and about the advantages and disad-vantages of these, before an agreement on a loan secured in real property is entered, cf. art. 10(3).
Since the executive order is characterized as public law, courts and the Complaint Board of Banking Services has been reluctant of using it in civil law cases. The Complaint Board of Banking Services has dealt with more than thousand complaints about financial advice. Most complaints about advice have been unsuccessful, from the customers point of view, because the conditions (e.g. loss) for granting damage were not present. With loss is meant economic loss. No compensation is granted for the nuisance of an insufficient advice; see U 1995.545 Ø about remortgaging and U 1996.200/2 H about loan period. In the two judgments’ the practice from the Complaint Board of Banking Services for granting compensation was overturned.
While there are provisions of advice for financial undertakings, other creditors are not covered by such provisions. Art. 7a(8) in the Consumer Credit Act (Act No. 761 of 11 June 2010) connects to the provisions about information and seems to concern a duty to explain the credit agreement. It seems too far to consider art. 7a(8) as a duty for the creditor to advice the debtor e.g. about the more suitable products offered by other creditors. According to art.7a (8) creditors and, where applicable, credit intermediaries shall provide adequate explanations to the consumer, in order to place the con-sumer in a position enabling him to assess whether the proposed credit agreement is adapted to his needs and to his financial situation, where appropriate by explaining the pre-contractual information to be provided in accordance with 7a(1)(2), the essential characteristics of the products proposed and the specific effects they may have on the consumer, including the consequences of default in payment by the consumer. Art. 7a(8) implements art. 5(6) in the Consumer Credit Directive (2008/48/EC). Member States may adapt the manner by which and the extent to which such assis-tance is given, as well as by whom it is given, to the particular circumsassis-tances of the situation in which the credit agreement is offered, the person to whom it is offered and the type of credit of-fered. Denmark has not done so. The lender has also a duty to assess the consumer´s credit worthi-ness before a credit agreement is concluded according to art. 7c, which implements art. 8 in the Consumer Credit Directive. However, art. 7c does not seem to change the fact that in Denmark there are low demands to assess the consumer’s credit worthiness. The consumer bear the risk for the repayment of the loan; see U 1997.522 Ø about an 18 year old man, whom bought an 10 year old car (BMW) for 220.000 DKR. Both the Danish art. 7a(8) and art. 7c have nearly the same con-tent as the Norwegian provisions (elaborated below).
5 In its 2011 proposal for a Directive on credit agreements relating to residential property (COM(2011) 142 final)), the European Commission proposes Union legislation on residential mortgages and includes legislation on advice in connection with lending. According to the proposal, which also optionally will be implemented in Norwegian law, there will not only be an obligation to give “adequate explanations” (art. 11), but chap. 7 of the proposal is headed “Advice” and it is pro-posed to establish “advice standards” in art. 17. The proposal also introduces a regime of responsi-ble lending. Before the conclusion of a credit agreement, the creditor (or, where applicaresponsi-ble, credit intermediary) will have to conduct a thorough assessment of the consumer’s creditworthiness, “based on criteria including the consumer’s income, savings, debts and other financial commit-ments”; see art. 14(1), first sentence. The creditor will have to refuse credit where “the assessment of the consumer’s creditworthiness results in a negative prospect for his ability to repay the credit over the lifetime of the credit agreement”, and will have to inform “the consumer immediately and without charge of the reasons for rejection”; see art. 14(2)(a) and (b). Art. 14(4) and (5) refer to an unsuitability test, which has echoes of the suitability and appropriateness requirements for invest-ments in MiFID-Directive (2004/39/EC, as amended), including geared investinvest-ments. Creditors will have to “consider a sufficiently large number of credit agreements from their product range in order to identify products that are not unsuitable for the consumer given his needs, financial situation and personal circumstances”; see art. 14(4). Powers are delegated to the Commission to ensure that credit products are not unsuitable for the consumer.
The Act on Financial Advisers (Act No. 599 of 12 June 2013) will come into force 1 January 2014. The aim is to strengthen the possibility for the consumers to get independent advice. The act applies to companies that as part of their professional main or secondary activity provide advice on financial products for consumers, but it does among others not apply to advice about financial prod-ucts that the company provides on itself or anyone else, to most advice provided by financial under-takings, and to investment advisers, see art. 1. The act therefore has its focus on other advisers than covered by the above-mentioned regulation and especially has its focus on companies offering in-dependent advice about financial products. The term inin-dependent or similar terms will mainly be used for such advisers, see art. 9, and a licing regime is introduced. If a financial adviser is not indepentent this must be showed at the company’s website, and the advisor shall disclose the amount of or the calculation of any commission or other remuneration, see art. 10. To ensure the independency and quality of advice, a financial adviser shall have a procedure for handeling conflicts of interest that may harm consumers’ interests in the relationship between consumers and the company, see art. 8. A financial adviser shall also ensure that its employees that provide advice on financial producs have sufficient skills to provide sound advice. The Financial Services Authori-ty will lay down more detailed roles on qualification requirements to employess of a financial adviser, see art. 6. Before the Act will come into force the more general provisions in the Marketing Act (Consolidated Act No. 58 of 20 January 2012) art. 1 og art. 3, and the Credit Agreement Act art. 7a(8) can apply to other financial advisers than financial undertakings.
In Norway the Act on Financial Contracts and Financial Assignments (Financial Contracts Act – No. 46 of 25 June 1999, in force 1 July 2000) gives the most significant provisions, and through some changes in the Act, in force 11 June 2010, the Consumer Credit Directive is implemented in Norwegian law. Chapter 3 in Financial Contracts Act is about loan contracts, also in connection with sale of goods on credit.
It´s symptomatic that the lender has a comprehensive obligation to give information before a contract is entered into with a consumer (art. 46a). The lender shall among other things inform the borrower of the effective annual interest rate, the nominal annual interest rate, and charges and oth-er loan costs to be charged to the borrowoth-er.
6 The lender has also a duty to assess the consumer´s credit worthiness before a credit agreement is concluded (art. 46b). The main subject is whether the consumer is sufficient to manage his/her obligations. The evaluation criteria should be “adequate information obtained from the consumer and if necessary from the relevant database”. If the parties agree to increase the total amount after the conclusion of the credit agreement, the lender shall again assess the consumer´s credit worthi-ness, see art. 46b second subsection. The purpose of this section is to protect the consumer from over-indebtedness, in that the credit may not be granted if the lender considering the consumer´s credit worthiness as weak. There is not a duty to deny the credit application according to this provi-sion. However, it may be obliged to dissuade, se below.
The lender has the primary responsibility for ensuring that the credit assessment is made on the basis of correct and, as far as possible, complete information. Normally the lender can build on in-formation from the consumer and relevant database. If the lender assume that the basis of infor-mation as inadequate, it must be assessed whether additional inforinfor-mation shall be obtained. Infor-mation about wages and asset conditions and payment records will usually be relevant, and the same apply to for example illness and marital status.
The lender has to undertake a specific assessment in each case, particularly based on the credit size. But also other factors could be relevant, among other things the importance of the information is likely to have on the credit assessments and the sacrifices and inconvenience imposed on the con-sumer by being demanded the appropriate information. Accordingly it cannot be made a general list of relevant factors applicable to all cases (Norwegian public reports; NOU 2009: 11, p. 153 and the following pages).
Before a credit agreement is concluded or entered into, the lender or the credit intermediary is obliged to give the consumer adequate explanation so that he or she is able to assess whether the proposed credit agreement is suitable for his or her needs and financial situation (art. 46c subsection one). The explanation must include information provided according to art. 46a first subsection, the credit agreement´s main features and consequences of the agreement may have on consumers, among other things by default. The explanation should be linked to consumer’s needs and finances, so that the risk and the burden is manageable.
The obligation to explain related to the consequences of breach will "normally include infor-mation about overdue payments that will be incurred, the risk that any pledged assets will be real-ized, that liability may be asserted against any guarantors, that the consumer will be responsible for any outstanding debt that can not be covered by payments from the consumer, and that the breach could lead to payment defaults” (Norwegian public reports; NOU 2009: 11, p. 154).
Otherwise, the content of the lenders obligation to explain must be determined on the basis of specific conditions, among other things related to the credit agreement's content and complexity. The lender has no obligation to explain if it is so that the consumer is able to assess whether the proposed credit agreement is suitable for his or her need and financial situation, provided that the consumer is familiar with the most important legal consequences of breach of the credit agreement. If it is doubt regarding the customers need for explanation, it is the lender who has to establish the fact as probable (Norwegian public reports; NOU 2009: 11, p. 154).
The obligation implies a sort of relativization in the sense that "the consumer's ability to evaluate information received and the importance of credit agreement is likely to have on the consumer's financial situation" is taken into account. The worse conditions the customer has to safeguard his or her own interests, the more stringent requirements will apply to the lender.
The obligation to explain is obviously different from the obligation to dissuade (se about dissua-sion below). Still, it is a correlation between the providissua-sions. If the credit agreement is not adapted to the customer's financial situation, this is something the lender is obliged to impart to the customer. In such cases, the lender often will have an obligation to dissuade.
7 The lender must be able to dissuade without fully meet the explanatory requirement. But if the customer wish to take up the loan in spite of dissuasion, the obligation to explain will have inde-pendent significance because dissuasion is not in itself sufficient to satisfy the explanation require-ment (Norwegian public reports; NOU 2009: 11, p. 155 and NOU 2007: 5, p. 48).
According to art. 47 in the Financial Contracts Act, the lender has an obligation to dissuade. The obligation occurs if the lender, before entering into a loan contract with a consumer or disbursing the loan to the consumer, has to assume that the financial capacity or other circumstances of the borrower indicate that he or she should seriously consider refraining from taking out the loan. The lender shall then inform the borrower thereof in writing and oral. If the consumer despite the suasion still wants to close the contract, he or she has to confirm that he or she is aware of the dis-suasion. The cases of dissuasion are intended to be between the cases of rejection and cases where an unconditional loanoffer is issued.
If the lender fails to do dissuade, the borrower's obligations may be reduced to the extent this is deemed reasonable.
Does the obligation to dissuade have the intended effect – which is to prevent bad loans? Perhaps is one effect better credit rating and more responsible lending. However, the consumer nearly al-ways is still taking out the loan despite the dissuasion. So even if it initially is more risk to the lend-er of irresponsible lending, the Act is a disclaimlend-er when the bank has dissuaded. In the lattlend-er case it´s almost impossible for the consumer to prevail with a claim on the basis of irresponsible lending. So, there is no doubt that the consumer still has significant responsibility.
The Complaint Board of Banking Services has dealt with about 95 complains since July 2000 to April 2013. The bank has won 77 cases and the customer has won 18 (among these 18, compensa-tion was reduced in 10). In 3 cases the bank should have dissuaded, but no compensacompensa-tion was given.
The Financial Supervisory Authority of Norway established in March 2010 guidelines for pru-dent resipru-dential mortgage lending practice. The main requirements centre on a thorough process and that the loan should in general not exceed 90 per cent of property valuation.
From the first of December 2011 Finance Authority's has tightening the guidelines, and they have been more concrete. Some of the important background is that house prices and household debt have a significant bearing on financial stability, and the intention of the guidelines is to avoid to dampen the build-up risk in the household sector by more sober lending practice.
In the new (changed) guidelines the level of what is considered a prudent loan-to-value ratio is lowered from 90 to 85 per cent of the property´s market value (the ratio covers all loans secured on the property). It is also a new, or at least a more specific, guideline that the bank will need to make allowance for an interest rate increase of 5 percentage points when assessing a borrower´s debt-servicing ability. The purpose of a large safety margin is to make it easier for the customer (and the lender) to cope with a setback in the real economy. If the borrower has an estimated cash deficit, taking into account interest rates, should as a rule the loan not be granted. At least – if the bank still choose to offer the customer the loan – it has to be with a dissuasion (according to Financial Con-tracts art. 47).
As earlier, the Bank should always inform and clarify for the customer the consequences of the choice between fixed and floating interest rates.
In the case of loan-to-value ratios above 85 per cent, additional collateral must be posted or a special prudential assessment must be made. If the loan exceeds 70 per cent of property value, in-stalment payments should be required as from the first due date. The normal loan-to-value ratio for lines of credit (equity release facilities) is lowered from 75 to 70 per cent of the property´s marked value.
8 The semi-public sector is e.g. organizations, who voluntarily give free counseling.
In both Denmark and Norway financial advice is rarely found in the semi-public sector, where the main focus is on money advice, see below. However a strict distinction between financial advice and money advice can hardly be made. No law or leading cases can be found at the area.
Public sector
In Denmark it is seemingly not considered a public responsibility to offer financial advice. No law or leading cases can be found at the area. However, there are certain initiatives especially where information is provided at the internet. In June 2007 the Money and Pension Panel was established by the Danish Parliament (Act No. 576 of 6 June 2007). The aim of the panel is to further a more comprehensive knowledge of and interest in financial matters among consumers. The Panels few initiatives directed to consumers has focused upon information at the internet. At the Panels homep-age (www.ppp.dk) consumers can read about private economy. There are campaigns and links. For example there is a link to “www.pengepriser.dk”, where the consumer can compare APR. The pri-vate “www.mybanker.dk.” already offered that. There is also links to two pripri-vate homepages that offers free budgeting programs.
In Norway the above discussed Financial Contracts Act is prevailing not only for private finan-cial institutions, but in principle also for similar public institutions, including the Norwegian State Housing Bank (the Housing Bank – Husbanken in Norwegian). The Housing Bank is offering dif-ferent types of loan products, and in practice the credit rating is less strict than in private banks.
The start-up loan offered by the Housing Bank is a favourable loan scheme offered by most mu-nicipalities and probably the most important and significant product in this context. Start-up loan may help consumers to buy their own home if they are in lack of capital or sufficient financing from the private market. It can also be used for improvement of a current home or refinance of mortgage. A start-up loan can finance all or parts of the total costs, but the size of the loan available depends on how much the household can manage to pay in interest and instalments alongside the everyday living expenses. It is the municipality that decides whether the customer is eligible for a start-up loan, and the size of the loan.
The loan is primarily intended for first-home buyers who can´t get started in the housing market for different reasons, as households with special needs, for example people with disability and peo-ple who are sole breadwinner. Before applying for a start-up loan, the customer has to examine whether all or parts of the costs can be financed by a private bank.
In 2012 municipalities borrowed an average of about 600.000 NKR by the Housing Bank to fi-nance start-up loans, and approximately 12.500 households received such funding. The value of outstanding start-up loans grew by 20 percent from 2011 to 2012 and was at the end of 2012 NOK 34 billion. Start-up loans increased from 2011 to 2012 as a share of total Norwegian mortgage mar-ket from 1.7 to 1.9 percent.
There are no formal regulation of competence standards for advisors and supervision, but it is the finance Department in the municipalities who is processing the applications for start-up loan, and in general these types of employees have good financial skills. Otherwise it is almost the same as in Denmark, described initially in this section above, in Norway with information about loanprices etc. provided at the internet under the auspices of the public financed Finansportalen – the financeportal (www.finansportalen.no).
Area 2. Money advice
After payment problems have occurred (post-contract) the main focus is getting the consumer out of dept. Here money advice plays an important role. A few other ways that over indebted persons are helped should though be mentioned.
9
Private sector
Either in Denmark or in Norway law states that the creditor shall help a debtor in default. Instead the legal system focus in both countries is to help creditors to enforce their claims. However, if the creditor agree, the debtor and the creditor can make a deed of arrangement. An arrangement may contain a reduction of the debt and extension of the payment or it can be a new credit agreement with other terms. An arrangement can be made out of court as well as in court. An arrangement does not have to be with one creditor. Out of court an arrangement can be made with the other cred-itors.
According to art. 1-3 in the Norwegian Debt Settlement Act (se below), debt settlement proceed-ings cannot be instituted according to the present Act before the debtor has to the best of his ability sought on his own arrive at a debt settlement with his creditors. No legal definition of money advice can be found in Norwegian law.
In Denmark the broad definition of advice in art. 7(1) in the Executive Order on Good Business Practice can include money advice. Even though the focus is on product selling, a financial under-taking therefore as a main rule (art. 7(2)) shall provide advice, hereunder money advice, if the cus-tomer so requests and provide advice at its own initiative, where circumstances indicate that this is required. Alternatively, the financial undertaking may refer the customer to seek advice elsewhere. The Act on Financial Advisers (Act No. 599 of 12 June 2013) can also include independent money advice, see above.
A few creditors voluntarily offer money advice often combined with an arrangement. Since 2009 the Danish mortgage bank BRFkredit’s Team Dwelling Help (Team Bolighjælp) has seek out and helped customers with delayed payments. Together with the customer they uncover the customer’s problems and offers solutions such as extension of payment, refinancing, negotiation with other creditors and visit the customer to draw up a budget. In 2010 about 2000 solutions where reached and in 3 of 4 cases BRFkredit reached a dialog with their customer. BRFkredit estimates that it los-es up to 400.000-500.000 DKR, when a dwelling is sold by sale by order of the court. Another mortgage bank Nykredit has since 2009 offered a hotline, where the bank’s customers anonymous are offered guidance to deal with payment problems.
In 2010 the Danish consumer interest organization the Danish Consumer Council (For-brugerrådet) estimated that there were 20 to 50 independent financial counselors, hereunder money advisors, in Denmark. Even though the market for independent advisors is improving there is no specific law in the area. The advisors are not met by minimum requirements of education, branch standards and supervision. Examples of bad advice have been seen.
Attempts to establish a branch organisation have been made by the Association of Independent financial advisers(INFIA – Sammenslutningen af uvildige økonomiske rådgivere). A single inde-pendent advisor (Uvildige.dk) has made its own ethical guidelines stated in general vague terms.
The Danish government has announced that it in 2012/2013 will make a law proposal dealing with all financial counselors that are not regulated as banks and mortgage institutes. To give finan-cial counseling will hereafter demands an authorization from the Financial Services Authority that will be the supervisory body. This may result in that the Consumer Complaints Board (Forbrugerkla-genævnet) no longer is competent to handle complaints from an advisor without public authorisa-tion. It has earlier viewed itself as competent to handle such complaints in the case 2003-203/7-2. However, this case is seemingly the only case handled.
The social economic organisation the Debt Company (Gældskompagniet) is related to both the private sector and the semi-public sector. It offers advice and help with creditor negotiation to zens. As a not-for-profit organisation with voluntarily advisors, the payment depends upon the
citi-10 zen’s income. From 2012 the Debt Company has been a part of the voluntarily organization the Social Legal Help (Den Sociale Retshjælp).
For money advice a debtor may e.g. seek lawyers and accounts help. Beside these traditional professions money advice and help to deal with financial problems is more often offered by private agents, both in Denmark and Norway. Even though the market is developing, no specific Danish law has been made and there are no standards of what the money advice should contain. Examples are therefore seen that indebted are used and are more indebted afterwards. In Norway the Debt Settlement Act will serve as a basis and will provide guidelines for a possible agreement between the creditors and the debtor, se below.
Semi-public sector
Free Legal Help (Retshjælpen (Denmark) and Fri rettshjelp (Norway)) is public financed and was established in 1885 in Denmark and in 1893 in Norway. The help depends upon the income of the household and includes most of the legal matters of daily life, hereunder advice about debt settle-ment and other legal aspects of debt. The advisors are e.g. law students.
In Denmark the Danish Bar and Law Society (Advokatsamfundet) in the beginning of the 1980’s established the Lawyers Guard (Advokatvagten), where people in many cities independent of in-come can talk to a lawyer or an assistant attorney and receive legal verbal advice for free. Other voluntarily organizations is the Social Legal Help (Den Sociale Retshjælp) and the Mother Help (Mødrehjælpen) offers free social, economic and legal advice to targeted socially disadvantaged mothers. As a quite new phenomenon a few voluntarily organizations offer debt counseling. In 2008 there was an appropriation of 16 million DKR over a 4 year period to establish debt counseling, where volunteers can help the most vulnerable citizens. The appropriation has supported the follow-ing organizations: Frelsens Hær, Forbrugerrådet, Kristeligt Studentersettlement, Den Sociale Retshjælp i Århus and KFUM’s Sociale Arbejde. The Danish Bankers Association (Finansrådet) cooperates with two of the organizations to which advisors in banks are referred. The free debt ad-vice was in September 2012 extended for another 4 year with an appropriation of 38 million DKR. The number of organizations will increase from 5 to 11 as an attempt to provide services nation-wide. The debt advice organizations earlier mainly served the greater cities.
In Denmark the public supported offices of the Free Legal Help and Lawyers Guard are regulat-ed in the Civil Justice Act ch. 31, Executive Order on Legal Aid by Attorneys, and Executive Order on Grants to Legal Aid Offices and Attorneys Guards. The other voluntarily organizations that of-fers debt advice are not regulated.
Also in Norway there are a few voluntarily organizations offer debt counseling, for example Poor Norway (Fattignorge – www.fattignorge.no) and (Fri rettshjelp – www.fri-rettshjelp.no), a public financed organization established in 1893. However, Free Legal Help offers not money advice when there are other providers. One of these other providers is NAV, cf. art. 17 in Act on Social Services in NAV, se below. Some of the semi-public providers are receiving assignment from the municipalities or from NAV – The Norwegian Labour and Welfare Administration, as a part of the duty to offer information, advice and guidance, see below (www.sologmaane.no). See about NAV below.
No law or leading cases can be found at the area.
Public sector
In Denmark a few municipalities offer citizens with debt problems free advice. E.g. Københavns Kommune established in 2010 a debt counseling center in connection with Valby Borgerservice.
In court the judge has a limited duty to provide guidance. According to the Civil Justice Act (Act No. 1237 of 26 October 2010) art. 500 (1) the bailiff's court guides in a requisite amount, a party,
11 whom is not represented by a lawyer, about his legal rights. More than getting the debtor out of debt, this duty relates to the court’s other duties to provide guidance according to the Act (e.g. to witnesses), which secures a fair trial.
However, when a hire purchase agreement is defaulted, the bailiff’s court has a more explicit role. In conditional sale (retention of ownership to the sold item until payment is made) the creditor as a main rule shall take the sold item back and cancel the dept. The rules in details are found in the Consumer Credit Act chapter 10. If the creditor has not met the requirements for a conditional sale, the court can state that the creditor shall take the item back without keeping any residual outstand-ing debt accordoutstand-ing to art. 30. One of the requirements for an effective conditional sale is accordoutstand-ing to art. 34 that a debtor shall pay 20 percent of the cash price of the item. It is not uncommon that this condition is unsatisfied. In hire purchase where the creditor never has tried to make a condi-tional sale, the court also can refer him to take the sold item back, but in these cases he still can claim the outstanding debt.
Another way to help physical persons out of debt is debt relief. The conditions for this are rather tight. According to the Bankruptcy Act (Act No. 217 of 15 March 2011) art. 197 it should be be-yond hope that the debtor will get out of the debt. In practice this means that the debtor in the near-est couple of years (about 5 years) most likely will not be able to full his obligations to the creditors. This assessment is among others based upon the total amount of the debt, age of the debt, income, a prognosis (implicating the person’s age, education and job) and disposable income. Another condi-tion is that the debt relief will lead to a permanent improvement of the debtor’s economic situacondi-tion. If debt relief is granted the debt is either lowered or cancelled, see art. 198. Debt relief will normal-ly not be granted if the debtor is unworthy. The Act explicates these situations in art. 197. Two of the situations are, if the debtor has not paid off the debt, when he had a reasonable possibility to do so, or if he has acted irresponsible in economic matters, e.g. if the debt is from luxury consumption goods or the debt is systematically build up to the public. The Danish Tax and Customs Administra-tion (SKAT) can cancel debt to the public. The condiAdministra-tions for this in the Public CollecAdministra-tion Act (Act No. 1333 of 19 December 2008) art. 13 match the Bankruptcy Act art. 197.
In Norway the social service shall provide information, advice and guidance which can help to resolve or prevent (new) social problems, cf. art. 17 in Act on Social Services in NAV.
NAV is a result of the integration of the Norwegian National Insurance Service (trygdeetaten) and the Norwegian Labour Market Service (Aetat). There are NAV-offices in all municipalities in partnership with the municipalities, who have a duty to bring in services associated with social wel-fare benefits. Beyond that there is substantial freedom about which social services should form part of the office. NAV is meant to contribute to the financial security of the individual. This depends on close interaction with the user, working life and local authorities, and a sharp focus on people with special needs in relation to the labour market and others in a challenging life situation. In an inter-view with Special Advisor Beate Fisknes in NAV, conducted by Christian Poppe (SIFO) and Dag Jørgen Hveem (BI) in January 2013, some interesting information and perspectives related to the content of the counseling service was presented.
Financial counseling is an important part of the counseling and supervision from the NAV-offices. Financial advice is "everything", from the simple household budget and tips, to more com-plicated advice for debt counseling. It should be offered specialist debt advice in each municipality. But it can be organized as an inter-municipal cooperation, and it can be outsourced and physically be located outside of the NAV office. A main point is that NAV has control of the resource.
In principle, the service is available to everyone, and since it is not only of reparative nature, but also preventive, people who need advice for dealing with their future economic challenges, are enti-tled to advice and guidance.
12 What are the requirements to the quality of the advice and expertise for the counselors? NAV has a duty to provide adequate service, cf. art. 4 in Act on Social Services in NAV. In principle, there are no financial constraints, but “law in book” and “law in practice” could be a little different. A problem is the gray area in terms of soundness. The circular refers to the "Standards of Social Work". This legal standard is dynamic and will be affected by, among other, education, training and development of the subject. This is not regulated in law or the circular. The practice of Appeal, the County Governor, may also be different. NAV aims to build a system that will ensure a more simi-lar practice than today. It should be made "supervisor" to art. 17 because there is uncertainty about the content of the decisions.
There is no specific qualification requirements for the counselors other than “sufficient compe-tence” to provide "professional services", which means requirements for "professionally qualified staff", cf. the circular section 4.17.2.5 and art. 6 in Act on Social Services in NAV regarding neces-sary training for the counselors.
What is significant new in art. 17 in the Act on Social Services in NAV after the new circular was implemented in June 2012? The main point and purpose is strengthening of the service. It will be given an individual decision on art. 17 of information, advice and guidance, cf. art. 41. There has been some skepticism in NAV because of the risk of bureaucratization and too difficult system, but in spite of the drawbacks, the conclusion is that the benefits are greater. Financial counseling in NAV is not very available for those who have not had much contact with NAV previously. Individ-ual decisions will result in visibility of the service and will enable proper evaluation with opportuni-ties to appeal to the County Governor.
A significant problem has been the capacity, resources and competence in NAV. In a survey conducted by the organization Poor Norway in 2009, 64% of the municipalities – of 279 respond-ents – answered that they do not have enough resources to engage in counseling. The wait and the long processing time has been a huge problem. The new circular from June 2012 is intended to mean more clearly duties for NAV and the municipalities and more clearly rights for the receivers of the counseling. It remains to be seen what will be the practical implications of the changes in the circular, which should be an important area to do more research.
The most important Act regarding money advice is “Act No. 99 of 17 July 1992 relating to vol-untary and compulsory debt settlement for private individuals” (The Debt Settlement Act, in force 1 January 1993). The Act enables that persons with serious debt problems can be given an opportuni-ty to regain control of their financial affairs. It provides for conditions in which debtors can, after applying for debt settlement proceedings, obtain a debt settlement, either voluntary debt settlement or compulsory debt settlement (confirmed by court). The Act does not apply to debtors with debts related to their own business, with two main exceptions: 1) the business has ceased, and no untled questions remain relating to it that might significantly impede the implementation of debt set-tlement proceedings, or 2) the debt relating to the (on going) business is a relatively insignificant part of the debtor´s total debt (art. 1-2).
The Act is intended to ensure that the debtor fulfils his obligations as far as possible, and that the distribution of the debtor´s assets among the creditors is well ordered.
Only debtors who are permanently incapable of meeting their obligations can obtain debt settle-ment according to the Act. Debt settlesettle-ment proceedings can not be instituted according to the Act before the debtor has to the best of his ability sought on his own to arrive at a debt settlement with his creditors. The enforcement officer has a duty to advise the debtor and, if necessary, will help the debtor to communicate with the creditors. Also the social service shall, as far as possible, assist the debtor to achieve voluntary debt settlement.
The main rule is a debt settlement period of 5 years (art. 5-2). The debt settlement can be changed or cancelled based on special conditions, for example (at the request of a creditor) if the
13 debtor has been guilty of dishonesty or has seriously neglected his obligation according to the set-tlement (chapter 6). As a main rule, a person can only obtain a debt setset-tlement once (art. 1-3).
In addition to the above mentioned Acts, the Norwegian judicial framework contains the Bank-ruptcy (Insolvency) Act (of 8 June 1984 no. 58) and the Act relating to creditors rights to satisfac-tion of claims (of 8 June 1984 no. 59). These to Acts are not often used to natural persons, because The Debt Settlement Act is more well-adjustet Debt settlement proceedings can not be instituted if the debtor´s estate is subject to proceedings according to the Bankruptcy (Insolvency) Act, and the institution of debt settlement proceedings is no obstacle to the institution of bankruptcy. If bank-ruptcy proceedings are instituted, the debt settlement proceedings shall cease (The Debt Settlement Act art. 1-2 section two).
If a single creditor will enforce payment, it has to be done within the framework of The En-forcement of Claims Act, through the enEn-forcement officer and the court. And if a creditor is intend-ed to reverse a gift transaction or other reversible transactions, it will be necessary to go through the Bankruptcy (Insolvency) Act.
Conclusions
The law in Denmark and Norway has many similarities. It rests upon the same legal traditions. The same considerations can be found in the ordinary tort law and contract law. At the EU-harmonized areas the legislation are pretty much the same. In both countries financial counseling before loans are taken out is primarily found in the private sector. Financial counseling after payment problems have occurred is more often found in the public sector.
However, the fact that production and distribution of welfare has developed in different direc-tions in the two countries are now reflected in the law. In Norway financial counseling before loans are taken out is more comprehensive regulated than in Denmark. While financial counseling after payment problems have occurred is at a beginning point in Denmark, such advice is offered by the public sector in Norway, however not thorough regulated. The new associated circular, implement-ed in June 2012, is intendimplement-ed to mean strengthening of the service. What will be the practical impli-cations of the changes remains to be seen.
Even though the rules may differ, the legal status and relationship between the counselor and the receiver of the service seem to be the same in the two countries. At one hand the advisor-customer relations in the private sector may be more well-defined in terms of rights and duties than are advi-sor-client relations in the public sector. On the other hand the regulations of the private sector main-ly focus upon the advice offered by financial undertakings. This kind of advice is often a part of the sale of financial products and can lead to miss-selling of products. This makes traditional, inde-pendent advice as well as financial counseling after payment problems have occurred more neces-sary.
To conclude, financial counseling across sectors and countries has certain basic elements in common to be efficiently regulated:
1) Requirements as to competence linked to a supervisory arrangement. The absence of such re-quirements can mean that the advice will not be of an adequate quality, which can have significant financial consequences for the client. The requirements for competence thus have the advantages of ensuring a uniform standard of advice among operators covered by such requirements, and estab-lishing a higher standard of advice.
2) Explicated right and duties to ensure truly independent advice. If other interests than the cli-ent’s interfere, it can not only have radical consequences for the client, with personal and financial consequences of over-indebtedness, it can also have drastic consequences for society and the wider economy. The need for independent advice increases with the financialisation of society.
14 3) A complaint structure that reflects a possibility for the client for obtaining compensation for bad advice. Legislation is only as good as its enforcement. Both supervision and penalties found in criminal law will have a preventive effect and secure compliance. Dealing with reparative issues, the redress of individuals is most often found in tort law. The legislation therefore may consider how strict the liability should be. For the client, who has the burden of proof, it can be difficult to prove the existence of improper advice. Even if the client can prove that the adviser has acted cul-pably, they will not necessarily have suffered a loss for which damages can be awarded. Compensa-tion for disappointed expectaCompensa-tions usually requires specific legal authorisaCompensa-tion.
If these elements are not met, the regulation of financial counseling is not well prepared to meet the pressure of the increasing financialisation.
15
Table 1
An overview of the regulation in Norway and Denmark.
Norway Denmark
Area 1. Financial advice. Pre-contract
Private Extent: Common.
Law:
Ordinary tort and contract law.
The Act on Financial Con-tracts and Financial As-signments.
The guidelines for prudent residential mortgage lend-ing practice (from The Fi-nancial Supervisory Au-thority of Norway). Leading cases Rt-1994-1430. Rt-2000-679. Rt-2013-388. Extent: Common. Law:
Ordinary tort and contract law.
Executive Order on Good Business Practice for Finan-cial Undertakings. Provi-sions about advise; see the appendix below.
The Consumer Credit Act art. 7 a (8). Adequate expla-nations
Leading cases:
U 1995.545 Ø.
U 1996.200/2 H.
U 1997.522 Ø. Semi-public Extent: Seldom.
No law or leading cases.
Extent: Seldom.
No law or leading cases.
Public Extent: Seldom.
In principal: The Act on Financial Contracts and Financial Assignments.
In principal: The Act on Social Services in NAV.
Circular relating to The Act on Social Services in NAV, developed and im-plemented the 22 June 2012.
Extent: A few municipalities. No law or leading cases.
Other Information at the inter-net, e.g. where consumers can compare. APR (fi-nansportalen.no and simi-lar private, semi-public and public sites).
The Money and Pension Panel.
Information at the internet, e.g. where consumers can compare APR.
Free budgeting programs at private basis.
16
Norway Denmark
Area 2. Money advice. Post-contract
Private Extent: No specific law but The Debt Settlement Act as a basis and guideline for possi-bly agreement between the creditors and the debtor. No leading cases.
Extent: A few creditors and companies.
No specific law or leading cas-es.
Semi-public Extent: A few voluntarily organizations.
No law or leading cases.
Extent: Some.
A few voluntarily organiza-tions.
Legal Help:
Civil Justice Act ch. 31
Executive Order on Legal Aid by Attorneys
Executive Order on Grants to Legal Aid Offices and Attorneys Guards
No leading cases.
Public Extent: Common.
The Debt Settlement Act. Many cases regarding various legal issues from: District Courts, The Courts of peal, The Interlocutory Ap-peals Committee of the preme Court and The Su-preme Court.
Extent: Seldom.
The Bankruptcy (Insol-vency) Act
The Act relating to credi-tors rights to satisfaction of claims.
Extent: Seldom.
The Civil Justice Act art. 500(1). Guidance in court.
The Consumer Credit Act art. 30 and ch. 10. Hire pur-chase agreements.
No leading cases.
Other If the creditor agrees an
ar-rangement can be made out of court as well as in court.
Debt relief:
The Bankruptcy Act art. 197 and the following articles.
The Public Collection Act art. 13 and the following ar-ticles.
17 U Ugeskrift for Retsvæsen. Denmark.
H Højesterets dom. Supreme Court Judgment. Denmark. Ø Østre Landsrets dom. High Court. Denmark
Rt Rettstidende. Law Journal with cases from The Supreme Court.
References
Norwegian public reports; (NOU) 2009: 11 Norwegian public reports; (NOU) 2007: 5
Penge- og Pensionspanelet. Initiativer for gældsatte. May 2011. Denmark
Regeringen: Forbrugerpolitisk eftersyn: Trygge forbrugere, aktive valg, 2012. Denmark
Tanja Jørgensen: Credit Advice. In: the European Review of Private Law, Vol. 20, No. 4-2012, p. 961-988
Tanja Jørgensen: Gældsrådgivning i Danmark og Norge. In: Vennebog til Lennart Lynge Andersen, Karnov Group, November 2012. Denmark
Økonomi- og Erhvervsministeriet. Analyse af markedet for forbrugslån i Danmark. Oktober 2010. Denmark
Økonomi- og Erhvervsministeriet. Familiernes økonomi. Oktober 2010. Denmark
Regulation
EUConsumer Credit Directive (2008/48/EC)
Directive on markets in financial instruments (MiFID) (2004/39/EC)
Proposal for directive on credit agreements relating to residential property (COM(2011) 142 final)
Denmark
Act on Financial Business (Consolidated Act No. 705 of 25 June 2012) Act on Financial Advisers (Act No. 599 of 12 June 2013)
Bankruptcy Act (Act No. 217 of 15 March 2011) Civil Justice Act (Act No. 1008 of 24 October 2012) Consumer Credit Act (Act No. 761 of 11 June 2011)
Marketing Act (Consolidated Act No. 58 of 20 January 2012) Money and Pension Panel Act (Act No. 576 of 6 June 2007) Public Collection Act (Act No. 1333 of 19 December 2008)
Executive Order on Competency Requirements for Individuals Providing Advice on Certain In-vestment Products (Order No. 346 of 15 April 2011)
Executive Order on Good Business Practice for Financial Undertakings, investment associations etc. (Order No. 1406 of 20 December 2012)
Executive Order on Grants to Legal Aid Offices and Attorneys Guards (Act No. 100 of 30 January 2012)
Executive Order on Information on the Risk Classification of certain Loan Products (Order No. 1457 of 18 December 2012)
Executive Order on Investor Protection in connection with Securities Trading (Order No. 768 of 27 June 2011)
Executive Order on Legal Aid by Attorneys (Act No. 1160 of 9 December 2011)
Executive Order on Risk-Labelling of Investment Products (Order No. 345 of 15 April 2011)
Norway
18 Act on Social Services in the Norwegian Labour and Welfare Administration (NAV) (Act No. 131 of 18 December 2009)
Bankruptcy (Insolvency) Act (Act No. 58 of 8 June 1984)
Creditors Recovery Act (relating to creditors rights to satisfaction of claims) (Act of 8 June 1984 No. 59)
Debt Settlement Act relating to voluntary and compulsory debt settlement for private individuals (Act No. 99 of 17 July 1992)
The Financial Supervisory Authority of Norway (Finanstilsynet): Guidelines for prudent residential mortgage lending practice. Established in March 2010. Tightened up from 1 December 2011
