Disbursements are expensive
Now they are getting complicated. In addition to a change in legislation with dubious benefits, debt is also a change in the banks’ pricing policy. It is already foreseeable that the interest rates for account overdrafts will continue to rise in the coming years and that too few consumers will make use of the possibility of a change.
The legislature is under criticism for a new requirement for loans with variable interest rates (which include the discretionary credit). Banks should link their interest rate to a reference interest rate, thus making the terms more transparent. Most banks therefore link their borrowing rates either to the 3-month Eurocen or to the CEB base rate.
Measures lead to complicated contractual conditions
In practice, the measures lead to complicated contractual conditions, the benefits of which are limited for the customer. If the reference interest rate rises, the bank may raise the borrowing rate by the same amount. If the reference interest rate falls, this must also be reflected in the borrowing rate. Banks set a measurement date on which the reference interest rate is considered. For example, this may be the first banking day of a calendar quarter. In addition, it is determined when a measured change in the reference interest rate is reflected in the terms – for example, on the first day of the month following the measurement date.
And that’s not all: if the bank is entitled to an interest increase in view of an increased reference interest rate and waives this right, it can “save” its waiver. The missed interest increase can either be made up at any time or charged with mandatory interest rate reductions. In the descriptions of the institutes this reads like this: “The unused relevant increase of the 3-month Eurocen amounts to 30 basis points”.
Regulation tends to be a problem
This regulation tends to be a problem for the banks because it makes the comparison of different offers difficult. Particularly in the case of variable rate loans, which are to be used on a larger scale and in the longer term, accrued interest rate increases must be taken into account in the future, so that the awakening threatens.
With regard to the objective of better transparency, the regulation does not yet have what some politicians have hoped for from it. Anyhow, the credit line will not be cheaper due to the requirement anyway. For one thing, the legislature has refrained from setting an upper limit for the premium which banks levy on the reference interest rate. On the other hand, the link to money market interest rates was made at a very unfavorable time: the CEB interest rate is at a historic low of 1.0 percent.
Legislator has obliged banks to document customer talks
The legislator has obliged banks to document customer talks in so-called advisory protocols. Among other things, consumers should be protected against wrong advice. As is so often the case with banking and financial reforms, the opposite is true: customer service is no better than it used to be – banks use advisory protocols to minimize their own liability risks.
The Legal had examined banks in August 2010 and carried out a nationwide test. This resulted in 61 advisory minutes that were evaluated by the Consumer Centers and the Verbraucherzentrale Bundesverband. The result: the benefit of the protocols for bank customers tends towards zero.
The investment objectives were not documented
In 59 of the 61 protocols, the investment objectives were not documented. In just 59 out of 61 cases, the consultants failed to grasp the client’s experience with financial transactions. In 58 cases, the product recommendation issued by the consultant was sufficiently justified. In no single advisory protocol did the banks provide meaningful explanations of the commissions they receive to broker an investment product. Also in no single protocol was there any indication that the bank adviser had checked the customer’s options to see if he was able to cope financially with the desired risk.
Banks were significantly more ambitious
The banks were significantly more ambitious in the effort to eliminate their own liability risk. According to the consumer advocates, in 49 out of 61 advisory bills that the client had to sign after the meeting, a clause was found that would exempt investors from any liability.
Consumer advocates are now calling on the legislator to set a uniform standard for the protocols. However, the consumer advocates may expect too much from it. Banks could use standardized documentation to secure their indemnity against all conceivable instances.
Just how easy this is is shown by a real example from everyday consulting: The customer confirms with his signature that he has been informed about all risks. The Bank validates this statement by also confirming the issue of a sales prospectus. Of this alone, the customer is not better informed. However, the bank is fully secured because, in case of doubt, it can provide tangible proof of the customer’s explanation.
The consumer advocate is to demand from the legislator changes
Part of the task of the consumer advocate is to demand from the legislator changes that should better serve the customer. However, in the recent past (eg in the case of the Consumer Credit Directive), it has become apparent that the hoped-for effect of a legislative change in the financial sector can easily turn into the opposite. Consumers should therefore obtain information themselves and obtain advice on important decisions from an independent consultant (for a fee).