The Financialisation of the Citizen: Social and Financial Inclusion through European Private Law 9781509919222, 9781509919253, 9781509919239

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THE FINANCIALISATION OF THE CITIZEN This book discusses the role of private law as an instrument to produce financial and social inclusion in a context characterised by the redefinition of the role of the State and by the financialisation of society. By depicting the political and economic developments behind the popular idea of financial inclusion, the book deconstructs that notion, illustrating the existence and interaction of different discourses surrounding it. The book further traces the evolution of inclusion, specifically in the European context, and thus moves on to analyse the legal rules which are most relevant for the purposes of bringing about the financialisation of the citizen. Hence, the author focuses more on four highly topical areas: access to a bank account, access to credit, overindebtedness, and financial education. Adopting a critical and inter-disciplinary approach, The Financialisation of the Citizen takes the reader through a top-down journey starting from the political economy of financialisation, to the law and policy of the European Union, and finally to more specific private law rules. Hart Studies in Commercial and Financial Law: Volume 1

Hart Studies in Commercial and Financial Law Series Editor: John Linarelli This series offers a venue for publishing works on commercial law as well as on the regulation of banking and finance and the law on insolvency and bankruptcy. It publishes works on the law on secured credit, the regulatory and transactional aspects of banking and finance, the transactional and regulatory institutions for financial markets, legal and policy aspects associated with access to commercial and consumer credit, new generation subjects having to do with the institutional architecture associated with innovation and the digital economy including works on blockchain technology, work on the relationship of law to economic growth, the harmonisation or unification of commercial law, transnational commercial law, and the global financial order. The series promotes interdisciplinary work. It publishes research on the law using the methods of empirical legal studies, behavioural economics, political economy, normative welfare economics, law and society inquiry, socio-legal studies, political theory, and historical methods. Its coverage includes international and comparative investigations of areas of law within its remit.

The Financialisation of the Citizen Social and Financial Inclusion through European Private Law

Guido Comparato

HART PUBLISHING Bloomsbury Publishing Plc Kemp House, Chawley Park, Cumnor Hill, Oxford, OX2 9PH, UK HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published in Great Britain 2018 Copyright © Guido Comparato, 2018 Guido Comparato has asserted his right under the Copyright, Designs and Patents Act 1988 to be identified as Author of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/ open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2018. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication data Names: Comparato, Guido, author. Title: The financialisation of the citizen : social and financial inclusion through European private law / Guido Comparato. Other titles: Financialization of the citizen Description: Oxford [UK] ; Portland, Oregon : Hart Publishing, 2018.  |  Includes bibliographical references and index. Identifiers: LCCN 2018012879 (print)  |  LCCN 2018013369 (ebook)  |  ISBN 9781509919246 (Epub)  |  ISBN 9781509919222 (hardback : alk. paper) Subjects: LCSH: Civil law—European Union countries.  |  European Union countries— Economic integration.  |  Social integration—European Union countries.  |  Capital market—Law and legislation—European Union countries.  |  Bank accounts—Law and legislation—European Union countries.  |  Credit—Law and legislation— European Union countries.  |  Confict of laws—European Union countries. Classification: LCC KJE995 (ebook)  |  LCC KJE995 .C66 2018 (print)  |  DDC 340/.115094—dc23 LC record available at https://lccn.loc.gov/2018012879 ISBN: HB: 978-1-50991-922-2 ePDF: 978-1-50991-923-9 ePub: 978-1-50991-924-6 Typeset by Compuscript Ltd, Shannon To find out more about our authors and books visit www.hartpublishing.co.uk. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters.

ACKNOWLEDGEMENTS

This book has been conceived largely within the research project on European regulatory private law (2011–2016) hosted at the European University Institute of Florence in Italy. That research project has received funding from the ­European Research Council under the European Union’s 34 Seventh Framework Programme (FP/2007–2013)/ERC Grant Agreement n. 269722. I would like to thank the team involved in that project: Hans Micklitz, Yane Svetiev, Marta Cantero, Rónán ­Condon, Lucila de Almeida, Federico Della Negra, Irina Domurath, Sabine ­Frerichs, Betül Kas, Heikki Marjosola, Thomas Roethe, Barend van Leeuwen, Beate Hintzen, Rossella Corridori, Claudia de Concini.

vi 

CONTENTS

Acknowledgements������������������������������������������������������������������������������������������������������v

Introduction��������������������������������������������������������������������������������������������������������������1 I. The Scenario�������������������������������������������������������������������������������������������3 II. Inclusion, Finance and Private Law������������������������������������������������������8 III. Methodology����������������������������������������������������������������������������������������12 IV. Structure�����������������������������������������������������������������������������������������������13 1. The Idea of Financial and Social Inclusion���������������������������������������������������17 I. Dimensions of Financial and Social Inclusion�����������������������������������17 II. The Rise of Social Inclusion and Its Merging with Financial Inclusion�����������������������������������������������������������������������������������������������21 III. The Transformations of State and Law�����������������������������������������������27 IV. Financialisation������������������������������������������������������������������������������������33 V. Privatised Keynesianism and Democratisation of Finance���������������38 VI. The Role of Trust���������������������������������������������������������������������������������44 VII. Passing the Risk������������������������������������������������������������������������������������48 VIII. The Other Side of the Coin�����������������������������������������������������������������50 IX. Re-regulation?��������������������������������������������������������������������������������������54 2. Financial and Social Inclusion in the European Legal Order����������������������58 I. An EU Affair�����������������������������������������������������������������������������������������58 II. Distinguishing the Forms of Inclusion in Europe������������������������������59 A. Financial Inclusion�����������������������������������������������������������������������60 B. Market Inclusion��������������������������������������������������������������������������61 C. Social Inclusion����������������������������������������������������������������������������63 III. A Just or an Inclusive Private Law?�����������������������������������������������������64 A. Social Inclusion and Social Justice�����������������������������������������������66 B. Market Inclusion and Access Justice��������������������������������������������69 IV. The Rise of Inclusion in European Law����������������������������������������������71 A. Social Exclusion����������������������������������������������������������������������������74 B. Financial Exclusion����������������������������������������������������������������������77 V. In European Contract Law������������������������������������������������������������������84

viii  Contents

3. Access to a Bank Account��������������������������������������������������������������������������������88 I. A Gateway to the Market���������������������������������������������������������������������88 II. Legal Frameworks in Europe���������������������������������������������������������������92 III. The Problems of Overdrafts����������������������������������������������������������������96 IV. EU Involvement���������������������������������������������������������������������������������100 V. The Recommendation�����������������������������������������������������������������������102 VI. The Problem of Reasonable Costs�����������������������������������������������������107 VII. The New Directive�����������������������������������������������������������������������������110 4. Access to Credit����������������������������������������������������������������������������������������������115 I. From a Right to a Bank Account to a Right to Credit?��������������������115 II. Responsible Lending and the Problem of Self-Interest��������������������117 III. Responsible Lending and European Contract Law��������������������������120 IV. Access to Information������������������������������������������������������������������������124 V. Post-Crisis Responses and the Mortgage Credit Directive��������������127 VI. The Public-Private Problem��������������������������������������������������������������133 VII. Financial Stability and Exclusion������������������������������������������������������136 VIII. Back to Trust��������������������������������������������������������������������������������������138 5. Over-Indebtedness����������������������������������������������������������������������������������������142 I. How Much is too Much?��������������������������������������������������������������������142 II. Legal Responses����������������������������������������������������������������������������������146 III. Causes of Over-Indebtedness and their Legal Appreciation������������149 IV. A Categorisation of Private Law Responses to Over-Indebtedness�������������������������������������������������������������������������152 A. Contract Law Ex Ante Instruments�������������������������������������������153 B. Contract Law Ex Post Instruments��������������������������������������������157 C. Non-Contract Law Instruments������������������������������������������������159 V. European Over-Indebtedness Law����������������������������������������������������164 6. Financial Education��������������������������������������������������������������������������������������169 I. Just Gonna have to be a Different Man���������������������������������������������169 II. The Rise of the Policy of Financial Education����������������������������������171 III. Critical Aspects of the Policy of Financial Education����������������������174 IV. Interference with Contract Law��������������������������������������������������������178 Conclusion�������������������������������������������������������������������������������������������������������������182

Bibliography������������������������������������������������������������������������������������������������������������188 Index�����������������������������������������������������������������������������������������������������������������������213

Introduction One must have money. This is one of the most traditional assumptions u ­ nderlying private law in Europe, forcefully conveyed by the German expression ‘Geld muss man haben’ (‘One must have money’), which conveys the idea that a debtor should always be regarded as having the economic means to perform a monetary obligation. The corollary thereof is that even if a civil debtor does not actually have sufficient economic resources to fulfil the obligation, the debtor will not be relieved of his or her contractual duties: entering into economic transactions is a voluntary decision based on private autonomy and the consequences of such involvement in the market is the personal responsibility of the individual. ‘One must have money’ conveys, therefore, a moral instruction and implicit warning as to the hazard of private indebtedness. One must have money. This has become over the course of the twentieth century a broad political and economic principle, articulated in recurrent expressions such as ‘democratisation of finance’1 in America or ‘financial inclusion’ in Europe. The significance of these expressions is that almost every member of society should be granted access to retail financial services. Through such access, individuals will be able to increase their own welfare as well as their chances to fully participate in a financialised society where fewer services are provided by the state. Not only the economy, but citizenry more generally becomes financialised. ‘One must have money’ conveys therefore an optimistic promise of growth which endorses private indebtedness. This political-economic principle promotes indebtedness in order for citizens to fully participate in society and fulfil their economic role as consumers, increasing the demand for products and services supplied by traders—becoming at once better customers and better citizens.2 However, the rationality of private law presupposes that those same indebted citizens have the monies necessary to perform their obligations and satisfy the legitimate claims of their creditors. The appeasement of the new political-economic rationale and the traditional values which inspire private law—regulating the basic interactions between debtors and creditors—has proven to be intricate in practice. The expansion of one places considerable pressure on the other. As a gradual shift from the public to the private dimension occurs, in the form of the privatisation of former public services and the increased relevance of governance by contract, private law is now charged with

1  2 

I Erturk, J Froud, S Johal, A Leaver and K Williams (2007). For the quite surprising origins of this distinction, see chapter one.

2  Introduction

further public policy tasks. However, the fundamental principles and rules which permeate private law are often inspired by different considerations and are rooted in earlier and different socioeconomic contexts or even anthropological models of an individual, making private law possibly inapt to keep track with new developments. By requiring a growing number of citizens to become actively involved in the financial market, the political-economic principle of financial inclusion reaches citizens who may be less able to pay their debts back but who are nonetheless required to ‘have money’ by the above-mentioned contract law principle. The idea that ‘one must have money’ ends up destabilising the assumption that ‘one must have money’. This mismatch can be the source of systemic failures and, consequently, calls for legal reforms meant to subordinate one of the rationalities to the other. The events linked to the 2007–2008 financial crisis and the subsequent debt crisis in Europe, which soon became a dramatic and still ongoing institutional crisis, have further complicated the relation between legal and economic rationales, revealing some of the risks which are inherent to the notion of financial inclusion, and lead us now to consider the role of private law within broader ­policies of financial inclusion. Against this framework, this book focuses on the role of private law as an instrument to produce financial and social inclusion in a context characterised by a redefinition of the economic role of the state, by demonstrating the degree to which the financialisation of the citizen is taking place. First, it depicts the political and economic developments behind the popular idea of financial inclusion. In doing so, this book deconstructs that idea, showing the multiplicity of narratives surrounding it and its association with specific economic and political concepts, and unpacks the notion for analytical purposes into further subcategories. It then traces the development of that concept specifically in the European context, introducing the way in which European private law seeks to achieve the goal of financial and social inclusion. The book then moves on to consider the European rules which pursue this objective. The purpose is to analyse the idea of financial inclusion in its different nuances and its links to different aspects of private and, more precisely, European private law. The analysis of the role of private law in that context requires a wide-ranging look at positive law in Europe as well as the underlying policies inspired by various considerations of political economy, taking a dynamic approach meant to put the emphasis on the transformative forces to which the law is exposed rather than providing a detailed doctrinal analysis of fixed rules. The theme of exclusion and, in particular, the considerable social consequences that derive from it in terms of over-indebtedness have been the object of a vast literature especially from a sociological standpoint, which offers valuable insights to academics and policy makers alike. Rather than repeating points already developed and established in that literature or offering new statistical data on the dimension of the phenomenon of financial exclusion, perhaps with a view to offering an empirical justification for proposed legal reforms, the focus of this book will be on the description of the role of private law as an instrument to produce fi ­ nancial

The Scenario 3

inclusion or combat social exclusion, as two conflicting or possibly coinciding objectives subjected to different narratives.

I.  The Scenario Financialisation, ie society’s growing reliance on financial services, affects the social structure of the state as well as the private law which regulates civil society. Considered from the perspective of the state, financialisation primarily implies an increased significance of the financial sector for the state economy and the increased dependence of the state on international financial markets. Considered from the perspective of citizens, financialisation implies an augmented use of financial services3 by consumers. This offers citizens new instruments to protect and invest their savings, but it also exposes them to new risks and requires them to become acquainted with intricate and highly specialised segments of the market. The notion of financialisation is as widespread in contemporary debate as it is multifaceted. The accounts of it tend to overemphasise its novelty, downplaying the historical continuity of certain financial phenomena. For our purposes, it should be highlighted that, historically, such involvement in the market by citizens through facilitated access to financial services has only become a deliberate policy objective since, at the earliest, the first half of the twentieth century in the US and only later in a European context.4 The political and economic background of that development will be discussed in the following chapters. It suffices to note that in the 1980s economic and political developments leading towards greater individualism and (only apparently) reduced state regulation led the financialised model to become predominant. More fundamentally, the very way in which an individual becomes an element of a polity, ie a citizen, was affected: access to financial services becomes the gateway to full participation in society or, to put it in European jargon, social inclusion. Conversely, exclusion from the market entails adverse social consequences. In a context characterised by a retreating welfare state dependent on transnational financial market for financing, the polity becomes de facto a ‘market state’5 where the financial exclusion of citizens might easily lead to their social exclusion. Financialisation, thus, became a primary method of socialisation. These developments contributed to an evolution in the anthropological

3  An indicative list of financial services can be found in the Annex on Financial Services to the ­ eneral Agreements on Trade in Services. Article 5 initially stipulates that ‘(a) A financial service G is any service of a financial nature offered by a financial service supplier of a Member. Financial services include all insurance and insurance-related services, and all banking and other financial services (excluding insurance)’ and continues with a comprehensive inventory of banking and financial services. 4  J Logemann (2008). 5  P Bobbit (2002) 229.

4  Introduction

model of the individual which is assumed by private law. The rhetoric of the merits of extension of finance to an ever growing number of individuals—already described in the US context with the loaded term ‘democratisation of finance’— hinted at a simplistic overlap of financial and social inclusion, while more recent events have warned against the social costs that a too hasty (over-)inclusion of citizens into the financial system might imply. What is the salience of the idea of financial inclusion in law and politics, such as to justify its treatment in a monograph such as the present one? Is it a concept defined in a sufficiently concrete way and by authoritative sources so as to become an effectively leading principle for legal policy? And where can its origins be traced to? The inclusion of citizens in the economic and financial sector has been advocated by many different factions and economic actors until it has eventually made its way up the political agenda becoming the rationale for legal reforms. As the following chapters will show, financial inclusion is now commonly accepted as a policy goal at the national, European supranational and global level. As one telling example of the worldwide emergence of the policy, the World Bank now explicitly aims to bring millions of individuals without a bank account, the so-called ‘unbanked’, into the financial system, and promotes and measures the levels of financial inclusion in most countries around the world.6 The underlying assumption is, of course, that a widespread diffusion of financial services will contribute to the overall wealth of those countries as well as to an improvement of the living conditions of their inhabitants. Moving from the global to the regional level, the realisation of a higher degree of financial inclusion appears to have become an autonomous goal of the European Union as well.7 The European Union, initially with a Recommendation8 and more recently with a Directive,9 has promoted financial inclusion through providing access to a basic bank account to all European consumers. Comparable, though certainly different, initiatives meant to facilitate access to financial services can be found in related areas of access to credit. More generally, economists aiming for the development of communities worldwide have even pleaded for the recognition of credit as a basic human right,10 particularly as an instrument to help disadvantaged individuals to get out of poverty.11

6  See, for example, recently: the World Bank, in April 2015 concluded: ‘Helping 2 billion people reach financial services is an ambitious undertaking—but the Global Findex data help point a path forward. We know who the unbanked are, how they get by, and why they do not have an account. Aided by the insights captured in the data, governments and the private sector can take effective steps to help bring the unbanked into the financial system.’ A Demirguc-Kunt, L Klapper, D Singer and P Van Oudheusden (2015) 4. 7  COM(2008) 412 final, 4.5. 8  Recommendation 2011/442/EU. 9  Directive 2014/92/EU. 10  For a discussion as to the theoretical foundations of a human right to credit, see M Hudon (2009). 11  M Yunus and A Jolis (2001) 280.

The Scenario 5

At a certain point, financial inclusion was an aim of legislators, financial services providers and consumer rights advocates alike: almost all agreed that access to a basic bank account, to credit, or to investment services should be granted to a greater number of citizens, though each with a slightly different understanding of it in mind. Who can possibly disagree with such a positive term like ‘inclusion’, which suggests benign ideas of participation and integration? The problem, rather, seemed to be that finance was still too exclusive and distant from the lives of ordinary citizens—in short, not ‘democratic’ enough. Concept such as democratisation and inclusion offered a ‘win-win’ for all the parties involved: retail financial services providers reaching out to more customers and customers having monies readily available to increase their own welfare. This generally came at the price of a certain trivialisation of the risks generally associated with the notion, and a shift to the notion of access to the financial market rather than protection from financial risks and their detrimental social repercussions. That harmony of intents lent the notion of financial inclusion a degree of acceptance that made it appear to be a neutral political objective: it is normal and unquestionable that people should have easy access to financial services and a debate on the contents and desirability of the notion is redundant. In this climate, the only aspect deserving discussion is the means through which it is to be achieved. But the positive message of inclusion conceals its political background and normative effects. As the term gained momentum in policy discourse and was unfolded in all possible variations, the notion of inclusion has started being considered more carefully in some research fields, and the question has emerged as to ‘whose interests are served by the way that inclusion is (re)presented and talked about?’12 The same enquiry should also be engaged in by lawyers. Indeed, the development which led to general recognition of the need to financially include citizens is in fact curious, in particular if considered from a European perspective. First, the EU is composed of a plurality of countries with different economic and welfare systems, in which the degree of financial and social inclusion is quite diverse. In advanced capitalist countries, levels of financial exclusion tends to be lower, while newer EU Member States statistics show extremely high numbers of, for example, unbanked individuals. In this context, the development

12  The introduction to a piece by L Dunne (2009) 42, although it addresses inclusion in the particular realm of schooling and education policies, is worth quoting here: ‘In my professional lifetime, the notion of inclusion has evolved and gained momentum. In official scripts, it is presented as a fundamental good and worthwhile endeavour. It may be seen as a concept that implies that nobody is excluded. Over time, I developed an increasing unease with “inclusion” myself, and with the discourses surrounding it within my professional practice. My consequent research enquiry was framed by a recognition that the ways that children are spoken about, positioned and “managed” in schools in the name of inclusion, however seemingly altruistic and well meaning, are not benign and can have disciplinary effects. A question that drove my enquiry was: whose interests are served by the way that inclusion is (re)presented and talked about in education?’ Dunne goes on to employ Foucault’s (1978) notion of knowledge-power to explore the discursive truth-effects of the discourse on inclusion.

6  Introduction

of a pan-European notion of financial inclusion might prove to be challenging to say the least. Secondly, and more fundamentally, if inclusion serves the interests of both services providers and consumers—appearing as a win-win situation— a spontaneous achievement of that objective by market forces themselves would be expected. On the contrary, and surprisingly, financial inclusion does not appear to be a condition that the market itself is able to attain without the support of ­specific legal instruments. For example, all attempts made to extend the use of financial services by way of soft law instruments failed, leading the European Union to elaborate more stringent reforms intended to achieve the objective. This consideration rather hints at the existence of contested interests and values behind the apparently neutral notion of financial inclusion. The vision of financial inclusion as a neutral and commonly agreed objective is in fact a misleading depiction, as the notion rather bears different or even clearly politically coloured connotations. More often than not, the various advocates of financial inclusion have diverse understandings of what that concept should mean in concreto and, consequently, opposing ideas as to the means to achieve that purpose and to the role of the law. To outline just a few possible issues: should the law acknowledge a generalised right of access to financial services for all citizens? Should it allow for discrimination among citizens and, if so, according to which criteria? Should it limit itself to providing access or also protection? Should it regulate the conditions under which a service is provided and how? Should it go as far as to dictate the price of basic services for which it promotes access? Should it offer debt relief to over-indebted customers? And to all of them, or only the ‘good faith’ ones? One single and undisputed answer to each of these questions does not exist. These and many more possible questions indicate that the concept itself remains ambiguous and necessitates a more careful consideration, all the more if it is seen as a guiding principle for private law, in addition to the recent regulatory and legislative interventions in the European Union. A more thoughtful analysis of the concept is required, not for the sake of pure critical deconstruction, but rather for reconstruction, as it is essential that a workable concept emerges clear in its normative content so that it may be integrated into private law. This is all the more useful at a time when different political and ideological forces focus on the relation between law and finance, as a new social awareness of the bearing of the financial market on ordinary citizens’ lives is emerging. The protest movements which developed and spread around the US, Europe—in particular in the most strongly affected countries of Iceland, Greek and Spain—and beyond, which often bear a transnational dimension of protest,13 are just the most visible manifestation of that increased awareness as to the social impact of financialisation. In this context, the debate on financial and social inclusion/exclusion was revived, leading European policy makers and scholars to inquire as to the degree to which exclusion from the financial market might have social consequences

13 

See D Della Porta and A Mattoni (2014).

The Scenario 7

for ­citizens.14 On the one hand, the notions of financial inclusion and democratisation of finance have been subjected to a more scrupulous examination,15 as reforms aiming at strengthening the ‘protection’16 of financial services users have been carried out. On the other hand, the notion of social inclusion, which had developed on the continent in the 1970s as part of a policy meant to extend state protective action to a range of disadvantaged subjects which was wider than just the ‘poor’,17 has become more pressing, and references to it rose steeply in numerous policy documents produced by the European Union. As the effects of the financial crisis started to dramatically impact citizens at risk of exclusion, the fight against poverty and exclusion became a more well-defined objective of EU social policy.18 In fact, the relation of the notion of social inclusion to the one of financial inclusion now also appears in need of a reconceptualisation.19 Most succinctly, if social inclusion was initially considered to be a positive side effect flowing from financial inclusion (coincidence of financialisation and socialisation), the post-crisis explosion of social exclusion as a consequence of a previous imperfect financial inclusion leads us to consider social inclusion as a different objective which might occasionally clash with financial inclusion (dissociation of financialisation and socialisation). If financial inclusion and social inclusion are distinct and possibly diverging aims, the relevant question is how they can be drawn together in order to ensure that the initial promise of democratisation of finance is maintained. If financial inclusion includes both access and protection, social inclusion has to be considered not as a natural side effect of access but rather as a guiding principle for protection (reconciliation of financialisation and socialisation). Appropriate strategies will need to be devised to include social ­considerations into financial regulation, so that the role of law becomes essential to the p ­ urpose. The legal infrastructure of the supervision of financial markets has been profoundly modified in Europe, especially in the last few years, with a new institutional framework, and some new principles and rationales—in particular the one of financial stability—have emerged as of paramount importance.20 The reforms at both the European and national level have not been limited to the public administrative infrastructure, on which a big part of EU legal scholarship has focused, but have noticeably engaged the substance of contract law as well, depicting a completely new legal scenario for financial products and services. These instances of the transformation that private law is undergoing in the shadow of the ongoing

14 

See H-W Micklitz and I Domurath (2015). The Wall Street Journal, ‘The ‘Democratization of Credit’ is Over—Now It’s Payback Time’ ­October 10 2009. 16  M Melecky and S Rutledge (2011) 19. 17  R Lenoir (1974). 18  See Communication from the Commission, Europe 2020: A strategy for smart, sustainable and inclusive growth, COM(2010) 2020 final. 19  See H-W Micklitz (2013). 20  Among others, see E Wymeersch, KJ Hopt and G Ferrarini (2012); N Moloney (2010). 15 

8  Introduction

European crisis can be linked in turn to more fundamental changes in the structure of the European model of the state and of its economic role in a globalised economy.21 European private law as it stands contributes to achieving the objective of financial inclusion, determining a financialisation of private law against a wider framework of financialisation of the economy and the state, but at the same time strives to develop effective instruments to protect the interests of the citizens who might bear the negative consequences of misguided financialisation. A look at European private law shows the existence of a so far unsolved and not insufficiently examined tension between regulations inspired by the political principle that ‘one must have money’ and the traditional approach inspired by the moral idea that ‘one must have money’.

II.  Inclusion, Finance and Private Law The relevant role attributed to regulation might give rise to a preliminary question concerning what the objective of regulation itself should be: is it promoting inclusion or combating exclusion? This seemingly trivial question in turn requires shedding some more light on the inclusion/exclusion dichotomy, inquiring how each term of the dichotomy refers to the other. A few introductory and quite broad considerations are useful in this place. In general, inclusion and exclusion can be regarded as two sides of the same coin. As the sociologist who most accurately investigated the dichotomy in theoretical terms remarked, ‘“Inklusion” bezeichnet dann die innere Seite der Form, deren äußere Seite “Exklusion” ist’22 (‘Inclusion’ describes the inner side of the form, whose outer side is ‘exclusion’), whereby exclusion is identified purely as the external side of inclusion. While discussing the two terms we are thus observing the very same object, though considering it from two different perspectives. Given this necessary interrelation—or rather even identity—a policy programme or a regulation meant to combat exclusion could perhaps appear to be fully equivalent to one meant to promote inclusion and vice-versa, so that the question of whether it is promoting inclusion or combating exclusion appears redundant. This is, however, not necessarily the case. Paradoxically, if the two elements are sides of the same coin, any policy meant to promote inclusion will have to accept a certain degree of exclusion as well. In notional terms, the persistence of such a degree of exclusion is logically necessary for the subsistence and well-functioning of the system in which one is supposed to be included. If this is true, over-inclusion might be detrimental to the very existence of the structure whose borders are defined by the interaction between

21  On the causes and effects of this transformation for private law, see H-W Micklitz and Y Svetiev (2014); G Comparato (2016) ‘Factors Behind the Transformations of Private Law’. 22  N Luhmann (2005).

Inclusion, Finance and Private Law 9

inclusion and exclusion. In more practical terms, can financial inclusion reach the point of including all citizens into the financial system under the same conditions? Initially, this requires a further problematisation of the notion of financial inclusion, regarding both the adjective ‘financial’ and, most importantly, the ambiguous word ‘inclusion’. This will be discussed further below. It suffices to note here that, with regard to the adjective ‘financial’, a multiplicity of financial instruments of a very different nature can contribute to dissimilar extents to inclusion: bonds, shares, consumer and mortgage loans, current accounts, savings accounts, pension funds and so on can all be considered to fall within the scope of financial inclusion policy. The importance, impact and risks of each of them are diverse, so that the general principle of financial inclusion must at some point boil down to more specific forms of regulation addressing particular segments of the financial market, setting the conditions of both access and protection. It must be clarified that space does not allow adequate consideration of each of those instruments in this book, and the focus will lie on some of them only. Secondly, with regard to the term ‘inclusion’, this should not be understood in purely linguistic terms as a process which brings new components into a pre-­existing structure, without considering the constitutive role of the inclusive ­process for the existence of the structure itself. To put it in less abstruse terms, all the legal provisions which promote inclusion in the market contribute to the ­creation of that market. Thus, inclusion policies cannot simply be regarded as instruments meant to extend the benefits of the financial market to a higher number of citizens, as much rhetoric on the democratisation of finance represents it, but they should rather be considered as instruments that shape the financial ­market. These considerations should warn of the deceptiveness of a narrative of pure extension of the advantages as well as the disadvantages of the financial market to consumers, according to which the law can only have the function of extending or ­limiting inclusion without regulating the essence of the market. This emphasises the ­significance of private law as an instrument to achieve the policy of inclusion. It is at the outset necessary to warn that the strict dependence of private law rules from the public policies pursued by the state can be criticised according to traditional views which conceive law in general as detached from politics, and private law more particularly as the law of individuals detached from public law. Under that viewpoint, the particular economic policies pursued by the state would be irrelevant for private law, which rather operates according to its own logic. Generally relying on an understanding of party autonomy as a form of ‘negative freedom’,23 those views would perceive private and public law as two opposite domains and accept intrusions of public considerations in the private law rationality with discomfort and only as exceptions to the general rule of the freedom of contract of parties. This reconstruction can however be challenged on theoretical

23 

I Berlin (1969).

10  Introduction

and on empirical grounds alike. It suffices to notice here that, historically, private law has transformed according to fundamental changes in the structure and the political economy of the state, such as those clearly described by the legal historian Franz Wieacker, analysing the characteristics of private law in a rising industrial economy.24 Because of the focus placed on private law, a few words on the actual situation of European private law are compelling in this introduction. It must initially be observed that in the European context, the analysis of private law is made challenging by the impossibility of speaking of private law in a single way. Not only is Europe characterised by a well-known multiplicity of legal systems and traditions, but the reciprocal interaction between that plural domestic private law and EU law must also be considered.25 This interaction cannot be simplistically explained as an overlap of two largely coinciding legal regimes. National private law aims at regulating the whole civil society, as a form of civic constitution; in contrast, EU private law has the much more limited function of fostering some of the general policy aims of the European Union, while the capacity of the EU institutions to act is limited by the principles of conferral, subsidiarity and proportionality, which would make illegitimate any private law measure which does not expressly and proportionally aim to achieve the Union policies.26 EU private law is, in this sense, constitutionally bound to be instrumental. At the same time, this constraint blurs the already vague boundaries between law and regulation.27 After having identified the emergence of a new goal among the policies of the EU more or less clearly covered by apposite treaty provisions, it is then possible to see how the private law created by the EU (or, rectius, the law of the EU which has a relevance for private law) is employed as an instrument to achieve those objectives. This approach, which can be described as a functionalisation or instrumentalisation of private law, opens the way to a series of possible modifications of the rules which traditionally govern the relationships between the citizens, which are all the more inspired by diverse public policy considerations or take their roots in a different anthropological model. Among some of those goals which are most relevant in the perspective of the private lawyers and which have already inspired much of the EU interventions in contract law, the creation of the internal market in general terms and the achievement of a high degree of consumer protection more specifically can be highlighted. Those aims have been fundamental in the development of a more or less coherent corpus of European legislation meant to protect the

24 

Most telling, F Wieacker (1974). On the different aspects of pluralism in this regard, see the contributions in L Niglia (2013). Case C-376/98 Federal Republic of Germany v European Parliament and Council of the ­European Union (Tobacco Advertising I) EU:C:2000:544. This holds true even if the Court of Justice of the European Union (CJEU) has traditionally been generous in appreciating the width of the powers of the European Union. 27  Further on European private law and regulation, see G Comparato, Y Svetiev and H-W Micklitz (2016). 25 

26 See

Inclusion, Finance and Private Law 11

consumer, identified as the weaker party in an economic transaction with a trader, and that have a considerable role to play also within the general theme of financial inclusion, despite the tendency to except financial contracts from the scope of application of a few ‘general’ consumer law directives and regulate them through more specific ad-hoc mechanisms.28 Given these premises, what is the position of the goal of combating financial and social exclusion within the EU legal order? Has it emerged as a legal principle either in primary or, at least, in secondary legislation? All the aims discussed above, rather than being dissimilar and unrelated ideals which confer inhomogeneous competences to the EU institutions, appear to be interrelated goals leading to parallel and analogous results. The coexistence of these objectives, which limit and steer the action of EU institutions, should be taken into account when considering the way in which the goal of financial inclusion is pursued in the EU legal order; for instance, if financial inclusion is addressed by the EU legislator through the internal-market competence, ie as an instrument to allow more citizens to participate in the internal market, then it should also be considered that ‘consumer protection requirements shall be taken into account in defining and implementing other Union policies and activities’.29 Taking into account the need to establish an internal market characterised by a high degree of consumer protection, the term financial inclusion, therefore, needs to be construed as the requirement to include a greater number of citizens in the financial internal market (access dimension), while providing them with a certain degree of protection from financial as well as social risks (protective dimension). It will be shown, however, that the law has mostly utilised the rhetorically loaded ‘inclusion’ as a synonym of access, downplaying its other dimensions.

28 See for instance, recital 32 of the Consumer Rights Directive (Directive 2011/83/EU of 25 O ­ ctober 2011 on consumer rights): ‘The existing Union legislation, inter alia, relating to consumer financial services, package travel and timeshare contains numerous rules on consumer protection. For this reason, this Directive should not apply to contracts in those areas. With regard to financial services, Member States should be encouraged to draw inspiration from existing Union legislation in that area when legislating in areas not regulated at Union level, in such a way that a level playing field for all consumers and all contracts relating to financial services is ensured’. Relevant provisions are instead set by Directive 2002/65/EC of the European Parliament and of the Council of 23 September 2002 concerning the distance marketing of consumer financial services. It can also be noted that the much older Unfair Contract Terms Directive (Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts) does not exclude financial contracts from its scope of application and has proven to be of great value in cases concerning those contracts. It is also noteworthy that the Unfair Commercial Practices Directive (Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market), generally characterised by a maximum harmonisation approach, acknowledges at Art 3(9) that ‘[i]n relation to “financial services”, as defined in Directive 2002/65/EC, and immovable property, Member States may impose requirements which are more restrictive or prescriptive than this Directive in the field which it approximates’. 29  Art 12 of the Treaty on the Functioning of the European Union.

12  Introduction

III. Methodology This is largely a multidisciplinary study on the politics of private law. Yet, the traditional private lawyer with expectations of a positivist or case-law based analysis of the law might be the most vexed reader of this book. The intent is rather to link the general discourse on financialisation of society with more concrete evidence drawn from the law. Methodologically, the views presented in this book are based on an analysis of EU legislation, case-law and, even more importantly, the policy papers produced by the EU institutions. These are the documents in which the objectives of the Union are most clearly spelled out and that, at the same time, anticipate and guide the adoption—and often even the interpretation by the lawyer—of more specific rules of contract law. Combining those sets of information it becomes clear how the political-economic foundations of the idea of financial inclusion are implemented in concrete legal rules, which de facto translate abstract policy considerations into social interrelations among citizens. Although the focus of this book is on general trends in Europe, giving particular attention is given to the law of the European Union, references to national laws are constantly made throughout the book. Those references are important to highlight the social and economic context as well as national legislative frameworks in which financial inclusion is discussed, especially in their interrelation with supranational law. European private law is understood, therefore, in broad terms, including the interaction between supranational institutions and national laws. The UK is also obviously embraced by the notion of European private law. The book undertakes, thus, to trace a continuum between political economy, policy and law, aiming to link the macro legal-economic to the micro dimensions, which are more visible in private law. The perspective adopted herein starts from broad political and economic ideals which stand behind financial inclusion; later, it identifies traces of that understanding in the policy documents on the regulation of EU financial markets and, finally, looks for the concrete application of policies in European private law. This analysis unfolds over four chapters, each devoted to the regulation of one particular aspect of financial inclusion. Needless to say, this will imply narrowing the scope of the analysis to certain areas only, leaving some other fields outside the scope of analysis; for instance, it will not focus on investment services nor address insurance contracts, which the European Union has also shown a renewed interest in regulating.30 Through this operation it will become clear how a new policy rationale, ie the promotion of financial inclusion/ fight against financial exclusion, has emerged and is affecting private law, leading to a functionalisation of private law31 in light of particular market rationalities.

30 

COM(2010) 2020 final. specific reference to the impact of EU law on national contract law, see extensively CU Schmid (2010). 31 With

Structure 13

These developments have further contributed to the disintegration of the misleading classical image of technical neutrality in private law, turning it into a functional device to achieve macroeconomic objectives. This is particularly evidenced by the growing tendency to regulate private relations, moving from a model which is more respectful of the autonomy of the parties involved, left free or purely encouraged to realise inclusion, to one in which that objective is more strongly sought through regulations with a strong market-building function. This pattern, which departs from almost complete freedom of contract and the absence of specific regulation, then increasingly relies on self-regulation and eventually public regulation to achieve financial inclusion, becomes clear in all the cases discussed. In this respect, and by way of a methodological explanation, a clarification regarding the term ‘private law’ seems opportune. Generally understood as the law governing the relations between private citizens, the exact definition and the borders of the notion of private law tend to vary in different legal traditions, which can include or exclude particular aspects, which remain relevant for this book. Private law is herein understood in broad terms, including most notably commercial and consumer contract law but also aspects of civil procedure, insolvency and even administrative law which have a crucial impact on private relations. This perspective downplays the importance of the public/private (law) distinction, without aiming to discuss it further in detail or to reaffirm its substance. Rather than offering a normative analysis, the book remains for the most part descriptive or, more correctly, critically descriptive. In other terms, it does not aim to explain the law as an analysis of legal texts interpreting it in a systemic way in order to build a coherent structure of legal concepts, but rather describes positive law in its broader political-economic context without, however, formulating overall recommendations for legal reform, which are rather left to the reader. Yet, in the presentation of various arguments, critiques are occasionally made of particular ideas and doctrines. To this end, the study avails itself of the contribution of other academic disciplines besides legal studies, drawing on economics, political science and sociology literature.

IV. Structure In order to address coherently the numerous questions which have been raised, this book is organised as follows. Initially, the focus will be placed on the concept of financial inclusion in a broad sense. Rather than offering statistical data as to the figures on financial exclusion and inclusion—there is a considerable and sometimes puzzling number of publications and studies in existence—the evolution of that notion will be critically outlined. The notion of financial inclusion can be linked to economic processes of financialisation of society, as well as deeper transformation in the state and the political economy that the state pursues, which will also have to be addressed.

14  Introduction

Chapter one is devoted to critically outlining the evolution of the idea of financial and social inclusion within the framework of the economic processes of financialisation of society and the deeper transformation of the political economy of the modern state and debtor-creditor relations. It shows how financialisation requires the inclusion of a greater number of individuals in the financial market, on the basis of the argument that this will increase consumer welfare. This argument is considered to lie at the basis of the purported association of financial and social inclusion, which chapter two will undertake to dissociate. Slowly narrowing the focus to the European context, chapter two traces the idea of financial inclusion in the policy documents of the European Union. It suggests that despite its origins in the US context, the discourse on financialisation assumes particular connotations in Europe. The chapter traces the evolution of that notion and highlights how ‘financial inclusion’ in Europe interacts with peculiar notions of ‘market inclusion’ and ‘social inclusion’, discussing how each of these concepts relates to conceptions of justice more familiar to private lawyers. It further shows that the policy documents of the European Union have identified a series of key topics which are particularly relevant for promoting inclusion. It will be shown that, even if an interest for social exclusion as a part of financial inclusion has risen only more recently on the European agenda, regulatory measures have traditionally been inadequate to consider that aspect, which has been mostly left to the Member States. On the contrary, EU private law in the areas considered seems to be characterised by an understanding of financial inclusion as mostly market inclusion, as consistent with the policy aim of creating an internal financial market. As stated, the angle which is employed to analyse the notion of financial inclusion is specifically a private law one and this book will look at the way in which this notion affects private law. A set of core issues which appear to be particularly relevant in the perspective of achieving financial inclusion, mostly relying on sociological and economic literature as well as, notably, policy documents of supranational institutions will be identified. The classification follows one proposed by the European Union in dealing with the topic of financial inclusion, which is not made on the basis of a legalistic criterion meant to distinguish single particular private law doctrines or contract types, but rather on social and economic aspects which are at the same time dealt with by different private law tools. In that light, four key and highly interlinked areas can be highlighted: access to a bank account, access to credit, over-indebtedness and financial education. For each of these areas, it will be shown how private law rules—both of traditional and regulatory nature—contributes to produce, or even impede, financial inclusion either in a market-oriented sense or a social sense, while the regulation of those issues at the European level is taken into consideration highlighting the function that this is supposed to perform. Chapter three initially focuses on access to a bank account, which is commonly regarded as the most basic financial service that an individual should have in order to be considered financially included, as well as clarifying in the banking law of several jurisdictions the minimum and necessary economic transaction in

Structure 15

order for a bank/customer relationship to be established. The chapter recounts the evolution of EU law in this area, showing that a growing interest and regulatory involvement culminated in the 2014 Directive on access to payment accounts with basic features. Chapter four looks into the instruments and the legal controversies surrounding access to credit. While offering credit to individuals has emerged historically as the first measure of ‘democratisation of finance’ in the US and ‘credit for everyone’ was considered, at least until the 2007–2008 financial crisis, as a policy objective to be fully endorsed, more recently a less enthusiastic approach has emerged. Policy makers and scholars alike have come to recognise the possible negative repercussions of the idea of easy credit and have started advocating more explicitly the need for a more responsible use of credit. EU private law shows clear traces of this evolution, which are all analysed in this chapter. The most worrisome negative aspect of policies of financial inclusion is that, when they are provided with too many financial services, citizens might become unable to fulfil their contractual obligations, entering a situation which is defined as over-indebtedness. While this situation is traditionally ignored by private law (at least general contract law, although it is considered by commercial law), the insolvency of a high number of citizens in a strongly financialised economic system might lead both to economic systemic risk and to social problems. In recent years, especially after the 2007–2008 financial crisis, a growing number of ­European states have introduced quite disparate mechanisms to remedy the overindebtedness of civil debtors in an attempt to counteract social exclusion and, at the same time, ensure financial stability. The rationales behind those reforms are directly addressed in chapter five. In a context in which the general policy goal is to promote the extension of financial services, while preventing the systemic and social risks which could derive from over-inclusion of consumers in the financial market, a strategy which is increasingly often advocated to allow for a more responsible use of financial services consists in the promotion of the financial literacy of the citizen, ie financial education. According to this view, many of the problems deriving from the use of financial services among individuals stem from the illiteracy of the citizen who, notwithstanding being provided with a conspicuous set of pre-contractual and contractual information, lacks the intellectual capacity to understand that information and, as such, should be aided through financial education programmes. Chapter six therefore addresses this topic, showing how controversial and possibly harmful to the interests of consumers this view, which represents the most evident step towards a model of the financialised citizen, could be. This kind of division of topics will admittedly produce certain overlaps between some sections of this book. For instance, the discussion of the principle of responsible lending, an instrument of consumer credit law meant among other things to prevent over-indebtedness which strongly impacts on the possibility of having access to credit, will necessarily cover aspects dealt with in both the chapters on over-indebtedness and access to credit. Over-indebtedness will be a recurring

16  Introduction

term also in the discussion of other related areas. Such an overlap is useful, rather than detrimental, to the coherence of the discussion, since it contributes to showing how the different dimensions are closely interlinked and how private law rules impact on each of them. At the same time, the purpose is not to offer a systematic or dogmatic interpretation of the rules of private law—which is an operation which would require an in-depth analysis of the positive law of one or more jurisdictions when the literature on even relatively new concepts such as responsible lending is already enormous—but rather to expose their function as instruments to allow for the inclusion in, or the exclusion from, the financialised economy. Rather than analysing particular pieces of legislation or case-law, therefore, this book’s interest lies in the evolution of the policy considerations behind those sets of rules.

1 The Idea of Financial and Social Inclusion I.  Dimensions of Financial and Social Inclusion Financial inclusion is a broad expression referring to the inclusion of a subject in the financial system. The term is mostly employed by economists discussing the degree to which individuals have access to financial services such as current accounts and credit, while financial exclusion is spoken of whenever individuals do not have access, or have access on considerably inferior conditions, to the services which are easily available to included citizens. To put it more concretely, a consumer with a bank account, an insurance policy, a credit card, a mortgage loan and other financial products could be considered as financially included, while a person who does not have the same products, or who has fewer of them, could be regarded as fully or partially excluded. To be sure, while the notion is relatively easy to describe in abstracto it is complicated to measure in practice: how many financial products should a person own in order to be considered financially included? Is financial exclusion to be regarded in absolute or in relative terms, similar to the traditional distinction between absolute and relative poverty? These and other questions make it necessary to turn a more attentive eye to the notions of financial inclusion and exclusion. Different definitions have been proposed. Some economists maintain that financial exclusion is ‘the inability, difficulty, or reluctance of particular groups to access mainstream financial services’.1 This definition obviously raises the question of defining a ‘mainstream’ financial service. Admittedly, if the only opportunity available to someone is to purchase a dangerous financial product on very unfavourable conditions, that person might not be regarded as financially included. By the same token, having to pay an unusually high interest rate to compensate the impossibility of offering a certain guarantee to the lender might also not be regarded as a success story of inclusion, as is a mortgage loan which is so expensive that it makes the possibility of incurring arrears and a consequent home repossession by a bank very likely.2 Therefore, something more than a simple ‘access’ to 1  2 

DG McKillop and JOS Wilson (2007) 9. On vulnerability of mortgage debtors, see I Domurath (2017).

18  The Idea of Financial and Social Inclusion

the service appears necessary. Other definitions in economic literature suggest that the term refers to ‘the lack of access by certain segments of the society to appropriate, low-cost, fair and safe financial products and services from mainstream ­providers’,3 hinting that financial exclusion addresses only ‘certain segments of society’, but focusing also on the need to have access to ‘fair and safe’ products. This definition implicitly assigns a role to regulation, not only with respect to providing access to services but also in ensuring their fairness and safety. A more complex definition has been put forward by a study for the European Commission, according to which ‘financial exclusion refers to a process whereby people encounter difficulties accessing and/or using financial services and products in the mainstream market that are appropriate to their needs and enable them to lead a normal social life in the society in which they belong’.4 This multifaceted definition refers to financial exclusion as a more generalised phenomenon which affects ‘people’ at large rather than only certain groups of society. Moreover, it considers not only the fairness and safety of financial services but also takes into account their impact on the life of customers. As these necessarily elusive yet telling definitions suggest, exclusion may take different forms. For example, it may be a tout court impossibility to enter the financial market, because of the refusal of banks to enter into economic transactions with individuals who offer little guarantee that they will perform their contractual obligations, or it may consist of access to the market only under particularly unfavourable conditions.5 For our purposes, the notion can be broken down into two parts: a minimalistic variant of financial inclusion, which completely coincides with access to the financial market and downplays the conditions under which that access is granted; and a second more comprehensive variant, which considers not only the mere fact of access but also the actual conditions under which access is granted, entailing elements of both access and protection. It seems reasonable to view financial inclusion as composed of two dimensions: access and protection. As a corollary, a legal measure meant to promote financial inclusion, most importantly should ensure access to services, but should also offer some degree of protection to the included subject. Different strategies, based on product regulation or information duties, can then offer that protection. This specification is important, as regulation meant to achieve financial inclusion might in practice—as it has often been the case— focus excessively on one side: in other words, facilitating access at the expense of protection or, at the other end, (potentially) establish forms of protection which are high enough to hinder access. For example, if the possibility of repossession of a mortgaged property is completely excluded, the security function of the mortgage will be de facto neutralised, thus leading banks to a more restrictive approach to mortgage lending.

3 

R Mohan (2006). L Anderloni, B Bayot, P Błędowski, M Iwanicz-Drozdowska and E Kempson (2008). 5  E Kempson (2006). 4 

Dimensions of Financial and Social Inclusion 19

As financial inclusion means having access to safe services, not having sufficient access to safe services coincides with financial exclusion. To give an example, in the UK, which is a country usually considered at the forefront of financial developments in Europe, around 1.7 million people remain without access to a bank account.6 They are ‘unbanked’ or financially excluded. Does this situation represent a problem? Should financial exclusion be a concern for the legal and economic system, so that law ought to promote access and protection? As the outcome of a basic interaction between supply and demand, financial exclusion should theoretically not represent a particularly worrying situation, if freedom of contract is valued over other goals. Nevertheless, that exclusion can have further negative consequences. On the one hand, those excluded will be left incapable of performing a series of basic operations which are generally necessary to actively engage in society: making and receiving payments, withdrawing money from an ATM, shopping online and so forth. Thus, there are social considerations that call for intervention. On the other hand, there are also economic considerations: the practical consequence of the impossibility for some members of society to be participate in the mainstream market is that alternative and on occasion unregulated or fraudulent submarkets can develop, in the long run posing problems of financial instability. Financial exclusion might therefore entail possible detrimental impacts both on the welfare of the individual (micro dimension) and on macroeconomic figures (macro dimension). The lack of economic capacities may lead to the exclusion of the disadvantaged from a wide range of services which are available to other individuals, and may even impact their ability to purchase basic goods and services. In this perspective, and although the notion of financial and social inclusion should be kept distinct at an analytical level, they may often come together in reality. By way of example, an inability to access mortgage credit might negatively impact the housing situation of a citizen and of his or her family, and the same socially detrimental outcome might be achieved when signing a particularly unfair mortgage contract which might easily lead to the eviction of a debtor in arrears. Financial and social exclusion hence appear to be interlinked, producing forms of social marginalisation. In academic literature, even if the two notions have developed independently, it has been suggested that financial exclusion is a specific form of social exclusion.7 Although this book draws examples mostly from contemporary financialised societies, it should be recalled that the connection between financial activities and social exclusion has been dramatically evident for large part of European history, as a phenomenon which is capable of affecting both the demand and the supply side of finance. Indeed, in the late Middle Ages, the general prohibition of lending on interest that characterised Christianity and hence medieval European private law contributed to the social and political marginalisation of those groups

6  7 

K Rowlingson and S McKay (2016) 5. MB Aalbers (2011) 5.

20  The Idea of Financial and Social Inclusion

involved in the controversial activity of ‘usury’.8 Forms of financial segmentation had consequences not only on the social structure of the city but even on its geography, producing ghettos separated from the rest of the city and in which usury could be practiced.9 Incidentally, it has also been speculated whether the most extreme forms of exclusion, including repression and expulsions of the Jews, did not in fact thrive as Christianity eventually overcame the prohibition on usury.10 That urban marginalisation is an aspect which, on the demand side, emerges most clearly at the present day, where financial exclusion seems to be mostly associated with certain urban areas,11 with mortgage lenders engaging in the ‘redlining’ of specific neighbourhoods where lending will be made more difficult and costly, and thus further contributing to social marginalisation.12 A growing amount of research shows the impact of financialisation on life in the city,13 breathing new life into Lefebvre’s celebrated ‘right to the city’ anti-capitalist critique.14 Against this background, exclusion might often appear as part of a vicious circle or even as a self-fulfilling prophecy, as the lack of involvement in mainstream markets may determine rather than be determined by social exclusion. These considerations might seem to provide sufficient reason to enthusiastically embrace any policy meant to promote financial inclusion. Nevertheless, the promotion of financial inclusion appears more problematic on closer inspection, and the reasons for this will be demonstrated in the discussion that follows. One should also be careful not to equate the economy at large with finance in particular. If being excluded from the economic system at large, which includes the labour market, leads to serious consequences in terms of social exclusion, the same does not necessarily hold true for financial exclusion. Arguing the opposite would mean equating economy and finance. This would not be correct either theoretically or empirically in the perspective of the life of millions of individuals, but has slowly become truer for economic systems which have been subject to processes of accentuated financialisation. It is important, then, to focus more specifically on the notion of social inclusion, considering how it developed and how it relates to financial economy.

8 

G Todeschini (2016).

9 Ibid.

10 

H Pirenne (1936) 133. Sibley (1995); P Bennet (2010). More recently, an empirical study of approximately 1,000 households in a British city has found that ‘financial exclusion is generally associated with socioeconomic characteristics such as age, gender, housing tenure, working status, income, disability, and the presence of young people in household but not with respondents’ residential area, education level, internet use, and social participation’: S Bunyan, A Collins and G Torrisi (2016). 12  MB Aalbers (2011) 13: ‘Redlining is a form of place-based financial exclusion, and financial ­exclusion is a form of social exclusion.’ 13  D Harvey (2008). 14  H Lefebvre (1996). 11  D

The Rise of Social Inclusion and Its Merging with Financial Inclusion 21

II.  The Rise of Social Inclusion and Its Merging with Financial Inclusion If in the previous pages different definitions of financial inclusion have been given, it is now time to consider social inclusion more closely. Social inclusion is in fact a much trickier concept to define than its financial counterpart. It refers to the inclusion—or, rather, as has also been suggested taking into account the characteristics of plural and multi-ethnic society, the participation15—of a subject in ‘society’ as such. In contrast to the discussions of economists and policy makers as to the need to foster financial inclusion, the sociological discourse has mostly been focused on the negative phenomenon of social exclusion rather than inclusion.16 This phenomenon may affect a vast number of subjects: the poor, the homeless, the long-term unemployed, immigrants experiencing difficulties in integrating in a new country and, more generally, those disadvantaged subjects who live at the margins of civil society without having the chance to fully participate in it. While accepting that social exclusion refers to some form of marginalisation from society,17 the core concept ‘society’ still remains cloudy. By way of example, libertarians dispute the existence of such a thing as a ‘society’ which is ontologically distinct from the inhomogeneous sum of the irreconcilably different men and women that compose it18 while, on the opposite side, socialist thinkers distinguish several classes within societies.19 What ‘society’ or ‘social class’ do we have in mind when we are talking of social exclusion? In other words, ‘where’ should one be included? In this regard, there are at least two main different yet partially overlapping understandings of social inclusion. In academic circles, the concept of inclusion has been mostly elaborated in sociology and is deeply embedded in the systems theory of the German sociologist Niklas Luhmann.20 There, inclusion mostly refers to the inclusion of a subject, considered in abstract terms as a ‘person’, in a ‘social system’ intended as a system of communication. As such, the notion is generic and does not necessarily refer to the need for social inclusion in the sense of making flesh-and-blood individuals participating actors of a given specific society and being provided with sufficient material resources to participate in it. This latter is, rather, a second and older way in which social inclusion is usually understood in much less theoretical and more empirical sociological literature, in which the

15 

H Steinert (2003) 5. Among the many publications on social exclusion, see C Nathan De Wall (2013). J Millar (2007) 2 ff. 18  Margaret Thatcher’s statement that ‘there is no such thing as society’, and her later clarification of that statement as meaning that people have to look after themselves before government can do, is well known. See in that respect, EJ Evans (2004) 106. 19  In particular, for the Marxist theory of social classes, see NJ Smelser (1973). 20  N Luhmann (2005). 16  17 

22  The Idea of Financial and Social Inclusion

adjective ‘social’ does not immediately refer to the ‘social system’ in Luhmannian terms but to a concrete society with a stronger welfarist connotation. In this latter sense, social inclusion has mostly been employed in statistical and policy research on the causes of ‘social exclusion and poverty’, taken as two interlinked—though distinct—phenomena. It is at any rate remarkable that Luhmann himself, who popularised a slightly different concept of ‘social inclusion’, described this latter kind of social exclusion as marginalisation when he started turning his attention to the social conditions of certain countries and cities. He could then spot social exclusion in the conditions in which the poor lived in Brazilian favelas,21 though similar considerations could be extended to any other suburban area. Interestingly, Luhmann associated those extreme forms of marginalisation to forms of social exclusion as a result of processes of de-industrialisation, which took place in the UK in the 1980s.22 In a context in which exclusion becomes easily tangible and becomes crystallised in the architectural and urban design of the city, Luhmann, whose primary research interest was not strictly speaking empirical, could see his general ideas on inclusion in, and exclusion from, society fully represented in the actual living conditions of citizens. The reasons for the rise of the discourse on social exclusion, however, appears to be more clearly linked to political economic developments rather than to the alleged success (in reality, very partial and limited to certain European continental countries only) of Luhmannian sociological categories. In fact, the notion of social exclusion had already emerged in the public debate in Europe around the 1970s, and was only later adopted in theoretical sociological literature, leading to a certain coming together of the two different understandings of social inclusion.23 The term was popularised in France through René Lenoir’s 1974 book Les exclus, un Français sur dix.24 Lenoir, as a politician, inspired the 1975 law in favour of disabled persons in France, which imposed a national duty for ‘social integration’ of physically or mentally disabled persons.25 While the roots of the notion emerged in France, it was soon transplanted to the European level, where it unsurprisingly emerged because of the influence of the French component of the Delors Commission. When it started being used at that level, the term was still interpreted in different ways in various EU Member States and even represented a novelty for some countries such as the United Kingdom,26 which nonetheless

21 

N Luhmann (1996) 227. Ibid: ‘Zur Überraschung aller Wohlgesinnten muß man feststellen, daß es doch Exklusionen gibt, und zwar massenhaft und in einer Art von Elend, die sich der Beschreibung entzieht. Jeder, der einen Besuch in den Favelas südamerikanischer Großstädte wagt und lebend wieder herauskommt, kann davon berichten. Aber schon ein Besuch in den Siedlungen, die die Stilllegung des Kohlebergbaus in Wales hinterlassen hat, kann davon überzeugen’. 23  S Farzin (2006) 9. 24  R Lenoir (1974). 25  Loi n. 75-534 du 30 juin 1975 d’orientation en faveur des personnes handicapées. 26  R Atkinson and S Davoudi (2000). 22 

The Rise of Social Inclusion and Its Merging with Financial Inclusion 23

soon fully embraced it as the New Labour Government came to power at the end of the 1990s.27 One could wonder, therefore, how is it possible that such a vague term entered en vogue. In fact, vagueness is often a strength rather than a limitation, especially at supranational level. As the European Commission aimed at developing a new social policy agenda for Europe, struggling to acknowledge and accommodate the remarkable differences in the welfare systems of the Member States, the ambiguity of the concept of social exclusion in fact proved to be useful in order to cover the different social policies pursued at the national level,28 and thus allowed Member States to commit to a generically valuable objective without too much normative specification.29 It has been suggested that, especially at level of the EU terminology, the term ‘social exclusion’ has supplanted and become a synonym for poverty, as a more politically acceptable term for some countries.30 The term social exclusion started being successfully employed in several European countries initially as a replacement for the tougher term poverty on the basis of the optimistic assumption that poverty was destined to disappear in Europe, although facts were soon to get in the way of aspiration. Has social exclusion, therefore, simply become a trendier and politically more acceptable way to say ‘poverty’—a disturbing term which still scares societies which would like to portrait themselves as rich and developed? To a large extent and rhetorically, the answer is yes. However, the two categories of poverty and exclusion differ in various ways. First, they differ in intensity, as poverty is a more extreme situation than social exclusion. That is one of the reasons why social exclusion is broader than poverty and can transcend traditional social classes. Secondly, they differ in their focus. The definition of poverty focuses mostly on the availability of economic resources to an individual person, and can traditionally be understood either in relative terms as in opposition to the amount of economic resources generally available to the rest of the population, or in absolute terms as in comparison with an ideal amount of economic resources which would be necessary to purchase basic goods and services in the same society.31 Both understandings of poverty, despite the problems that can be associated with a relative or an absolute definition,32 are quantifiable on the basis of a numerical criterion, which can then be usefully employed by legislation to set the thresholds of poverty considered relevant for the application of certain legal rules operating a differentiation based on the assets of the addressee of the legal rule, as most notably done by the law relating to taxation of income. The description of social exclusion is, in contrast, more complicated and does not immediately rely on quantitative data. The notion comprehends, as discussed

27 

GJ Room (1999); MB Aalbers (2011) 16. R Atkinson and S Davoudi (2000). 29  A Marsh and D Mullins (1998) 751. 30  P Spicker (2007), cited by M Ravallion (2016) 108. 31  See for the historical development of the concept, M Ravallion (2016) 106. 32  See P Townsend (1979) 31 ff. 28 

24  The Idea of Financial and Social Inclusion

earlier, subjects lacking the substantial rights of other citizens, who are discriminated against and who are cut off from mainstream society because of other ­reasons, which may include physical and cognitive disability.33 It can even include the case of self-exclusion, a phenomenon which appears to be on the rise in affluent Western societies where it affects especially young individuals not in employment, education or training (so-called ‘NEETs’) because of disadvantaged social backgrounds,34 but also and increasingly more often as a self-exclusionary choice believed to be somehow facilitated by the potentially alienating effect of new digital technologies, which allow people to retire from society and lock themselves into a more comfortable virtual world.35 Hence, social exclusion appears capable of also covering cases which are, at least partially, a by-product of prosperity rather than poverty. Social exclusion is then a dynamic and comprehensive concept, again representing a novelty when compared to the concept of poverty which is more tightly linked to social class and therefore more static, similar to the lack of social mobility between social classes: poverty or wealth is mostly transmitted vertically along family lines leading to social stratification over generations.36 In contrast, the transmission of social exclusion operates also at the horizontal level, as the exclusion from a particular service can impact the possibility of accessing further services in an unexpectedly negative way. For instance, certain people may encounter difficulties in opening a bank account in order to make and receive payments, and this can have possible negative consequences in terms of employment and housing, while even receiving welfare benefits might become practically impossible for those who do not have an account. This in turn represents a limitation on the possibility of obtaining credit from a bank. In sum, the notion has come to embrace diverse concepts and forms of marginalisation, mainly referring to a complex and dynamic process37 rather than the static situation of particular predetermined categories of people based on status: people might not be ‘poor’, but still be underprivileged in certain areas of social and economic life. The dynamic character of inclusion replaces the static dimension of status, better fitting—at least at a conceptual level—a new socioeconomic reality allegedly characterised by increased flexibility, mobility and diminished social security. What are the consequences of the emergence of a notion of social exclusion for law and regulation? At the regulatory level, the differences highlighted make it more complicated—but also rhetorically easier—to address problems of social exclusion than poverty. The first immediate policy response to the problem of poverty would consist of offering poor citizens economic benefits to live a decent life or give them an effective chance to obtain the capacity to obtain those resources by

33 

J Pierson (2013) 72, introducing concepts by R Lenoir. S McNally and S Telhaj (2007). 35  See G Hongyee Chan (2016). 36  Y Elmelech (2008). 37  A Taket, BR Crisp, A Nevill, G Lamaro, M Graham and S Barter-Godfrey (2009) 6 ff. 34 

The Rise of Social Inclusion and Its Merging with Financial Inclusion 25

themselves. Hence, the typical policy to counteract poverty is pursued traditionally by the welfare state which, in line with the different ideal characterisations and practical manifestations in various countries, can either provide direct economic benefits to the needy subjects, protecting them from events which could impact negatively on their economic status—such as unjustified dismissal from labour— or, in a more dynamic sense, take care of those subjects by way of education, training and in general creating the conditions for them to develop valuable skills to be employed in the labour market. This welfarist view also reverberates in private law, and in fact the function of protecting the vulnerable has increasingly shifted from public to private law.38 The ‘poor’ have generally never become a typical separate ‘legal subject’ in private law terms, such as to receive a certain and special legal treatment different from the one acknowledged generally to all legal subjects, but in practice the condition of poverty has occasionally been considered by courts as an element justifying increased protection, as shown for instance in English law by the exceptional treatment of the ‘poor and ignorant’ in a case at the end of the nineteenth century.39 The idea of the protection of the ‘weaker party’—which differs from the ‘poor’ in that it is broader and not quantitatively predetermined— has inspired labour law as well as the initial national developments of consumer law. In EU legislation as well, commentators have spotted some traces of a social dimension, especially in the area of services of general interest,40 which contribute to create the image of a low-income, ie poor, consumer.41 The lack of a decent level of income, in other terms, reduces the freedom of choice of the citizen, making that person a vulnerable consumer. The welfare state model, however, has been subject to a redefinition and its private law ramifications have also undergone modifications: even the social dimension of EU private law aims to address the problem of the low-income consumer by granting him or her access to those services from which he or she would otherwise be excluded. This development characterises the transition from the second to the third wave of globalisation of law and legal thought, as famously described by Duncan Kennedy.42 As the ideal model of the welfare state is being redesigned, the discourse on the need to fight poverty is turning into a discourse on the need to include disadvantaged citizens. The European Commission acknowledged this quite clearly as early as 1992, stating: The concept of social exclusion is a dynamic one, referring both to processes and consequent situations. It is therefore a particularly appropriate designation for structural changes. More clearly than the concept of poverty, understood far too often as referring exclusively to income, it also states out the multidimensional nature of the mechanisms

38 

U Reifner (2017) 79. Fry v Lane (1888) 40 Ch D 312. 40  See in this regard especially the White Paper on Services of General Interest, COM(2004) 374 final. 41  P Rott (2014). 42  D Kennedy (2006). 39 

26  The Idea of Financial and Social Inclusion whereby individuals and groups are excluded from taking part in social exchanges, from the component practices and rights of social integration and of identity. Social exclusion does not only mean insufficient income, and it even goes beyond participation in working life: it is felt and shown in the fields of housing, education, health and access to services …43

Policies to advance social inclusion therefore insist on the need to grant access to the excluded citizen to those services which are generally already available to other parts of the population. One of the most efficient instruments to generate social inclusion is a better regulation of services focused on access: ‘Social exclusion is thus a multidimensional phenomenon stemming from inadequacies or weaknesses in the services offered and policies pursued in these various policy areas.’44 The focus of the legal system thus shifts from access to labour to access to the market. All in all, labour law itself underwent a much debated transformation, from law of the labour relations to law of the labour market.45 Inclusion must be pursued through interventions which empower the capacity of the excluded person to participate in society and in the financial system, but are not concerned with the substantive outcome of that involvement. The downside is that this new conceptualisation bears the risk of neglecting and indirectly justifying structural inequality and poverty.46 Put in this light, the discourse on social inclusion can be viewed as the social side of a new post-welfare state, which conceives participation as involvement in the financial system rather than in society through labour. This new model is well described by an expression that the EU introduced—not by coincidence—in a crucial directive aimed at financial inclusion, which will be discussed later, in which it referred to Europe as a ‘modern socially inclusive economy’.47 In this economic scenario, financial exclusion is increasingly regarded as a part of the more general category of social exclusion, as the two phenomena are clearly linked.48 This tendency is not only European. Paradigmatically, at the global level, the 2011 Maya Declaration on Financial Inclusion, which aims to promote the expansion of financial services in emerging countries, which represent 75 per cent of the unbanked world population, was presented as a commitment ‘to unlock the economic and social potential of the 2.5 billion poorest people through greater financial inclusion’.49 The goal of providing economic resources to disadvantaged people and helping them improve their quality of life is obviously a commendable one; however, the focus of this kind of policy seems to have shifted further

43  EU Commission, Towards a Europe of Solidarity: Intensifying the Fight Against Social Exclusion, Fostering Integration, COM(92) 522 final, 8. 44  Ibid, 8. 45  See the contributions in B Hepple and B Veneziani (2009). 46  J-P Révaguer (1997) 39. 47  Directive 2014/92/EU, recital 7. 48  P Bennet (2010) 223. 49  Alliance for Financial Inclusion (2011).

The Transformations of State and Law 27

away from poverty to support for the financial inclusion of the unbanked into the mainstream financial sector.50 The evolution in the economy and the social fabric of Western societies has brought about a confusion—in the original meaning of merging together—of financial and social inclusion. Even if the requirements of financial inclusion appear different from the rationales calling for the intervention of social private law, it must be repeated that, even if financial services are not a stricto sensu basic necessity, in a financialised society a limited possibility to accede to financial resources might result in forms of social marginalisation. For example, lack of access to a student loan might impact in an extremely negative way on the capacity of a young person to have access to education and therefore find his or her desired place in the social structure, while, even more dramatically, limited access to pension schemes might easily lead the elderly to the margins of social co-existence to an extent which has probably not yet fully shown its potential. The crucial aspect of these examples is that they only make sense if seen against the background of the welfare state and of the services that this is able to offer to its citizens: the question of a student loan, for example, necessarily emerges from a social reality in which higher education is not provided free of charge and is an onerous financial burden, so that undergraduates might de facto end up subsidising research that the state is now less generously funding,51 while it would be immaterial in the opposite case. As fittingly noted by a leading consumer lawyer, ‘financial inclusion as a social objective fits with a conception of social rights contributing to market objectives, such as greater productivity, rather than permitting an individual to stand outside the market’.52 It then becomes crucial to consider the political roots of that association and, despite the growing rhetoric on the subject, one should be wary of an easy and ideologically tainted equation of financial and social inclusion. A brief economic-historic overview of the relevant processes will be opportune now, as consideration of the economic context in which the discourse on financial inclusion has emerged and is flourishing53 is crucial to make sense of the different dimensions of that notion.

III.  The Transformations of State and Law The previous section suggested that the emergence of the concept of social exclusion has to be read against the rise of a post-welfare state. What characterises this transformed state appears to be the increased relevance of services in general, and

50 

S Johnson (2009). For the US and suggesting further privatisation as a remedy, see RK Vedder (2004). I Ramsay (2016) 163, with further reference to V Schmidt (2011) 46–47. 53  See G Comparato and I Domurath (2015). 51  52 

28  The Idea of Financial and Social Inclusion

financial services in particular, in the economy, which has coincided with tendencies of de-industrialisation, flexibilisation of labour, and rethinking of welfare state models—in other words, a possible overcoming of industrialism. Private law has more or less directly followed those developments, although recent phenomena like globalisation challenge more fundamentally the traditional association between the state and private law. It is opportune, therefore, to try to define more clearly what has been provisionally termed the post-welfare state, by way of a quick overview of the main transformations that have the affected the Western modern state and how they relate to private law. Although several denominations and conventions are employed in the public law and political science literature on the subject of the transformation of the state,54 where diverse views and nation-bound categorisations exist,55 a general consensus can be found that the state is undergoing a process of transformation in the context of globalisation, whose contours are not yet fully visible but whose essential traits are already identifiable. For the sake of simplification, only three stages of that trajectory will be distinguished here. State-made private law emerged relatively recently, in particular following the process of nationalisation of law which led to a redefinition of the substance of private law along national lines,56 and which led to a certain national unification of substantive rules and a major politicisation of private law.57 Organised on a national basis, the nineteenth-century nation-state was characterised by a liberal approach in the economy,58 based on the belief that free economic forces would produce wealth internal to the nation-state. That historical phase saw the development of several legal principles and doctrines which remain relevant in both civil law and common law countries.59 Those rules and principles were tailored on the needs of a mostly pre-industrial economy, although the creation of the nationstate and the consequent nationalisation of private law represented steps towards the process of industrialisation.60 The predominance of the contract of sale as the archetype of a contract, which has left its footprint in most civil codifications, is a consequence of that historical phase. The liberal phase of the state did not last long and in the first decades of the twentieth century new models started developing in which the state, through a considerably growing administrative structure, could directly intervene in economic and social regulation. This ideal model, though with very different manifestations, can be generally labelled as an interventionist

54 

For an overview of the evolution of the state: R Axtmann (2004). an analysis limited to one country but which can be fruitfully extended to other contexts: S Cassese (2014). 56  For the development in Europe, from the angle of German law, see F Wieacker (1967). 57  See G Comparato (2014). 58  EJ Hobsbawm (1975) 86, considers the nation the natural unit for the liberal, progressive and bourgeois society of that time. 59 If for continental Europe one can easily mention the great codifications of France, Austria, ­Germany, also in English common law, the foundations of modern contract doctrine were laid between 1670 and 1870, see W Swain (2015). 60  E Gellner (1983) 24. 55  For

The Transformations of State and Law 29

state, characterised by policies of redistribution and macroeconomic stabilisation pursued through means such as nationalisation of economic activities of national interest as well as taxation and public spending. This state model can also be associated with later European totalitarian and anti-liberal experiences, so that traces of it can be occasionally identified in the civil codifications of the period,61 but it would clearly be a mistake to associate the interventionist state model with totalitarian experiences only. The celebrated model of the so-called welfare state can be regarded as a manifestation of the interventionist state, as it adopted substantially identical political economic means to achieve its goals, which now more notably included the need to ensure social rights and protections for the weaker parties in society. Private law could play a role in these developments. The social task of private law had been extensively debated since the end of the nineteenth century, as scholars tried to (legally) rationalise the economic and technological innovations of the period.62 At the end of the nineteenth century, Max Weber detected a growing influence of economic ideas in legal reasoning.63 In fact, as the authority of the pandects was used to uphold a liberal economic system, the emergence of industrial economic considerations increasingly complemented and updated the foundations of the law of the bourgeois class.64 At the start of the twentieth century, once the German civil code (Bürgerliches Gesetzbuch—BGB) had already entered into force, German courts had difficulties finding in the freshly elaborated civil code—based on the rationality of the pandects that was already contaminated by ‘economic’ rationality according to Weber—the solution to rising labour problems such as, most notably, workers’ strikes. It took decades and a world conflict before European countries developed appropriate legal regimes to cope with the issue. If the core element of that model of industrial society and the precondition to the participation of individuals in it was labour, modern constitutions paid particular attention to the dimension of labour, underlying its important political role as one of the foundations of civil society.65 Since the beginning of the twentieth century, the regulation of labour by the state has been seen as an instrument to be used to mould society at large, encompassed in the notion of the labour constitution.66 The economy had, in other terms, entered an industrial phase. Based on this accelerated overview, we can roughly link the liberal state to the pre-industrial economy and classical legal thought on the one hand, and the interventionist/welfare state to industrial economy and social private law on the other hand. But this model is today undergoing a further transformation, as we

61  The paradigmatic case is the Italian Civil Code. On the history of civil codification in Italy, see P Grossi (1998). 62  For an account of that historical development, now see T Repgen (2001). 63  M Weber (1980) 439. 64  See S Frerichs (2013). 65  See art 1 Italian Constitution 1948. 66  R Dukes (2014) 3, referring to Sinzheimer’s idea of (non-ordoliberal) economic constitution.

30  The Idea of Financial and Social Inclusion

witness a shift from an industrial to a post-industrial economy. While until at least the first half of the twentieth century the largest part of the population was employed in the primary and secondary economic sector, that is to say agriculture and manufacturing, after the Second World War larger parts of the population were drawn into the services sector. That trend has increased over time, so that currently services amount to 70 per cent of the GDP in Europe, coming close to 80 per cent in countries like the United Kingdom.67 This development should not be surprising, as it was predicted as early as 1940 by the economist Colin Clark.68 In a later edition of his book, Clark formulated the view that ‘[a]s time goes on and communities become more economically advanced, the numbers engaged in agriculture tend to decline relative to the numbers in manufacture, which in turn decline relative to the numbers engaged in service’.69 The industrial welfare state model started going through a crisis, at least an electoral one, towards the end of the 1970s, when a new international economic climate started making the means through which the state financed its policies appear inefficient, while welfare policies began to be viewed as detrimental to competitiveness. Deregulation was the consequence of these trends in the normative arena, while in the economy the new state at least partially embraced liberalisations and privatisations, whose expected, but not always delivered,70 result was to foster competition and lower public spending and indebtedness. Even more fundamental was the abandonment of the gold standard, which led to a model of ‘fiat money’, indirectly giving finance a potentially unconstrained power to create money. Starting from the 1980s, a new type of service started taking the lion’s share in several economies, ie financial services, made possible by the development of new financial technologies as well as by the global decline of the gold standard. The growing importance of financial services led even to negotiations in the Uruguay Round to extend the international free trade in goods to services, which resulted in the General Agreement on Trade in Services which entered into force in 1995 and the correlated Annex on Financial Services, meant to further incentivise that sector and promote its liberalisation. These developments are caught in sociology and political science by the notion of ‘post-industrialism’, as developed in particular by the sociologist Alain Touraine in France71 and Daniel Bell in the US.72 In Bell’s view, ‘[t]he concept “post-industrial society” emphasizes the centrality of theoretical knowledge as the axis around which new technology, economic growth and the stratification of society will be organized’.73 Knowledge and information technologies allow for the ‘revolution’ of a New Economy, similar to the way in which older technological innovations

67 

Financial Times, ‘Services close to 80% of UK economy’, 31 March 2016. C Clark (1940). 69  C Clark (1957) 402. 70  W Streeck (2013). 71  A Touraine (1974). 72  D Bell (1973). 73  Ibid, 112. 68 

The Transformations of State and Law 31

led to the industrial revolution. In fact, technology is nothing more than ‘the use of scientific knowledge to specify ways of doing things in a reproducible manner’, according to the theorists of post-industrialism and network society.74 These developments puts considerable pressure on the industrial model. Responding to this political economic development, the legal system started elaborating mechanisms to ensure access to services under different conditions, to make sure that the financial system could fulfil the new role of promoting social inclusion. The trend not only supplements but to a certain extent—the actual extent of which is debatable—even replaces the older models, as is visible in the dismantling of the traditional welfare system in areas such as pensions and its replacement by private schemes which are highly dependent on the financial markets but which, on the other hand, engender doubts as to their effects on social inclusion.75 Historically, these public pension schemes were the task of government,76 but oldage welfare is now seen as one of the most expensive aspects of a welfare state, and different solutions have been attempted to make the system economically sustainable in line with the requirements of a new ‘pensions orthodoxy’,77 largely coinciding with privatisation. This has been promoted in particular by the World Bank, triggering a series of reforms all around the world meant to focus more on the ‘private’ rather than the ‘public’ side.78 As a result, while participation in the post-industrial society is realised through access to financial services, on the other side of the coin exclusion might manifest itself in advanced capitalist societies as a limited capability to participate in the financial market itself by purchasing the products which may directly or indirectly contribute to the individualised welfare of the citizen. It is then remarkable that, at the same time at which the state undertook a programme of diminishing public indebtedness, the diffusion of financial services fostered private indebtedness. The predominant feature of this new model hence appears to be a ‘change from collective national welfare to individualized transnational and national inclusion’.79 At any rate, this development did not coincide with a revival of the older ­laissez-faire minimal state model. The programme of selling of public assets and privatisations was not fully implemented in several countries, but most importantly it was accompanied by a new wave of regulation in the liberalised and privatised fields. Even private sectors could be shaped according to public policies, so that a new ‘regulatory state’ has emerged after deregulation.80 Exposed to the complex phenomenon of globalisation in which competition has been increased at a transnational level and new post-industrial intangible financial ‘products’ 74 

D Bell (1973) 29, quoting H Brooks (1971) and also quoted by M Castells (1996). P Bridgen and T Meyer (2007) 3. For the development in the US compared to Europe, see J Quadagno (1988). 77  P Bridgen and T Meyer (2007) 3. 78  The World Bank, Averting the Old Age Crisis. Policies to Protect the Old and Promote Growth (Oxford, Oxford University Press, 1994). 79  R Münch (2012) 1. 80  G Majone (1994). 75  76 

32  The Idea of Financial and Social Inclusion

have been engineered,81 even the economic role of this model of the state has been altered. Rather than pointing to a simple but dramatic takeover of public functions by the private sector, new forms of partnership and complementarity between private and public sector have emerged, under the general and quite unsatisfactory compromise definition of the ‘third way’.82 The importance of the growing involvement of private actors in regulatory governance has been such that, going beyond the model of regulatory state, the notion of the ‘post-­regulatory state’ has already been advanced in the literature.83 This fully fits the accounts of ‘post-industrialism’ and ‘network society’84 that emphasise the growing importance of technical knowledge and the development of new forms of decision-­ making structures based less on general legislation and more on ‘[p]rivate will and administrative acts’, which are ‘the instruments of making decisions on the basis of diffused and distributed knowledge’.85 More fundamentally, these features of globalisation and their impact on national policies have led political science scholars to wonder whether in the global context the state has started to disappear or whether the ‘Leviathan’ has been dispossessed of its power,86 although the answer seems to be negative and points to a reconceptualisation of the economic role of the state rather than to its evaporation. The conceptually most radical among the proposed categories to make sense of the changing structure and function of the state against the framework of the globalisation of finance has been suggested in the US by Bobbitt, ie the market-state,87 which conceptualises the diminished role of the state in a global context characterised by the emergence of new intangible markets in services. In the already famous—or notorious—words of that author, ‘where the nation state—be it fascist, communist or democratic—is highly centralized, the market state is fragmented and is run by outsourcing its powers to transnational, privatized organisations’.88 This affects not only the economic role of the state and the means through which it pursues its policies, but even, and more fundamentally, its very source of legitimacy. To be sure, if the Leviathan is still there, its power is at least partially constrained by the emergence of another actor, international finance. While for our purposes it is exaggerated, and certainly dangerous, to draw a direct link between economic performance of a state and its political legitimacy, in the way that the notion of the market-state seems to do, it is nonetheless easy to see how the reliance of the state on the international financial market has increased

81 

F Galgano (2005) 17. J Stiglitz (2003) 5. C Scott (2004). 84  M Castells (1996). 85  K-H Ladeur (2007) 338. 86  See M Bach (2013). 87  P Bobbit (2002) 229. 88 Ibid. 82  83 

Financialisation 33

over the years until the point that the degree to which the state can freely pursue its own policies has been limited, with direct consequences on the way in which the state is perceived to be legitimate by its population. The 2008 economic crisis, with its peculiar manifestations in the European context and the rise of technocratic governments meant to deal with the problem, offers significant evidence for this trend. At the same time, the perceived remedy to the malfunctions of the marketstate is found in a revival of the market-state’s older rival, ie the nation-state. The state has become increasingly dependent on finance, while finance has become increasingly independent of the state.

IV. Financialisation The previous section highlighted the connection between the modern state and global financial markets. In fact, the state has historically been linked to, and dependent upon, financial resources offered by merchants and bankers located in other countries at least since medieval times and particularly so in the Renaissance,89 so that the historical roots of financialisation should be investigated starting from antiquity.90 As extensive historical analysis is not possible here, it is sufficient to note, focusing instead on its embeddedness in a post-industrial economy and in the logic of globalisation, that the impact of finance on the state and the economy seems to have dramatically increased in the course of the twentieth century, leading to the phenomenon which we now call financialisation. An account of this peculiar and well-documented phenomenon, also referred to using terms such as finance-dominated capitalism and financial capitalism, is now overdue. The financialisation of the economy, as it is commonly though ambivalently termed in economic and political sciences,91 refers to a model which permits the creation of profit ‘through financial channels rather than through trade and commodity production’.92 Thus, while in the pre-industrial and industrial economy wealth can be created through production and trade in those manufactured products, financialisation allows it through the provision of financial services increasingly detached from underlying commodities. Those services become tradable dematerialised commodities, so that the term ‘financial product’ is also germane. The materialisation of financial instruments is admittedly not something new, as the medieval law merchant already allowed for the creation of negotiable instruments such as bills of exchange, cheques and bills of lading which, on the one hand, embody an obligation to pay or perform an obligation but, on the other

89 

H Pirenne (1936), 128; J Burckhardt (2014) 107; RA Goldthwaite (2009) 259. See J Le Goff (2012) 94 ff. See the contributions in G Epstein (2005); M Hudson (2010). 92  GR Krippner (2005) 174 ff. 90  91 

34  The Idea of Financial and Social Inclusion

hand, give rise to autonomous obligations separate from the underlying contract, becoming easily transferable documents. However, while those instruments mostly perform an economic function as payment mechanisms, modern financial products instead represent commodities themselves. This confers autopoietic features on the financialised system, as it gradually detaches from the ‘real’ economy typical of the agricultural and industrial societies and creates profit on its own terms,93 or, as it has been poignantly described, ‘profiting without producing’.94 In fact, the relation between financialisation and the ‘real’ economy, despite playing a big role in the debate on finance after the 2008 crisis, appears to be a particularly complicated one. On the one hand, it has long been established that financial derivatives detach finance from the fundamentals of the real economy,95 yet on the other hand, they manifest the capacity to steer the real economy itself, so that— also in line with constructivist theories of value—the distinction between the ‘real’ and ‘financial’ economy appears to be particularly blurred.96 As a result, the financial sector tends to dominate the real economy and is often accused of draining resources from it.97 For our purposes, the paradigmatic example is offered by the practice of securitisation. Securitisation is a process through which a bank’s various illiquid assets, such as long-term loans, are pooled and repackaged as securities that produce interest. In its simplest form, it usually works by way of transfer of a certain number of assets to an ad-hoc entity called a Special Purpose Vehicle, which then sells interestbearing bonds to investors on the financial market. Securitisation has the practical effect of turning a mortgage loan into a tradable instrument for investors, as well as outsourcing the credit risk naturally associated with the loan and place it on the market. These financial practices have a peculiar effect, which further proves financialisation’s ability to steer the real economy, as they almost mathematically require the increasing financial inclusion of citizens: considering that ‘the aggregate lending of the banking system to mortgage borrowers must equal the sum of the equity and the borrowing from outside creditors’ and ‘[s]ince it is the borrowing from the outside creditors which is increasing, the funding must ultimately find its way to an end-user borrower. Once all the prime borrowers in the population have a mortgage, the banks must find new borrowers in order to expand their balance sheets’.98 In other terms, it is not just the home, but rather the homeowner who becomes ‘financially exploitable’.99 This has a direct consequence which becomes particularly relevant also in the perspective of contract law as will be further highlighted with respect to access to credit: ‘[t]he only way they can do

93 

J Vogl (2011), see K Marx (1981) 566 ff. C Lapavitsas (2013). 95  E Lipuma and B Lee (2004) 85. 96  D Alessandrini (2016). 97  TI Palley (2007). 98  H-S Shin (2009) 325. 99  MB Aalbers (2008). 94 

Financialisation 35

this is to lower their lending standards’.100 This is a crucial aspect in understanding the reasons behind the development of a consumer society increasingly based on access to financial services. A certain academic viewpoint emphasises the demand side of credit, suggesting that the decisive underlying force behind financialisation has been the escalating desire of consumers who aim to increase their well-being and possibly social status. This tendency conversely attributes the failures of the system to the possibly irrational behaviour of those individuals.101 The development of financial inclusion in that perspective is fully demand-driven. The very term ‘consumer society’ conveys this vision. Despite that demand-driven account, nonetheless, it is important to shift the focus onto the supply side. In broader terms, macroeconomics and public policy have also to be considered while investigating the behaviour of individual consumers when purchasing financial services such as credit.102 This perspective explains financialisation as a supply-driven phenomenon. As it has been noted, when analysing a continental European market which has embraced this financialised economic model only more recently: It is an error of logic to explain the household credit market on the supposition that its form mainly arises from the behaviours and preferences of households themselves. The type and variety of financial intermediaries, their business models, distribution channels, lending policies and lender-household interaction modes have all led to major changes in the consumer credit market.103

Financialisation leads to important repercussions on corporate structures, society at large, and the economy of the state. In terms of corporate structures, it incentivises short-termism and risk-taking on the side of company directors, who might find it more rewarding to engage in financial trading rather than in responsibly financing the real economy, with possibly negative consequences on stakeholders’ interests.104 Such short-termism has been authoritatively identified as one of the problems of the UK banking system leading up to the crisis in 2008 which put the integrity of the whole system in jeopardy, incentivised by deeply ingrained views of the corporate structure as one meant to maximise the profit for its shareholders rather than stakeholders.105 In terms of society, research has shown that financialisation redistributes income, consisting in a rise in profit for top managers of the financial industry and diminishing labour income, and thus in practice increasing inequality.106 This finding reveals a paradox, whereby an increasing 100 

H-S Shin (2009) 325. The growing emphasis on the need to improve financial literacy might be regarded as a sign of this approach, see chapter six. 102  See the contributions in TA Durkin and ME Staten (2002). 103  S Cosma (2016) 322. 104  Financial Services Authority, The Turner Review: A Regulatory Response to the Global Banking Crisis, March 2009. 105  A Keay (2012). 106  E Hein (2013) More specifically, the channels through which such redistribution has occurred are ‘(1) a shift in the sectoral composition of the economy; (2) an increase in management salaries and rising profit claims of the rentiers, and thus in overheads; and (3) weakened trade union bargaining power’. See also P Tridico (2017). 101 

36  The Idea of Financial and Social Inclusion

number of low-income people enter the financial market, exemplified by the case of the extension of consumer credit,107 while at the same time it is exactly those lower classes who might more easily be negatively affected by financialisation. This becomes a vicious circle, since such facilitated access to financial resources ­compensates the otherwise demand-depressing effects of financialisation due to growing inequality.108 Hence, [c]oinciding with the financialization of the everyday is a shift towards financial markets for the provision of people’s basic needs. Whereas such “cradle to grave” services were previously provided by the welfare state, the employer or the savings account, the individual is now required to purchase financial products to protect against the uncertainties of life. The result of the democratization of finance is therefore not just a growth in financial flows, but an increased convergence of finance and the life cycle.109

It is worth noting that this is a development which has already been anticipated by scholars of the post-Fordist tradition discussing the notion of ‘bio-capitalism’, which refers to the ability of capitalism not only to create value through the bodies of the workers instrumentalised as a production tool, but to extract value from the whole of that body and its basic needs.110 From this perspective, the financial sector increasingly became involved in the provision of every day services in place of the state, leading to a financialisation of daily life requiring citizens to accept greater financial risks.111 Not only the overall economy, but also the citizen became financialised.112 In terms of the economy of the state, financialisation operates as a partial release valve for the state insofar as it frees the state from the duty to provide certain services itself, and allows for the economic and social role of spending to be reassigned from the public to the private domain. There is, thus, a public interest in the further diffusion of the financial market, at least up to the point at which the state is still able to regulate it. Thus, despite the emphasis on individual responsibility and the plan to replace public with private spending, the state was in fact not disinterested in the process which led initially to the democratisation of finance. Quite to the contrary, it strongly incentivised individuals to make use of financial services, by reducing welfare provision and making the financialisation of economy possible through specific legal reform. It has been shown that in the US the process of financialisation of the economy, including its pathological manifestation in housing bubbles, has been favoured by specific and controversial monetary and fiscal reforms.113 At other times, rather than explicitly seeking this

107 

I Ramsay (1989) 309 ff. See E Hein (2012). 109  N Van der Zwan (2014) 111; see also C Lapavitsas (2013). 110  V Codeluppi (2008). 111  R Martin (2002). 112  D Kingsford Smith and O Dixon (2015) 699. 113  T Mahmud (2015) 76. 108 

Financialisation 37

outcome, it has been a side effect of regulations which initially had a different goal. Quite paradoxically, for instance, the capital requirements posed in particular by the Basel Accords, was meant to ensure the solvability of banks and their financial stability, but in practice gave banks a strong incentive to securitise their mortgage loans.114 The practice of securitisation, in turn, started to increase exponentially in the US after the Tax Reform Act of 1986, which allowed the creation of Real Estate Mortgage Investment Conduits in the private sector.115 Before these reforms, in contrast, the only institutions engaging in securitisation of mortgages were the US government agencies Ginnie Mae, Freddie Mac and Fannie Mae.116 That same year the first securities backed by credit card debt were also created.117 In the UK, the increase of secured as well as unsecured borrowing was encouraged in the 1980s by ‘the removal of constraints on bank lending arising from access to the wholesale market for funding’,118 while this expansion was ‘deliberately fuelled by Government policies aimed at promoting home ownership’.119 These policies notably consisted in the liberalisation of mortgage lending and the creation of a ‘right to buy’ which made it possible for tenants in the social sector to purchase their own dwellings, hence privatising public resources.120 Notably, the facts of an important case on securitisation in the UK stem precisely from such a s­ cenario, in which mortgages on ex-council properties were transferred to a Special Purpose ­Vehicle.121 Such events favoured the growth of a European securitisation market,122 which developed much later than the one in the US and with less considerable, though still relevant, dimensions.123 Writing at the end of the 1980s, Ford noted that while ‘[i]n the eighteenth and nineteenth centuries most credit was taken to manage poverty’—something which contributed to a pejorative moralistic view of indebtedness—in more recent times that use of finance was accompanied by a new ‘development of credit related to the growth of affluence’, which contributed to a change in the general attitude towards credit.124 But where are the origins of this system? In order to fully appreciate the current economic scenario, it is of pivotal importance to make one step back and trace the origins of financialisation of the citizen, taking into account the interaction between supply and demand discussed above.

114 

G Donadio and A Lehnert (2015) 343. B Casu and A Sarkisyan (2015) 356. Ibid, 356. 117 Ibid. 118  E Kempson (2016) 70. 119  D Gibbons (2016) 91. 120  B Edgar, J Doherty and H Meert (2002) 41–43. 121  Paragon Finance v Pender [2005] EWCA Civ 760. 122  B Casu and A Sarkisyan (2015) 359. 123  Financial Services Authority, The Turner Review: A Regulatory Response to the Global Banking Crisis, March 2009, 14. 124  J Ford (1988) 33. 115  116 

38  The Idea of Financial and Social Inclusion

V.  Privatised Keynesianism and Democratisation of Finance In the previous pages it has been suggested that financialisation is but one aspect of post-industrial societies, characterised by the development of a service economy since at least the aftermaths of the Second World War. Financialisation calls for increased financial inclusion, by providing more services to retail consumers. But financial inclusion is a recent and European term, while the origins of such development can be traced back to an earlier moment and different context, when increased access to financial services emerged in the US as an instrument meant to boost economic growth by fostering aggregate demand in the first decades of the twentieth century. Those developments marked a paradigm change in the anthropological approach to money and debt. Traditionally, and particularly so in Protestant countries as has been authoritatively suggested, austerity and frugality had been regarded as virtues: in the prevailing religious understanding of society, wealth should not be shown off and debts had to be repaid as a matter of morality, as debt mostly coincided with moral sin and moneylending as a manifestation of personal trust. This vision was famously sustained by Max Weber who, in a groundbreaking though particularly controversial book, identified in the protestant ethic one of the reasons for the capitalist and industrial development.125 Legal historians have highlighted how this view tends to downplay the older t­wentieth century roots of capitalism and the role of Roman Catholic thought in its development,126 over-emphasising differences in central aspects like usury that, despite the new more capitalist-oriented readings of the biblical sources offered by Calvinist scholars,127 appeared in fact attenuated in practice.128 If one accepts Weber’s interpretation, it should nonetheless be noted that the very same capitalism which allegedly blossomed thanks to its underlying protestant ethic was soon to betray its own moral foundations: while that particular form of ethics allegedly encouraged reinvestment of money rather than its spending in superfluous goods, morality was soon to come to terms with the economic laws of supply and demand. During the first decades of the twentieth century in the US, it became clear that even private indebtedness, rather than being an expression of financial recklessness and moral hazard, could, rather, have a positive role in the further development of the capitalist system. In fact, credit allowed citizens to purchase new goods and services, boosting the demand side of

125 

M Weber (2001). HJ Berman (1983) 337. 127  R Zimmermann (1996) 174 and M Weber (2003) 271 refer in particular to the writings of Claudius Salmasius (1588–1653). 128  HJ Berman (2003) 162. 126 

Privatised Keynesianism and Democratisation of Finance 39

the economic system, consequently enabling new industries and technologies to develop.129 If Bernard Mandeville’s notorious Fable of the Bees had already powerfully criticised frugality and magnified the virtues of private vices in the eighteenth century,130 creating controversy and encountering severely critical reactions,131 two centuries later, in the 1920s, (industry-financed) research in the US indicated that ‘consumptive credit’, far from being a manifestation of moral irresponsibility as often considered previously because of cultural or even religious prejudice,132 had in fact an indirectly productive function. This move did not only confute the moral preconception of debt as sin, from which the law merchant had in fact already partially departed, but also theoretically challenged the economic distinction between consumption and productive credit—the former being employed by consumers to purchase goods and services, the latter being employed by entrepreneurs to invest in business. Rather, it insisted on the production-inducing potential of the former type of credit, inasmuch as it fostered the purchasing of new products by consumers, who could immediately obtain the goods they desired without having to accumulate enough savings first.133 This result could be achieved primarily by providing consumers with easier access to credit,134 so that access was soon promoted even by the Government, while providing consumers with the means to purchase everyday things slowly became an industry in the 1930s.135 The necessity of revitalising the US economy after the great depression contributed to this development, which soon even found its justification in economic thought. Keynesianism could contribute to the notion, as it seemed to highlight the importance of spending in a period of economic contraction. The best illustrations of historical and economic phenomena which leave a deep mark in social consciousness can always be found in the arts, which are capable of conveying complex social and political messages providing them with an appealing narrative. The remarkable 1946 Hollywood drama film by Frank Capra It’s a Wonderful Life, a movie which has become a well-loved classic in the US, offers a vivid representation of that new ethos. For our purposes, one particular scene of the movie is revealing. Portraying an event taking place in the 1930s, the movie

129  It is nowadays clearly recognised, especially by those who put emphasis on the advantages of consumer credit, that ‘consumer lending has contributed to the growth of durable goods industries where new technologies, mass production, and economies of scale historically have produced employment growth and new health. It is simply hard to imagine development of the suburbs or the automobile and appliance industries in the twentieth century, or for that matter the higher education system as it now exists in many places, without the simultaneous rise of consumer credit to facilitate sale of the output’, TA Durkin and G Elliehausen (2015) 313. 130  B Mandeville (first edition 1714). 131  M Jack (1976) 369. 132 For a very brief account of this aspect, see R Skidelsky, ‘The moral economy of debt’, The ­Guardian, 21 October 2014. 133  J Logemann (2008) 537, referring to W Cheyney (1956) 4–5. 134  D Marron (2009). 135  E Clark (1931).

40  The Idea of Financial and Social Inclusion

depicts the protagonist George Bailey as the young and unfortunate director of a Building & Loan company, moved by the idealistic aim of helping low-income citizens to obtain credit and buy their own homes, in open contrast with the opposite plans of the evil Mr Potter, an old greedy banker embodying the previously restrictive banking system and who became the iconic representation of the rich capitalist villain in American cinematography. In a direct confrontation with his nemesis, George Bailey defends the work of his deceased father, founder of the company, and at the same time vehemently conveys the message of the virtues of democratisation of finance to the American audience. Bailey’s monologue anticipates themes which will be dealt with later in this book: But he did help a few people get out of your slums, Mr. Potter, and what’s wrong with that? Why … here, you’re all businessmen here. Doesn’t it make them better citizens? Doesn’t it make them better customers? You … you said … what’d you say a minute ago? They had to wait and save their money before they even thought of a decent home? Wait? Wait for what? Until their children grow up and leave them? Until they’re so old and broken down that they … Do you know how long it takes a working man to save $5,000? Just remember this, Mr. Potter, that this rabble you’re talking about … they do most of the working and paying and living and dying in this community. Well, is it too much to have them work and pay and live and die in a couple of decent rooms and a bath? Anyway, my father didn’t think so. People were human beings to him, but to you, a warped, frustrated old man, they’re cattle. Well in my book, he died a much richer man than you’ll ever be!136

The idea of easy credit came thus to the rescue of capitalism during one of its most dramatic crises, in a period in which much more drastic alternatives were experimented with in other parts of the world. But is this really Keynesianism? The Cambridge economist in fact emphasised the importance of spending by the state when the private sector is in a recession and no private actor has enough trust to spend money. According to the logic of easy access to finance, however, it is instead the private sector itself which takes on the function of sustaining the demand of the capitalist economy rather than the welfare state. This model has been more recently very fittingly described by the sociologist Colin Crouch as ‘privatised Keneysianism’,137 a concept which is in fact quite widespread in the post-Fordist critique of financial systems speaking of ‘a kind of privatization of deficit spending à la Keynes’.138 The role of fostering consumption was given, rather than the welfare state through redistribution policies (for example through Keynesian policies), to the market itself (privatised Keynesianism), as credit allowed ‘families to purchase homes, deal with emergencies, and obtain goods and services’.139 Thus, the term privatised Keynesianism alludes to the political economic idea which makes economic development depending on spending, but 136 

F Capra (1946). C Crouch (2008); C Crouch (2011). C Marazzi (2011) 34. 139  A Greenspan (2005). 137  138 

Privatised Keynesianism and Democratisation of Finance 41

from the private sector rather than from the public sector. Coherent with this view, public indebtedness has to be limited, while private indebtedness is promoted. As It’s A Wonderful Life shows, the most evident application of this idea is to be found in the housing market, where the easy availability of mortgage loans at low interest rates allows a greater number of citizens to purchase their own dwellings, in a way that both sustains the growth of the housing market and relieves the state from the role of providing welfare benefits such as social housing to those economically disadvantaged people. Private home ownership has been encouraged and mortgages have gained a fundamental importance especially for low-income citizens.140 In that perspective, financial and social inclusion align, and become almost indistinguishable within the category of the so-called ‘democratisation of finance and credit’, an expression which became commonplace in the US but that is much less employed in Europe. The term ‘democratisation of finance’, and especially its immediate reference to democracy, forcefully conveys a positive idea of advantages being associated with the employment of financial services and increased access to it by ordinary citizens. The formula ‘democratisation’ conceals different nuances, as it expresses both an idea of ‘popularisation’ but also and more importantly includes a connotation of power redistribution within society, suggesting that the possibility of accessing financial services is a precondition for a full participation in state politics. The notion of democratisation of finance therefore echoes another successful though misleading formula in liberal economics which emerged in the same years, suggesting the prominent political role of the citizen who actively participates in the market and consequently in the politics of a country by making his or her consumption choices, ie consumer sovereignty.141 The term/concept of ­‘democratisation’ therefore does not simply describe a specific economic model but, more fundamentally, describes the promise of a new structure of relations of power within the state, with the consumer as the key actor, and it hardly matters that, as Hyman Minsky142 put it, ‘consumer sovereignty is subordinated to the vision of entrepreneurs and the critical analysis of bankers in determining the path of the economy’.143 While Keynesianism left the stage in the 1970s and 1980s, when new monetarist and neoliberal thinkers proposed to offer an explanation for stagflation—high unemployment combined with high inflation—the idea of easy access to credit was not abandoned. Quite to the contrary, it was reinforced by deregulation— a wide collection of policies ranging from the lifting of quantitative controls on bank assets to the demise of exchange controls144—and financialisation.145 140 

For the developments in the US, see RJ Shiller (2008). W Hutt (1940). 142  On Minsky and financialisation, see CJ Whalen (2017). 143  H Minsky (1993) 107. 144  K Matthews and J Thompson (2008) 3. 145  Tracing in short the whole historical economic development of debt crises, AM Taylor (2012) 19–20 notes that: ‘At first glance, the historical record appears to present us with a rather inconvenient 141 

42  The Idea of Financial and Social Inclusion

Democratisation of finance fully complied with the new economic and philosophical ethos, since it promised to reduce public spending while leaving more choice to the citizens themselves. Thus, while financial services providers could appeal to a wider number of individuals giving them the opportunity to obtain credit and financial products for the needs of everyday life on affordable conditions,146 the new economic doctrine, backed by different and usually opposite political parties,147 pursued the retrenchment of a welfare state perceived as inefficient and economically untenable. According to this model, those utilities which could have been offered by the welfare state and whose costs had to be borne by the whole communities, would be better left to the private sector itself which, through financial innovation, appeared to be capable of bearing those tasks that appeared costly for the public sector. As a result, the promise of democratisation lent financialisation a social narrative which legitimised efforts to increase access to the financial system. A view that magnified the socially benign effects of financial products became successful as economic studies showed the beneficial effects of credit, highlighting that although the system is obviously not ‘problem-free’, the expansion of credit generally enhances consumer welfare as well as economic progress more generally.148 Not only is finance no longer regarded as a matter for an ‘elite’, but its popularisation allows for increased democratic power to be put in the hands of citizens. Following Robert Shiller’s famous expression, the mission is ‘to democratize finance and bring the advantages enjoyed by the clients of Wall Street to the customers of Wal-Mart’.149 Those financial means would then be used by citizens to increase their own personal welfare, so that democratisation of credit appears not only as a process but even more fundamentally as a promise, ie the ‘promise that all households can make money and/or manage risk by buying appropriate financial services products’.150 As the protagonist of

truth, namely that financial crises might just be an occupational hazard, a simple fact of life, in modern finance capitalism. However, one major exception was the era 1950–70 with tighter domestic financial regulation, and external capital controls. This was a period of low credit growth, and very little in the way of financial innovation. But it was also still a period of very high investment, savings and real growth for the advanced economies. This period did not last, thanks to a series of unfortunate events. Starting in the 1980s it gave way to a less regulated and more risk-hungry world, reflected above in the rapid growth of bank lending. By the 1990s, with a firmer low-inflation nominal anchor, the entry of high-saving self-insuring emerging economies took the world down a path of ever lower nominal and real rates. Ostensibly a good thing for the consenting adults involved—who could object to cheaper capital?—with hindsight we see that not every private project funded by this glut of funds was, ex post, worthwhile from a risk-reward point of view. In this respect a historian might reflect that we have traversed back not only to the good aspects of integration seen in the first era of globalization, but also its not so good aspects, namely increased financial fragility, despite all we had supposedly learned along the way.’ 146 

F Sabry and C Okongwu (2009). for the US, B Clinton, ‘How we ended welfare, together’, The New York Times, 22 August 2006. 148  G Bertola, R Disney and C Grant (2006) 1. 149  RJ Shiller (2003) 2. 150  I Erturk, J Froud, S Johal, A Leaver and K Williams (2007) 553. 147 See,

Privatised Keynesianism and Democratisation of Finance 43

It’s a Wonderful Life had said: ‘Doesn’t it make them better citizens? Doesn’t it make them better customers?’ The identity of customer merges with that of citizens. The narrative about the interlinked positive effects of financial inclusion in both economic and social terms became predominant until at least the 2008 financial crisis, when those problems associated with the system started becoming more evident worldwide. In the UK, the former Chairman of the Financial Services Authority—an institution that came under fire because of its inability to prevent major banking crises in the country and was abolished and replaced by new institutions as part of the post-crisis new institutional design—recognised that the 2007–2008 crisis ‘occurred because we failed to constrain the financial system’s creation of private credit and money; we failed to prevent excessive leverage’.151 In fact, the narrative of democratisation, and the supposed advantages that citizens could draw from their inclusion in the financial system, often neglected to mention both the possible detrimental consequences for consumers as well as the worsening conditions of the financially excluded and, on the other side, the advantages that the financial system itself obtains from the overinclusion of citizens. For instance, while the limitation of state-provided social welfare might compel citizens into the financial market, at the same time it can lead to the worsening of the economic situation of financially excluded people. This raises the question of the limits of inclusion and whether this policy can really be considered as an appropriate goal for all consumers.152 More ­fundamentally, it should be noted that the superseding of the distinction between consumption and productive credit in light of the demand-boosting effect of consumer lending was in reality illusory if considered from the perspective of the contracting parties rather than that of the overall economic system. Productive credit is still meant to be reinvested in the business activities on which the possibility to repay the debt depends; consumption credit, on the contrary, will generally153 not be reinvested in productive activities by the consumer, so that the possibility to repay the debt cannot depend on the viability of a business plan but on something else, including the individual’s current income, any loan guarantees and—most paradoxically— the availability of further credit. These dynamics are at the roots of the phenomenon of over-indebtedness, which is facilitated by the development of the economic model sketched so far.

151 

A Turner (2013) 17. Again, a comparison with education studies highlights the point. As highlighted by a respondent in a study on inclusion and schooling: ‘You know it’s a good thing and you should be advocating it all you can. But you know that sometimes it just isn’t the right thing to want to place every single child in a mainstream setting. … Inclusion is a good thing but not such a good thing for special needs children with severe learning needs’, L Dunne (2009) 49. 153  It should be noticed that consumer credit legislation might extend the notion of consumer such as to comprehend also individual businesses, see for instance in the UK the Consumer Credit Act 1974. 152 

44  The Idea of Financial and Social Inclusion

In spite of these objections, as the focus shifted from public welfare to private responsibility—and thus from social security to individual risk—private debt acquired the role of functional substitute for welfare and access to credit on a nondiscriminatory basis became a matter of justice, to be legislatively granted even to those subjects who would have otherwise been excluded from it for discriminatory reasons.154 It is in this context that the focus of the political as well as legal discourse shifted more strongly from community to individual, from equality to non-discrimination, and from social justice to social inclusion.

VI.  The Role of Trust The developments discussed in the previous sections have directly affected private law, further challenging the model inherited from classical legal thought in several ways. One crucial characteristic of that model is that a debtor/creditor relationship is conceived primarily as one based on interpersonal trust. If the debtor is the one who ‘owes’, the creditor is etymologically the one who ‘trusts’. As demonstrated by the Belgian historian Henri Pirenne, developed forms of commercial credit already thrived in the twelfth century in Flanders and Italy.155 The development of a credit system was central to twelfth century ‘capitalism’, and ‘a system of transferring a debtor’s future obligation from one creditor to another could not have been developed and maintained if there had not been a strong belief or faith or trust in both the integrity and the duration of the community to which all creditors and debtors belonged’.156 The British historian Craig Muldrew has shown how, often rooted in a religious conception, trust in people worthy of ‘credit’ allowed a credit market to develop as early as at the beginning of the sixteenth century in England.157 Credit was thus highly dependent on social relations within the community, and ‘such trust was interpersonal and underpinned by emotional relations between individuals communicated in the form of reputation’.158 A comparable situation existed also in early modern France approximately until the eighteenth century.159 Analogously, medieval private law generally intended credit to be not freely transferable because of the personal nature of the debt-credit relationship, as ‘nomina ossibus inhaerent’.160 The harsh treatment traditionally reserved by the law to insolvent debtors, ranging from dismemberment in ancient times to imprisonment in more recent ones, can be given an explanation which goes beyond an

154 

I Ramsay (1995). H Pirenne (1936) 121. 156  HJ Berman (1983) 351. 157  C Muldrew (1998). 158  Ibid, 5. 159  E Dermineur (2015). 160  See R Zimmermann (1996) 58, referring to E Genzmer (1963) 159. 155 

The Role of Trust 45

interpretation which emphasises the moralistic dimension of debt also on the basis of the need to uphold trust within the community. An insolvent debtor had not only breached his or her promise, but also broken the trust that another member of the community had put in the debtor. Greek and Roman law insisted that ‘πίστις’ and ‘fides’ attached to credit, so that allowing debt discharge would end up damaging public trust.161 If it is possible to speak of an (im)morality of debt, the ‘sin’ resides not so much in the debt itself as in its non-performance against the background of trust. Default had, therefore, a further social dimension. The medieval development of the law merchant, more flexible and separate from the regime applicable to the rest of the community, marked the choice for a less punitive approach to the insolvent debtor. This is not to say, however, that non-repayment of a commercial debt would not be considered a matter of trust. While he highlighted the importance of the new approach developed by the law merchant, Harold J Berman mentioned the case of a London merchant who, having failed to pay a debt he owned to a German seller in 1292, provoked an immediate loss of trust of foreign merchants in London traders, so that ‘[a]t the instance of London merchants, who feared for their reputation’, the debtor was eventually imprisoned.162 As other scholars have pointed out, ‘[c]redit among capitalists is a historically specific relation that is based on trust and power with social determinants’.163 In fact, credit/trust has some limitations such as, as it has been put when discussing the different and more fundamental question as to the anthropological functions of money, ‘[c]redit money is based on trust, and in competitive markets, trust itself becomes a scarce commodity’.164 As ‘in complex networks of financial exchange that emerged during the eighteenth century, agents sometimes did not know each other and had only partial, if any, information about debtors’ assets and competencies’, then ‘trust had to migrate to institutions with enough authority and power to enforce contracts’.165 Legal and political institutions undertook that function. This amounts to the creation of an institutionalised system of trust as described by Luhmann,166 intended as a way to reduce complexity and to make a complicated economic system work. This is different than simply ‘replacing’ trust: as noted by the economist Costas Lapavitsas ‘[t]rust between capitalists is certainly a nefarious relationship. However, it is fallacious to assume that it is non-existent, thus creating the need for legal agreements backed by p ­ enalties’.167 As summarised by Muldrew, the older model, which persisted until the e­ ighteenth century, ‘has been replaced by a utilitarian world in which a massive body of economic knowledge is used to operate systems which seek to reduce economic

161 

AD Manfredini (2013) 28. HJ Berman (1983) 343. 163  C Lapavitsas (2003) 76. 164  D Graeber (2011) 73. 165  E Dermineur (2015) 505. 166  N Luhmann (1979). 167  C Lapavitsas (2003) 76. 162 

46  The Idea of Financial and Social Inclusion

agency into p ­ redictable patterns of behaviour in order to reserve stability and permit the trajectory of utilitarian economic growth’.168 Muldrew brings more historical complexity into Luhmann’s functionalism by refusing the contraposition between a complex present and a simple past, and placing more emphasis on the social function of credit and trust, as ‘the early modern market was not only a structure through which people exchanged material goods, but was also a way in which social trust was communicated’.169 Most importantly, one should avoid over-imposing a liberal economic framework onto a scenario where people ‘did not, in fact, understand marketing through the use of a language which stressed self-interest, but rather one which stressed credit relations, trust, obligation and contracts’.170 This brings to the fore the culture of credit, rather than its economics, which also appears necessary to be considered in the present financialised society, where trust, after having been at least partially detached from the interpersonal relation, has to be placed in the social system overall. The legal system must not only uphold ‘old’ interpersonal trust through contract (or, until recently, even criminal sanctions) but also uphold ‘new’ system trust through interventions meant to increase or restore confidence in the market. While from a purely economic perspective the new model appears to be more efficient than the previous one, the social and cultural reality of democratisation of credit is inconsistent with the basic private law principles inherited from a period in which interpersonal relations and trust played a more prominent role. In the eighteenth century, the development of nascent ‘consumer credit’ already put considerable pressure on the law, often requiring, to stay with the English example, correction by the courts of equity.171 In the twentieth century, the emergence of democratisation of credit made this inconsistency even more patent, and our attention can now turn to this phase. As it makes credit available en masse, financial capitalism replaces interpersonal trust with technological instruments which allow for more reliable predictions as to the likelihood of reimbursement and default of the debtor, becoming increasingly more exact but, at the same time, more intrusive. Credit scoring is a case in point. Frictions with the pre-existing trust-based legal framework pose problems of confidentiality and require new consideration of data protection.172 How is it acceptable that banks share personal financial information concerning their customers with third parties? In an important English case, the argument proposed by the defendant bank that the practice of credit reporting was sufficiently widespread as to be regarded as implicitly agreed to by any customer opening a bank account was rejected by the House

168 

C Muldrew (1998) 6. Ibid, 5. 170  C Muldrew (1993) 163. 171  M Finn (2003) 309. 172  F Ferretti (2009). 169 

The Role of Trust 47

of Lords,173 which instead required an express authorisation by the customer and thus found the bank in breach of its duty of confidentiality. Nonetheless, the ­Lending Code of 2011—an instrument of self-regulation drafted by the British Bankers’ Association—restricted the need for consent and authorised the disclosure of the banking information of customers in default, possibly based on the general and very controversial old exception of disclosure ‘in the bank’s interest’.174 In fact, the ‘bank’s own interest’ was originally spelled out as a possible justification for disclosure of customer’s confidential information in the landmark case which created the duty of confidentiality, but has rarely been successfully employed by banks in recent years. The most notable authority on this qualification is an old decision,175 rooted in an evidently obsolete understanding of society, which justified the conduct of a banker who disclosed the gambling habits of a woman to her husband, both being customers of the bank. The principle appeared so outdated that authoritative doctrine pleaded for it to be abandoned.176 That same exception was mentioned as a possible justification for credit reporting by the UK Government White Paper on Banking Services.177 On a more theoretical level, some have raised the concern that the development of these technologies leads to the substitution of the ‘real person’ with our ‘digital identity’:178 it is akin to a situation where, having dematerialised commodities, finance dematerialises identities. The process of creating a ‘financial identity’ through credit reporting has been detected as early as nineteenth century America.179 Interestingly, this dematerialisation relates not only to the identity of the customer, but also that of the banker: forms of automated financial advice have recently been developed, replacing the role of the banker with an algorithm capable of giving customers financial advice with no or little human intervention. Again, this poses a series of legal questions, including ones of allocation of liability, which have now started attracting the attention of regulators.180 The development of e-banking poses a threat to the traditional bricks and mortar local bank, which is likely to have more profound repercussions, as ‘[t]he anonymity of virtual banking destroys customer loyalty’.181

173 

Turner v Royal Bank of Scotland [1999] 2 All ER (Comm) 664. This was one of the exceptions recognised by the landmark case Tournier v National Provincial and Union Bank of England [1924] 1 KB 461. 175  Sunderland v Barclays Bank Ltd [1938] 5 LDB 163. 176  R Cranston (2002) 174. 177  UK Government, White Paper on Banking Services. Law and Practice, Cm 1026, London, 1990, 16. 178  R Metz (2014). 179  J Lauer (2008). 180  European Securities and Markets Authority, European Banking Authority, European Insurance and Occupational Pensions Authority, joint committee of the European supervisory authorities, Joint Committee Discussion Paper on Automation in Financial Advice, JC 2015 080, 4 December 2015, 28. 181  K Matthews and J Thompson (2008) 17. 174 

48  The Idea of Financial and Social Inclusion

VII.  Passing the Risk There is a second type of technological innovation which has profoundly contributed to the development of financialisation and to the redefinition of the previously trust-based relationship between creditor and debtor, which is what is usually referred to as financial innovation. While originally consumer credit was granted by the sellers themselves through payment by instalments, financing the consumer soon became an industry in its own right. This led to an extension of the use of credit and was an important aspect in the development of the American consumer society, but did not yet imply particularly important consequences for the essence of the debtor-creditor relation: the lender still had to face the credit risk, thus the risk that the borrower would not pay his debt. It was only in the second half of the twentieth century that deregulation, favouring financial innovation, allowed for the development of techniques such as securitisation, which proved to be of importance for displacing the traditional understanding of the debtor-creditor relation. Meant to reduce risk, those instruments allowed lenders to minimise and practically transfer the default risk. Through securitisation, the source of the profit of the originator does not immediately reside in the final moment in which the debt, consisting in the capital plus an interest, is paid off but rather in the possibility of pooling and transferring the loan, turning it factually into a bond. This practice can be concisely described as a structured process that involves a bank transforming its (usually) illiquid assets, traditionally held until maturity, into marketable securities by pooling these assets and transferring them into a special purpose vehicle (SPV), a bankruptcy-remote entity that in turn finances the purchase through the issuance of securities backed by the pool ­(generally referred to as asset-backed securities or ABSs).182

Thus securitisation differs from comparable transactions like factoring, in that it involves a plurality of actors and leads to the creation of tradable bonds rather than a simple transfer of the loan to a new subject. This mechanism leads to a ‘fundamental change in the industrial organization of mortgage lending’,183 with traditionally the three distinct components of origination, funding and servicing. Securitisation ‘allowed lenders to turn over the funding to financial markets’,184 and determined a shift from a ‘originate to hold’ business model to one which is termed ‘originate to distribute’. Such a model is clearly more profitable than the first one as it circumvents credit risk and even led some bankers to regard the traditional activity of lending as ‘value destroying’, while ‘business that generates fees and other non-interest income is seen as more attractive’.185 In fact,

182 

B Casu and A Sarkisyan (2015) 354. G Donadio and A Lehnert (2015) 341 Ibid, 341. 185  CN Rouse, C Bell and A Graham (2011) 22. 183  184 

Passing the Risk 49

‘a key aspect of securitisation is that the creditworthiness of the notes is de-linked from the credit risk of the originator’.186 On the one hand, this offers immediate liquidity to the lender, but, on the other hand, it significantly reduces the incentive to select creditworthy borrowers while at the same time increasing the temptation to take riskier decisions.187 As concluded even by the US Financial Inquiry Commission, ‘[w]hen originators made loans to hold through maturity—an approach known as originate-to-hold—they had a clear incentive to underwrite carefully and consider the risks. However, when they originated mortgages to sell, for securitization—known as originate-to-distribute—they no longer risked losses if the loan defaulted’.188 The quantity of the contracts concluded becomes more relevant, ie remunerative, than the quality of the loan itself, all the more so considering that the remuneration policies adopted by banks in the US ­incentivised brokers to favour the conclusion of more contracts rather than the repayment of the debt.189 Although the traditional rationality would recommend not extending credit or other financial services to vulnerable consumers who are unlikely to repay their debts, those very customers became instead the ideal target of irresponsible predatory lending practices. In their most degenerate and notorious manifestations, these predatory practices even assumed clearly racial connotations.190 To be sure, the practice of securitisation cannot be simplistically reduced to an exercise of passing the ‘hot potato to the greatest fool’, since it does not always coincide with selling bad loans,191 but growing research has now highlighted a link between the use of securitisation and the relaxation of lending standards in the US.192 The result was de facto a decoupling of the traditionally interlinked aspects of credit and responsibility, which determined the expansion of financial services to an ever growing number of citizens, whose possibly lower creditworthiness and consequent higher credit risk was somewhat compensated by the possibility of securitising those loans. This aspect is of crucial importance as it challenges the basic assumption that the solvency of the debtor is in the immediate self-interest of the creditor. ­Paradoxically, however, while it creates frictions with the assumption that the debtor’s solvency is in the lender’s self-interest, securitisation takes advantage of that very idea. Since the nineteenth century,193 that assumption has led the legal system to take a liberal approach to assignments, limiting the importance of the debtor’s consent, while the debtor could not transfer his or her debt without the

186 

JJ de Vries Robbé (2008) 3. BJ Keys, T Mukherjee, A Seru and V Vig (2010). 188  Final Report of the National Commission on the Causes of the Financial Crisis in the United States, February 2011, 89. 189  D Immergluck (2009). 190  GA Dymski (2009) 149. 191  H-S Shin (2009) 312. 192  A Sufi (2012); AR Mian and A Sufi (2009); BJ Keys, T Mukherjee, A Seru and V Vig (2010). 193  R Zimmermann (1996) 64. 187 

50  The Idea of Financial and Social Inclusion

c­ reditor’s consent. In a relevant English case,194 a married couple with a mortgage loan resisted the attempt of a lender bank to repossess the mortgaged property, since the legal charge had previously been transferred by the bank to a Special Purpose Vehicle (SPV) as part of a securitisation process. In the borrowers’ view, thus, it was only the SPV that was entitled to repossess. The court nonetheless rejected that argument, relying on the distinction between legal title, which continued to reside with the lender, and equitable beneficiary ownership, which on the contrary now resided with the SPV. This dissociation allowed transferability of legal charges without the need to notify the debtor. As that security is traded among investment banks, this practice turns the credit risk into a systemic risk, shifting the risk from the micro to the macro level. This raises the question of how, against this framework, it is possible to avoid the credit risk being translated into a systemic risk. Regulation so far has tried to increase the transparency of securitisation practices, in order to enable investors to be more informed about the risks associated with securities. As has been noted, financial innovation has destroyed the symmetry between performances of the contract.195

VIII.  The Other Side of the Coin If democratisation of finance entailed an authentic promise of increased individual welfare and power redistribution within society, it should be noted how in hindsight that promise does not seem to have been completely fulfilled, as the subprime scandal in the US has shown particularly clearly. To be sure, it would be unfair to come to the conclusion that a whole economic model is irremediably flawed only because in a given moment it has been affected by a crisis—even if in fact it is not the first time that the dynamics of financialisation led to a crisis196— no matter how serious: economic crises are after all cyclical, and it would be naive to believe that there can be any system so perfect as to be immune to them. S­ everal economic theories have tried to incorporate the concept of crisis within the one of capitalism, as if crisis pertained to the physiology rather than pathology of capitalism.197 At any rate, even without insisting on the huge costs that it caused— which according to some estimates amount to 22 trillion dollars in the US alone198—the nature of the 2008 crisis is qualitatively peculiar as it takes its roots in the contradictions of the model of democratisation of finance itself. While for 194 

Paragon Finance plc v Pender [2005] EWCA Civ 760. J Vogl (2011). 196  RW Parenteau (2005) 111. 197  It suffices to mention JA Schumpeter (1975). 198  United States Government Accountability Office Report to Congressional Requesters, Financial Regulatory Reform, Financial Crisis Losses and Potential Impacts of the Dodd- Frank Act, GAO-13-180, January 2013. 195 

The Other Side of the Coin 51

a long time the emphasis has been on the social beneficial effects of financial ­inclusion, the opposite possible link between financial inclusion and social exclusion needs now to be considered. The rapid diffusion of mortgage loans to a higher number of low-income citizens in the US, determined by the factors which have been mentioned, could be initially regarded as evidence of the beneficial social effects of democratisation of credit, since financial innovation made it possible for those individuals to satisfy their need to own a dwelling. Supporting that view, it is calculated that 1.4 ­million people between 1998 and 2006 were able to purchase a home thanks to loans obtained in the subprime market. Nevertheless, as early as 2007, a study carried out by the Centre for Responsible Lending estimated that many more people, ie 2.4 million, would lose their homes because of their inability to pay off their loans.199 A considerable number of citizens therefore had to face the negative effects of inclusion, especially in the form of an increased number of house evictions after the subprime crisis.200 While no official national register of the figures on evictions exists, it was recently calculated that 2.7 million people faced eviction in the US in 2015.201 This ghastly realisation of the initial promise of financialisation was not confined to the housing market: with regard to old-age welfare, pension funds have suffered large losses, often also due to the structural problem of reduced contributions. While awareness of this correlation has become manifest over the last few years, the fact that financial inclusion could paradoxically lead to social exclusion was actually discussed much earlier, when it was suggested that financial inclusion could have a positive social effect only when other factors are present, namely, the predictability of income over the life of an individual or household, a basic level of financial literacy of consumers as well as the transparency of financial services where risks and returns could be easily calculated—factors which did not appear to be co-existent in the Anglo-American experience,202 nor, indeed, in the continental European one. At a more fundamental level, it is clear that while it initially allows for a reduction of public spending, democratisation of finance ends up resulting in an overextension of household indebtedness. The problem here is that the system has a tendency to extend indebtedness as much as possible, but by so doing it ends up resulting in over-indebtedness posing a systemic threat. As a matter of fact, indebtedness is not a negative element per se—and in fact an expansionary monetary policy necessarily produces debt together with credit—as long as the debt is sustainable and can be paid back. Economic research studies have highlighted that indebtedness has mostly positive effects on competition and growth—­pointing out that spending mostly focused on household durable goods and leisure services—while recessions impacted negatively on spending exactly in those same

199 

Centre for Responsible Lending (2007). D Immergluck (2009) 135–40. 201  T Marr (2016). 202  I Erturk, J Froud, S Johal, A Leaver and K Williams (2007) 555. 200 

52  The Idea of Financial and Social Inclusion

sectors which were initially boosted by indebtedness, somehow counterbalancing the initial advantages.203 Whenever the debt incurred by individuals becomes so considerable that it outweighs their reimbursement capacity, then debtors are likely to enter over-indebtedness. This risk obviously increases as the recourse to credit increases, assuming that the assets of the debtor remain stable over time. Paradoxically, while privatised Keynesianism reduces the need for a welfare state by relying more strongly on private indebtedness, the lack of welfare entitlements as well as the possible dismantling of welfarist protections for the worker can lead to a drop in the income of the citizen and conversely an increased risk of over-indebtedness. In this situation, a strongly financialised model without public support can be sustained only so long as new credit is available. This aspect, which is worrisomely reminiscent of a Ponzi scheme, is evidenced in the practice in several European states, where (usually more expensive) revolving credit cards debts are often used to refinance other outstanding debts. A characteristic feature of financialised society is in fact identified in the accumulation and continuous refinancing of debt through new debt, and therefore the postponing to an indefinite moment in the future of the natural end of the debit-credit relation, which is the payment of the debt.204 Such a system of expanding financialisation is problematic not only from a social perspective concerned with the welfare of an over-indebted citizen, but also shows a tendency to produce speculative bubbles and is not without macroeconomic consequences. The old saying, often misattributed to Keynes himself, that ‘if you owe a bank thousands you have a problem, owe a bank millions, the bank has a problem’, explains in its simplicity the possible macroeconomic problem associated with household over-indebtedness. While socially engaged academics have popularised the political connotations of debt205 and the need for drastic debt refusal measures in a socioeconomic context which appears to limit the spaces of democracy of the citizenry,206 a new attention has started to be paid to the further macroeconomic effects of excessive indebtedness. This has implied a critique of the idea of privatised Keynesianism, instead suggesting that ‘for any capitalist economy, in a long-run perspective, recourse to public debt appears decidedly more appropriate than recourse to household debt for sustaining aggregate demand and activity levels’.207 Hence, it is now increasingly recognised that

203 

P Bunn and M Rostom (2014). M Amato and L Fantacci (2012). 205  D Graeber (2011). 206  A Ross (2014). 207  A Barba and M Pivetti (2009) 130: The authors also point out: ‘In addition to the sustainability question, the case for public rather than household debt will appear further reinforced if one considers the likely necessity for the government to eventually intervene to safeguard a financial system severely stressed by an excessive amount of no longer collectable outstanding debts. In the end, the piling up of household debt would thus actually result in a rising public debt, unless taxpayers could be called upon to provide for the funds to be used to preserve the financial system’s capacity to extend credit.’ 204 

The Other Side of the Coin 53

the occurrence of an economic crisis can be better predicted by looking at the level of private indebtedness in a country, which reaches a peak at the eve of a crisis and obviously drops immediately after that (because of the unwillingness of banks to grant new loans),208 rather than public indebtedness, which is moreover a complex figure which could be subdivided into further categories such as, most notably, internal debt and external debt. The continuous emphasis on interventions limiting public indebtedness appears on the contrary to be one-sided.209 Even if the political debate has focused mostly on the role of public debt, and reforms of the institutional framework have been carried out in the European Union to further limit the capacity of Member States to become indebted (while some of them even went as far as constitutionalising budgetary constraints),210 it should be remembered that household debt represents a crucial indicator of the possibility of financial crises.211 Though the cause-effect relations between levels of public and private indebtedness are still debated by economists, it is now widely recognised that recessions are more severe and protracted when preceded by increases in household debts. This was also authoritatively recognised by the International Monetary Fund in 2012,212 while most recently in 2017 the IMF called for an appropriate level of regulation noting that high growth in household lending appears to foster above-average growth and employment at first, but tends to be followed by a period of instability and subpar GDP growth and employment … Furthermore, even in countries with low macro levels of household debt, a rapid expansion in credit may lead to an increasing fraction of highly leveraged households that may be vulnerable to shocks.213

The impact of household debt on macroeconomic stability has also been investigated by the Organisation for Economic Co-operation and Development, which suggests that even legal procedures intended to write down debts are an important factor contributing to macroeconomic stabilisation.214 More cautiously, while a direct causal link between private debt and recessions might appear too radical to

208  For the US, see M Brown, A Haughwout, D Lee and W van der Klaauw (2010). For a ­European state which has traditionally had high levels of public indebtedness and low levels of household ­indebtedness, ie Italy, see S Magri and R Pico (2012). 209  Even before the 2008 crisis and commenting on the equity bubble in the 1990s in the US, a commentator had noted that ‘[i]ronically, while orthodoxy leaned on the need to get public finances in order, private financial balances were debauched. The ruling ideology of fiscal prudence at all costs was, at best, myopic and, at worst, part of a cynical attempt to make the world safe for Wall Street’, RW Parenteau (2005) 144. 210  For an overview, see M Adams, F Fabbrini and P Larouche (2016). 211  Ò Jordà, MHP Schularick and AM Taylor (2003); AM Taylor (2012). 212  International Monetary Fund, World Economic Outlook. Growth Resuming, Dangers Remain, April 2012, chapter 3. 213 International Monetary Fund, Global Financial Stability Report. Is Growth at Risk? October 2017, 70. 214  D Sutherland, P Hoeller, R Merola and V Ziemann (2012); R Merola (2012); V Ziemann (2012); D Sutherland and P Hoeller (2012).

54  The Idea of Financial and Social Inclusion

be proposed, it can at least be suggested that even if private indebtedness is not the only factor leading to those results, it nevertheless concurs with other macroeconomic indicators.

IX. Re-regulation? Given the link between private indebtedness, unemployment and crisis discussed above, it is patent that the financial crisis has brought to the fore the possible negative effects of financial inclusion in terms of social exclusion, hence strongly impacting our understanding of democratisation of finance.215 Confronted with the shortcomings of financialisation both in the housing market and private pension schemes, the reaction in the US has been a growing awareness of the risks linked to the a shift of public policies to the private market. As several commentators have pointed out, the financial crisis has led to a Keynesian revival, which peaked at quite a short period before a more conservative approach reemerged as early as 2012 in the US.216 In 2008, the Emergency Economic Stabilization Act was passed, creating a $700 billion fund—the Troubled Asset Relief Program (TARP)—through which the Government could purchase assets from troubled financial institutions. This has been accompanied by subsequent authoritative requests for re-regulation, banning of toxic financial products217 and, in the case of pension schemes, the suggestion advanced in post-Keynesian economics that rather than continuous financialisation the American economy needs to eliminate government support for pension plans and private savings ‘and instead to boost Social Security to ensure that anyone who works long enough to qualify will receive a comfortable retirement’.218 Reforms to the banking system have also notably shown a tendency to restore older models. The most paradigmatic example is the distinction between investment and retail banking, which is being—very partially—recreated in the US, though the so-called Volcker rule.219 The impact of the new regulations has been such that scholarship has critically evidenced the risks inherent in crisis-driven regulation, usually enacted with the intention of solving immediate problems but often on the basis of limited information.220 Something comparable has emerged more recently in the UK through the new system of ring-fencing221 of banks providing core services, which de facto creates a

215 The Wall Street Journal clearly wrote on 10 October 2009 that ‘[t]he “democratization of credit” is over—now it’s payback time’. 216  M Seccareccia (2011) 64. 217  AM White (2008). 218  Y Nersisyan and L Randall Wray (2011) 31. 219  Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. 220  R Romano (2012) 86–117. 221  Financial Services (Banking Reform) Act 2013, amending the Financial Markets and Services Act 2000.

Re-regulation? 55

distinction between investment and retail banks, although the number of operations that ring-fenced banks can perform has been slightly increased and now also includes securitisation practices. Again, in the UK, regulatory interventions by the Financial Conduct Authority have now introduced interest cap rates on high-cost short-term credit (so-called payday loans),222 reversing an historical liberal tradition in the area. In that same context, there is more awareness that a more protective stronger regulatory approach can lead to some form of ‘financial exclusion’, but this is not regarded as a necessarily negative consequence, since those financially excluded are likely to be the same individuals who would suffer the most from too hasty inclusion: in the words of the FCA, ‘[w]e now estimate 7% of current borrowers may not have access to payday loans—some 70,000 people. These are people who are likely to have been in a worse situation if they had been granted a loan. So the price cap protects them.’223 Within the International Monetary Fund some voices have started openly criticising some previously advocated neoliberal policies such as the curbing of the ‘size of the state’ and focusing on the reduction of public indebtedness, now considered with more suspicion as choices which are not ideal for all countries.224 In Europe, it has also been noted that the lack of welfarist instruments such as social tariffs are partly responsible for the social exclusion of vulnerable individuals,225 while the worryingly increasing phenomenon of individual over-indebtedness has been at least partially counteracted in some countries by a return of the welfare state supporting households in trouble with public solidarity funds.226 If the Keynesian revival has not been as protracted and intense as some might have hoped for, it is still clear that within the ideal public-private continuum which underlines ­economic policies of the post-industrial ‘third way’, the balance has been at least partially shifted back to the public’s side. The developments discussed above might point in the direction of a radical defectiveness of the democratisation of finance narrative. Nonetheless, just as it has been said that financial and social inclusion should not be too hastily equated, a too sharp opposition between what is economic and what is social can be likewise misleading. All in all, social welfare is mostly a matter of allocation of economic resources, and a well-functioning economy is a precondition for individual and social welfare, so that it seems important not to idealise—or associate new moral characteristics to—either of those two dimensions. Nevertheless, those economic and social rationales cannot be simplistically equated as they are based on necessarily different interests which, rather than harmoniously compensating each

222 

Financial Conduct Authority, Consumer Credit Sourcebook, Chapter 5A. the words of the UK Financial Conduct Authority in November 2014, available at https:// www.fca.org.uk/news/press-releases/fca-confirms-price-cap-rules-payday-lenders. 224  JD Ostry, P Loungani and D Furceri (2016). 225  P Rott (2016) 193. 226  For instance, in Italy a public ‘Fondo di solidarietà dei mutui per l’acquisto della prima casa’ has been created to help individuals with mortgages who have recently lost their job. 223  In

56  The Idea of Financial and Social Inclusion

other when supply and demand meet, can also lead to conflicts. In a highly regulated market, the specific way in which the transaction is legally governed might, and in fact must, take into consideration the occasionally diverging interests of any of those parties. To give an example, the requirements of social inclusion might require that citizens be entitled to open a basic bank account at low cost in order to fully participate in the market, while banks might find that solution unprofitable and raise the threshold cost of the basic account, potentially cutting off vulnerable citizens such as the unemployed. Which perspective should be taken by a legal rule which aims at ensuring inclusion? Should it place banks under an obligation to contract with anyone? Should it require them to evaluate the credit score of the possible new customer strictly? The way in which that conflict is solved, striking a balance between the opposite interests and rationalities, determines the practical extent of financial inclusion, and of course depends on a political choice. The role of private law starts to appear clearly, while a more concrete example will underscore the point. It is known that a series of events led the mortgage market to bloom in south European countries like Greece and Spain. It is estimated that in Greece there are around 700,000 consumers with mortgage debt.227 The figures are even more accentuated in Spain, where it has been estimated that there are 5 million distressed mortgages.228 Combined with the effects of the economic crisis and rising unemployment, this has produced known adverse social consequences. Since 2007, official figures show that there have been 500 thousand evictions in Spain alone.229 In considering those data, it should be remembered that Spanish mortgage law allowed lenders to quickly repossess mortgaged properties for even a very short period of payment shortfall by the debtor, while a deficient procedural system blocked courts from assessing the possible unfairness of acceleration clauses. This situation led to the a series of cases before the Court of Justice of the European Union which, despite amendments to the law made in 2013 by the Spanish legislator to comply with the ruling in Aziz230 and to increase the system’s procedural fairness, is at the time of writing still ongoing.231 These figures can now be roughly compared to those of northern European countries. In the UK, figures from 2013 show that around 11 million people have outstanding mortgage debt. Interestingly, that alone is a much higher number than that of both Greece and Spain combined. Nonetheless, it appears that since 2007 there have been ‘only’ around 250,000 home repossessions.232 In other words, the UK has double the number of

227 

G Mentis and K Pantazatou (2014) 23. P Gutiérrez de Cabiedes Hidalgo and M Cantero Gamito (2014) 111. 229  Ibid, 114, reporting data from the Spanish General Council of the Judiciary. 230 Case C-415/11 Mohamed Aziz v Caixa d´Estalvis de Catalunya, Tarragona i Manresa ­(Catalunyacaixa) EU:C:2013:164. 231  Case C-421/14 Banco Primus SA v Jesús Gutiérrez García EU:C:2017:60. 232 Department for Communities and Local Government, Statistical data set, Live tables on repossession activity, available at https://www.gov.uk/government/statistical-data-sets/live-tableson-repossession-activity. 228 

Re-regulation? 57

mortgages of Spain and less than half the number of repossessions. The low level of arrears in the UK has already been compared to other countries and explained on different grounds.233 Macroeconomic considerations are crucial, but one cannot underestimate the legal framework in which those dynamics operate. Even if accelerated clauses are also routinely employed in loan agreements in the UK, British regulators put in place a system which is meant to postpone repossessions as much as possible: the Mortgage Conduct of Business Sourcebook which, revised in 2010 to turn guidelines into prescriptive rules and help borrowers find aid,234 makes provisions to protect the debtor who has a payment shortfall (being unable to pay for two months), requiring the bank to contact the borrower to attempt to find alternative solutions and to ‘not repossess the property unless all other reasonable attempts to resolve the position have failed’.235 This model has marked a considerable shift from the previously widespread tendency to accelerate repossessions, and has thus been labelled as a model of ‘managed forbearance’.236 A direct causal link between number of evictions and legal guarantees in the above-mentioned countries cannot be straightforwardly assumed here, as too many social and economic variables might play a role and would need to be considered, while even protective rules might turn out to be less effective in p ­ ractice. Without going more into details of the specifics of both of those systems, what emerges is that if financialisation in general might affect different countries in abstracto, it will be a combination of economic factors and private law rules that will determine in concreto how financial and social inclusion will be realised. Given these premises, how does the law, in particular European private law, ­pursue the goal of financial inclusion and how does it strike the balance between the interests affected? Having clarified the theoretical and political foundations of the financialisation of the citizen, it is now necessary to look more specifically at the European context to see how legal systems deal with the challenges which have been identified.

233 

E Kempson (2016) compares the case of Britain with that of Ireland. Financial Services Authority, Mortgage Market Review: Arrears and Approved Persons Feedback to CP10/2 and Final Policy, Policy Statement 10/9, 2.2. 235  Financial Conduct Authority, Mortgages and Home Finance, Conduct of Business Sourcebook, 13.3.2A(6). 236  A Wallace and J Ford (2010) 142. 234 

2 Financial and Social Inclusion in the European Legal Order I.  An EU Affair In the complex context which has been outlined in the previous chapter, the role and the involvement of the European Union in the area of financial inclusion becomes a particularly important factor to consider. On the one hand, Europe appears to mimic the US model, where the notion of democratisation of finance initially developed; on the other hand the European discourse on financial inclusion does not fully replicate its US counterpart, as it appears intertwined with, and contaminated by, different considerations. These include, first, a stronger emphasis on questions of social justice; secondly, a more pronounced moral connotation to indebtedness and, thirdly, the necessarily instrumental nature of the EU interventions in the field. While several European states have already tackled the issue of financial and social exclusion by means of interventions of very different natures, the involvement of the European institutions in the subject through legally binding instruments has traditionally been scarce, such that until a decade ago some economists could mourn that the European Union ‘has done little to tackle financial exclusion and what has been done is rather dispersed and disappointing’.1 In a ­legalinstitutional perspective, certainly, it can be seen that the possibility for the ­European institutions to intervene in the subject is severely restrained by the ­limited competences attributed by the EU Member States and by the principle of subsidiarity. Not only does this institutional structure limit the possibility of the EU to take action but, more importantly, it also strongly impacts the substance of the measures taken, which have to be functional to the achievement of the objectives laid down in the treaties. Regardless of these possible institutional constraints, the European Commission has, for several years, underlined the need to combat both social and financial exclusion. The fight against those forms of exclusion has hence become relevant in the European perspective as well, to the

1 

S Carbo, EPM Gardener and P Molyneux (2007) 26.

Distinguishing the Forms of Inclusion in Europe 59

point that European primary law now offers several bases for instrumentalist and diverse interventions in the area. While the criticism that the European Union has done little to tackle financial exclusion quoted above was expressed in 2007, it is crucial to point out that the most important innovations in the legal infrastructure of the European Union were implemented immediately in the period after 2007. These measures were taken in response to the financial and debt crises which threatened the stability of the Union and of the Eurozone countries. In analysing the developments which have taken place in this area, 2007 can be considered as the turning point. What is more, after the crisis, a more critical eye has been cast on the notion of financial inclusion, one that considers also the possible negative sides of that policy in terms of social exclusion. In 2012, the European Parliament itself quite emphatically stated that over-indebtedness, one of the most evident social repercussions of financialisation, is ‘the most significant new social risk across the Union’.2

II.  Distinguishing the Forms of Inclusion in Europe Broadly speaking, financial inclusion is the general idea which refers to the inclusion of a greater number of individuals in the financial market, comparable with the more rhetorical formula of democratisation of finance which has been more widespread in the US context. The terminology favoured in Europe, however, presents a different rhetorical content. If notions of democratisation of finance and privatised Keynesianism suggested an image of redistribution of power from a financial elite or the state to the community, ‘inclusion’ on the contrary suggests an irenic image of integration which might even require the proactive role of a benign state. Despite this otherwise important difference, the ethos underlining both policies is largely coincident, suggesting that extending financial services to citizens is beneficial and that all customers should have the possibility to purchase financial services. Within inclusion policies, there are, however, further specifications to be taken into account. Studying the negative side of exclusion rather than inclusion, Dieter Korczak3 has distinguished between access exclusion (meaning the impossibility of obtaining the financial product), price exclusion (obtaining it a higher price than the one offered to other subjects for the same product), condition exclusion (obtaining it at less favourable conditions), as well as two other categories, of self-exclusion and social exclusion. The remarkable aspect of this categorisation is that it breaks down the concept of financial inclusion, showing how even a

2  European Parliament Resolution of 4 July 2012 with recommendations to the Commission on Access to Basic Banking Services (2012/2055(INI)), p 3 (M). 3  D Korczak (2004) 7.

60  Financial and Social Inclusion in the European Legal Order

citizen who has been offered a financial instrument might in fact still be regarded as excluded. In light of all these nuances, what is the understanding of financial inclusion predominant in Europe and especially within the EU? It is possible to identify at least three different aspects inherent to the term inclusion, which are of relevance in this perspective. In order to more clearly highlight their connotations, in this chapter these conceptions will also be linked to specific ideas of justice. ­Listing the different ideas, a distinction between the following terms should be made: financial inclusion, market inclusion, and social inclusion.

A.  Financial Inclusion In a narrow understanding, financial inclusion is primarily concerned with the inclusion of subjects in the financial market, mostly from the perspective of the financial services provider. As many representatives of the finance and ­banking industry are well aware, and have advocated also in Europe, the inclusion of medium-income citizens into the market can under certain conditions be profitable for banks in the medium to long term, as an enlargement of the customer base to which financial services can be offered.4 The prospect of bringing a greater n ­ umber of people within the financial market is usually presented as a ­win-win situation, from which both financial services providers and c­ ustomers can ­benefit.5 On the contrary, pushing a considerable number of people into subprime markets may be detrimental not only to the interests of the customers involved, but even have harmful macroeconomic impact. Considered from this angle, inclusion appears to be a strategy to target a specific class of unbanked ­customers or, if we were to employ a more critical vocabulary, a mechanism through which finance capitalism extracts value from the socially excluded. Building upon what has been suggested in the previous chapters, it could actually be posited that rather than a simple strategy to increase market and hence a business opportunity, financial inclusion appears to be a necessity, since ‘[o]nce all the prime borrowers in the population have a mortgage, the banks must find new borrowers in order to expand their ­balance sheets’.6 As money supply depends on the continuous extension of new loans in the first place, an expanding economy will require increased lending. According to this understanding, financial inclusion ends up covering all the hypotheses in which a financial product is purchased by a citizen, possibly irrespective of the actual circumstances in which the product is purchased and of its characteristics. From a welfarist perspective concerned with the citizen rather than the customer, however, it is not sufficient to grant access to a financial service to confirm that inclusion has taken place if other c­ onditions

4 

Associazione Bancaria Italiana (2009) 15. Ibid, 58. 6  H-S Shin (2009) 325. 5 

Distinguishing the Forms of Inclusion in Europe 61

are not taken into account. The more concrete conditions under which the product is ­purchased—which determine the creation of very different categories of financially included citizens and even m ­ arket segments—give rise to further subcategories.

B.  Market Inclusion Market inclusion, or more correctly internal market inclusion, refers to the idea of bringing a greater number of customers into the internal market, intended in a broader sense than the financial market and ideally a territory larger than the national one. This would allow European consumers to participate in all aspects of the EU internal market. This point has been explicitly raised several times by the European Commission, worried that it remains the case that a high number of European citizens cannot make use of the benefits offered by the internal market project. A slogan employed in the 2010 New Strategy for the Common Market (the so-called ‘Monti Report’), straightforwardly illustrates this concept of inclusivity: ‘Inclusivity: Ensuring that all citizens can benefit from the Single Market’.7 Against this background, financial inclusion itself appears to be an instrument to implement the internal market project, opening it up to a higher number of previously excluded customers and possibly ensuring competition. An example will help us clarify the relevance of the internal-market considerations for addressing financial inclusion: taking into account that most internet economic transactions require credit or debit cards to be used, the fact that a considerable number of adults in the EU do not have access to these financial services hinders the free circulation of goods and services in the internal market.8 This obstacle becomes more pronounced at a time when European institutions are aiming to create an ‘inclusive digital internal market’, which is regarded by the European Union as having ‘great potential to promote growth, jobs and prosperity in general’.9 Digital inclusion is emerging as a new form of inclusion in the EU agenda, consistent with a more general global move which increasingly considers financial and digital inclusion as tightly interlinked phenomena—in particular, digitalisation of payment services is regarded as an instrument of financial inclusion—which are both to be incentivised around the world.10 There is an instrumental dimension, therefore, to the financial inclusion ­policies envisaged by the European Union. On the one hand, this market angle appears as the only one through which the Union can claim some competence

7 

M Monti (2010) 74. Commission, DG Internal Market and Services, Study on the Costs and Benefits, July 2010. 9  Opinion of the European Economic and Social Committee, INT/627, ‘An inclusive digital internal market’, rapporteur Ms Darmanin, Brussels, 20 March 2013. 10  See JD Villasenor, DM West and RJ Lewis (2016). 8 European

62  Financial and Social Inclusion in the European Legal Order

for ­tackling the issue of financial/social exclusion. On the other hand, this turns financial inclusion into an instrument to pursue the goal of creating an ‘integrated ­market’, ie a financial market characterised by price convergence for similar ­products which, as the Commission declared in 2007, ‘should enable all market participants (consumers, financial institutions, etc.) to buy and sell financial instruments and/or services, which share the same characteristics, under the same conditions, regardless of the location of origin of the participant’, intending that this ‘should result in more opportunities for risk diversification, better allocation of capital, and higher economic growth’.11 Indeed, as the European Central Bank declared in 2007, shortly before the outbreak of the financial crisis, the creation of a ‘fully integrated’ financial market requires equal access to financial services as well as a uniform set of rules that apply to those services. More precisely, the European Central Bank considered the market for a given set of financial instruments or services to be fully integrated when all potential market participants in such a market (i) are subject to a single set of rules when they decide to deal with those financial instruments or services, (ii) have equal access to this set of financial instruments or services, and (iii) are treated equally when they operate in the market.12

Currently, the need to establish an internal market underlies, and is explicitly ­mentioned in, all consumer law directives,13 including the Consumer Credit ­Directive,14 which has the most immediate repercussions in terms of financial inclusion. This particular rationale of internal market inclusion appears as a manifestation of the more general ‘internal market rationality’ which permeates several areas of EU law. The reason behind the prominence of this rationality in EU legislation derives, in the first place, from the goals that can be pursued by the European institutions, so that it would be impossible, for instance, to effectively tackle issues of social exclusion without finding an internal-market angle to them. It has been noted that this rationality is also more profoundly e­ mbedded

11  European Commission, European Financial Integration Report 2007, Commission Staff Working Document, SEC (2007)16969, Brussels, 10 December 2007, 2.1. 12  European Central Bank, Financial Integration in Europe, March 2007, 5. 13  As an example, the recitals of the Unfair Contract Terms Directive 93/13/EEC of 5 April 1993 mention as justifications that ‘it is necessary to adopt measures with the aim of progressively establishing the internal market before 31 December 1992; whereas the internal market comprises an area without internal frontiers in which goods, persons, services and capital move freely’, that unfair terms have to be removed ‘in order to facilitate the establishment of the internal market and to safeguard the citizen in his role as consumer when acquiring goods and services under contracts which are governed by the laws of Member States other than his own’, so that ‘competition will thus be stimulated, so contributing to increased choice for Community citizens as consumers’. 14  Directive 2008/48/EC of 23 April 2008, recital 4: ‘The de facto and de jure situation resulting from those national differences in some cases leads to distortions of competition among creditors in the Community and creates obstacles to the internal market where Member States have adopted d ­ ifferent mandatory provisions more stringent than those provided for in Directive 87/102/EEC.’ Recital 7: ‘In order to facilitate the emergence of a well-functioning internal market in consumer credit, it is necessary to make provision for a harmonised Community framework in a number of core areas.’

Distinguishing the Forms of Inclusion in Europe 63

in the ­functional institutional design of the European Union, and has a tendency to produce reification of certain solutions diminishing the role of the political (even democratic) discussion as to the goals of the legal order.15 One of the manifestations of that rationality, it has been suggested, is the considerable amount of ‘knowledge’ regarding the needs of the internal market produced at the European level, which includes reports, impacts assessments, policy documents and even Eurobarometer surveys. Even if that body of knowledge appears to be technical and neutral, it is in fact not separate from the objectives that motivated its ­production.16 This ­latter aspect is evidenced by the large amount of technical reports commissioned by the EU institutions in the area of financial inclusion and how they all point to the necessity of facilitating access to finance, possibly correcting it with considerations more strongly oriented to the goal of social inclusion, justified on the basis of its importance from the internal-market perspective but without challenging the notion of financial inclusion itself.

C.  Social Inclusion Employing Korczak’s categorisation discussed earlier, characterisation of financial exclusion as access exclusion tends to neglect a social exclusion dimension, trustingly assuming that social inclusion will naturally follow from market inclusion. Admittedly, this notion is a particularly vague and a possibly misleading one, as the adjective ‘social’ can refer either to society at large, in the sense of ‘societal’ or, rather, refer to support to a disadvantaged individual, in the sense of ‘welfarist’. In the European discourse, the concern over social inclusion translates mostly into the solidarity imperative to offer support to the worse-off in society. Financial services might be relevant for that purpose, inasmuch as they offer the economic resources which will be used by citizens to raise their living standard. A correlation between the two aspects can be posited, as it is a matter of fact that social marginalisation and financial exclusion often seem to address the same individuals, categories of persons or even certain geographical and urban spaces.17 Fighting financial exclusion hence becomes a means to promote social inclusion, combat poverty, and thus as an instrument of welfare which can foster, according to an expression à la mode, economic citizenship. Hence, the fight against financial exclusion can be read as a social justice objective. In the years preceding the financial crisis, in particular, it was considered that the internal market project produced positive social effects per se. The Commission, in 1997, praised the market as an objective inasmuch as this ‘generates employment, increases personal freedom and benefits consumers, while

15 

M Bartl (2015) 573.

17 

E Kempson and C Whyley (1999) 4 ff.

16 Ibid.

64  Financial and Social Inclusion in the European Legal Order

e­ nsuring high levels of both health and safety and environmental protection’.18 In fact, in a period in which the European Union had not yet gone through its Eastern enlargement, the European Commission noted that ‘[t]he Single Market is not simply an economic structure. At its heart are 370 million people seeking ­better employment opportunities, improved living and working conditions, and a wider choice of quality products and services—including access for everyone to­ services of general interest—at lower prices’.19 The alleged coincidence of financial and social inclusion confirms the internal-market bias of the European discourse which ‘translate various social problems into internal market language, bringing them thus into the normative an cognitive domain of the internal market’,20 as a possible manifestation of that ‘constitutional asymmetry’ between economic and market policies which was already detected several years ago as implicit to the EU integration process.21 Scholars who have investigated the development of the concept of social exclusion highlighted that the fight against exclusion was ‘justified on the grounds that it threatens economic growth and competitiveness and undermines core elements of the European social model by placing unsustainable financial strains on social protection systems’.22 While the approach which equates social and financial inclusion is overly optimistic, the EU institutions at least showed awareness of the intricate relationship between social and economic dimensions: the Commission admitted that ‘further steps are needed, including steps to enhance the social dimension of the Single Market’23—qualified as a ‘strategic target’, while a more critical stance to the project was later taken by the European Economic and Social Committee, which in 2005 pointed out the risk that new sectors of the market could actually destroy jobs in the short term, rather than create them.24

III.  A Just or an Inclusive Private Law? Financial inclusion contributes to achieving social inclusion, contributing to the creation of a more just economy with citizens at its core, to paraphrase the European Commission. Economically instrumental law can pursue any objective, such as the promotion of an internal market, economic growth or the expansion of financial

18  Communication of the Commission to the European Council, Action Plan for the Single Market, CSE (97)1 Final, 4 June 1997, 2. 19  Ibid, 1. 20  M Bartl (2015) 576. 21  FW Scharpf (2002). 22  R Atkinson and S Davoudi (2000) 431. 23  Communication of the Commission to the European Council, Action Plan for the Single Market, CSE (97)1 Final, 4 June 1997, p 2. 24  European Economic and Social Committee, Opinion of the on the White Paper on Financial Services Policy 2005–2010, COM(2005) 629 final, 1.3.1.

A Just or an Inclusive Private Law? 65

services, but can private law also achieve an objective of social justice? Although the internal-market discourse in Europe tends to neglect the moral dimension of that economic construction,25 it is important to consider also how the discourse on inclusion relates to notions of justice in the internal market. Whether private law rules should be concerned with social justice is an intricate and long-debated question, which can only be touched upon here. In general terms, admitting that pursuing social inclusion as a (limited) form of social justice should be an objective for the state does not imply that this should be achieved through private law. Autonomists and instrumentalist views of private law reach opposite conclusions, whereby the former argue that the bilateral structure of private law adjudication makes private law impermeable to social values, while the latter claim private law to be also a form of regulation open to further social, economic and political ­considerations.26 In the realm of contract, the principle of freedom of contract traditionally represents a hindrance to the introduction of considerations of social justice in contractual relations, since free agents are allowed to decide to conclude even an ‘unjust’ agreement between themselves—within the external limits posed by mandatory rules, good morals and the rules safeguarding the genuineness of the free will. To overcome those theoretical limitations, it would be sufficient to note that, despite the renewed academic appeal of the autonomist position at least in the American context,27 it is self-evident that practice does not conform to t­ heory, particularly in Europe where private law is in fact being used as an instrument of regulation. In this instrumentalist context, reflecting upon other social values which can be perceived through instrumentalism—and even accepting that there are limits to instrumentalism—appears justified.28 On a more fundamental analytical level, private law does not appear to be fully immune from considerations of justice even emphasising the adjudication moment over the regulatory one, as the whole development of equity in common law systems reveals the tension that might occasionally emerge between contract law and widely shared notions of justice. This is regardless of the fact that justice can assume different connotations, and it has been suggested that different European countries have developed different approaches departing from the traditional autonomy-based view, so that various varieties of welfarism can be found even within contract law in Europe.29 While different forms of social justice can thus be pursued by private law as mentioned earlier, private law as such is traditionally considered to be inspired by an idea of justice not necessarily coincident with that which characterises other sectors of the legal order. This consideration is firmly rooted in the long established Aristotelian tradition which relegates distributive justice to the realm of

25 

L Tjon Soei Len (2015). a recent account of that contraposition and a critique to both position, see H Dagan (2013) 104. 27  See EJ Weinreib (2012). 28  C Schmid (2010). 29  T Wilhelmsson (2004). 26 For

66  Financial and Social Inclusion in the European Legal Order

public law, recognising a more limited role to private law, whose redistributive abilities appear much less clearly defined. In that perspective, even if one accepts justice as a value, other fields of law, such as tax law, appear better equipped to deliver it than general private law.30 This view, however, paves the way to two further equally v­ aluable considerations. On the one hand, partially rejecting that critique, it could be considered that ‘the public law of tax and redistribution is unlikely to supplement private law with rules adequately remedying the injustice of a libertarian private law, if not in terms of distribution at least in terms of interpersonal dependence’31 therefore recognising more moderately that, if it is hard for private law to pursue justice, it should at least not have unjust effects.32 On the other hand, accepting the privatist critique and bringing it to its extreme conclusions, if private law is an inefficient instrument for providing social justice we might wonder whether the idea behind democratisation of credit, ie that social inclusion can be achieved by granting access to a certain kind of private law transactions such as financial services, is not indeed erroneous: how could regulating contracts in such a way as to promote access to the financial system achieve a just result such as social inclusion? If we combine these two objections, the role of private law in this context appears as necessary and yet insufficient, ie necessary to prevent social exclusion yet insufficient to ensure social inclusion.

A.  Social Inclusion and Social Justice Addressing the issue of what model of justice, if any, underpins the discourse on financial inclusion in Europe, it would seem immediately logical to ­associate the idea of social inclusion with that of social justice, at least for self-evident terminological reasons. It would appear to be a requirement of social j­ustice that citizens are also socially and financially included. Yet, to rely on purely terminological affinity might mislead, all the more when the term is a vague one which conceals a plurality of meanings. In fact, although the association between social ­inclusion and social justice is prima facie clear, it proves to be less so on a closer inspection. In a nutshell, social justice is for the industrialist welfare state what social inclusion is for the post-industrialist market state. Although it can be posited that social justice requires social inclusion in general terms, the opposite is not true, ie pursuing and obtaining social inclusion is not per se a factor suggesting that social justice has been achieved. In order to understand more clearly the tricky relationship between social ­justice and social inclusion, it is important to introduce the first notion. This is certainly not an effortless task and only an abridged introduction can be offered

30 

L Kaplow and S Shavell (2002) 33. H Dagan (2013) 108. 32  MW Hesselink (2014) ‘Unjust Conduct in the Internal Market’. 31 

A Just or an Inclusive Private Law? 67

in here, since the notion of social justice is widely debated in philosophy and ­different models could be identified, as well as an almost infinite number of social issues which are relevant in that perspective.33 Nowadays, the concept of social ­justice can be understood as embracing minimalistic forms of interpersonal justice, or religious-oriented interpretations of the good, or more radical social demands of equality (although equality and justice are not necessarily coincident aims), and can therefore have quite different impacts on private law.34 The overuse of a term easily leads to its abuse, leading social justice to be employed as a mere synonym of ‘justice’ more generally, which certainly deprives the phrase of some of its n ­ ormative and explanatory power. The phrase has a long philosophical tradition, as it was elaborated drawing on the Aristotelian tradition especially in the ­philosophy of the Catholic Church’s social thought, whereby the social and ­solidarity oriented dimension of social justice appeared as more prominent than it is in the modern discussion. In the 1967 encyclical Populorum Progressio by Pope Paul VI, one of the most outspoken social manifestos of the Catholic Church ­written in an historic period of social and political turmoil in Western Europe, for instance, social justice was described as requiring ‘the rectification of trade relations between strong and weak nations’,35 while in another part of the writing it was affirmed that ‘trade relations can no longer be based solely on the principle of free, unchecked competition, for it very often creates an economic dictatorship. Free trade can be called just only when it conforms to the demands of social justice’.36 The Church encyclical portrayed social justice as a counterbalance to competition and free market, almost in direct opposition to those, rather than derivative, as in the democratisation of finance discourse. Though the concept of social justice stems, logically and philologically, from the idea of distributive rather than commutative justice, it is not a mere synonym of the former, since it adopts a broader approach considering the just distribution within a society as a whole. In order to distinguish it more clearly from other types of justice, social justice can thus be considered as an attempt to promote a more just society through social institutions and in particular the welfare state (leaving aside the further question of what kind of welfare state we are talking about, given the existence of different models even for that). The most salient aspect which opposes the two concepts, however, lies in the opposition between their collective and individual dimensions. Social justice has a collective dimension, while social inclusion has an individualist one, which makes social inclusion a more usefully employable category in a context of widespread economic individualism. Thus, social justice is generally defined as a relative and collective concept, such that we tend to consider a policy unjust when ‘a person, or

33 

For a list of social justice issues, see ME Cannon (2009). Micklitz (2011) ‘Introduction’ in The Many Concepts of Social Justice in European Private Law; MW Hesselink (2008). 35  Pope Paul VI (1967) 44. 36  Ibid, 59. 34  H-W

68  Financial and Social Inclusion in the European Legal Order

more usually a category of persons, enjoys fewer advantages than that person or group of persons ought to enjoy (or bears more of the burdens than they ought to bear), given how other members of the society in question are faring’,37 as clearly expressed by David Miller. Social justice has the main objective of achieving a ‘just society’, in which for example differences between the better-off and the worse-off are not excessive within a geographically limited community, as in the thoughts of Miller, or even in an international commercial setting, as in the social thoughts of the Catholic Church. The concept of social justice easily fits the theoretical framework of those who have an organic view of society, and it is accepted and adopted by political ­philosophers who more clearly adhere to communitarianism or even liberal nationalism. Modern political philosophers thus maintain that such theories of justice can work better by adopting a view of the community as a homogeneous whole, possibly a nation, rather than a simple sum of individuals and families,38 and that a similar conception is necessary even for liberal theories of justice to be functional: even Rawls’ liberal theory of justice rests upon a surprisingly narrow understanding of a society in terms of a nation-state39 with clear ethnic traits.40 The concurrence is also historical, since the notion started being employed in the academic debate by writers inspired by idealism in particular between the nineteenth and twentieth century,41 when organicist visions of society were ­ most widespread. These instances show how the notion of social justice cannot ­jettison a collective dimension and requires a certain idea of ‘just society’ rather than some form of commutative justice between individuals. At the same time, it does not derive from this that the idea can work exclusively within the limits of a self-contained community mostly represented in ethnic or national terms. Quite to the contrary, although that attempt has been criticised by liberal nationalist philosophers, s­ everal efforts have been made more recently to show the existence of a certain kind of global justice.42 Between the opposite ends of nationalist and internationalist perspectives, it suffices to note that social justice requires a certain kind of idea of society and shared values and cannot therefore be reduced to an individual phenomenon. Those who adopt an individualistic stance which does not recognise the existence of society as an organic community but merely as a network of self-centred individuals cannot easily acknowledge the existence of a collective and organic idea such as social justice so that from that perspective the notion of social justice appears misguided,43 and does not justify any claim to wealth redistribution based only on membership of a wealthy community.44 37 

D Miller (1999) 1. D Miller (2000) and Y Tamir (1993). J Rawls (1971) 457. 40  J Rawls (1993) 68. 41  D Miller (1999) 4, referring to W Willoughby (1900) and LT Hobhouse (1922). 42  See the contributions in TW Pogge (2001). 43  FA von Hayek (1976). 44  FA von Hayek (2006) 88. 38  39 

A Just or an Inclusive Private Law? 69

By those lights, the only way to save the notion of social justice would be to ­downplay its social aspect, moving it closer to the idea of commutative justice rather than distributive justice, from which it originated. The perspective of social inclusion differs from that of social justice and comes closer to individualism. While social justice assumes an already existing social structure that it aims to ameliorate, social inclusion pursues the inclusion of a ­previously excluded subject in that society. It achieves its goal whenever the subject gets ‘in’, while it seems indifferent as to the question whether the society in which the subject is included is just or not. At most, it can rephrase the question suggesting that a just society is one which ‘includes’—without considering the most fundamental and political question of whether the individual also desires to be included in a society which that person does not perceive as just. The notion can bypass, then, the questions which are most important in the perspective of social justice, but which also lead to the most recurring libertarian critiques. This contributes to the success in contemporary debates and policy discussions of formula such as ‘inclusive society’ rather than ‘just society’. In the meantime, the Directorate-General of the European Commission responsible for social ­policies—previously ‘Employment, Social Affairs and Equal Opportunities’, which had already lost its original name of ‘Employment, Industrial Relations and Social Affairs’ under Barroso Commission (I)—is now known as ‘Employment, Social Affairs and Inclusion’. This jargon of course spills over to the law, as for instance the European consumer organisation BEUC already speaks of ‘inclusive consumer policy’ as part of a ‘more sustainable, inclusive and responsive economy’.45 While the concept of justice has ended up both in a political rhetorical success and in a dead-end circle of philosophical disputes which have destroyed the unity of that category, inclusiveness has started to appear as a more concrete, more feasible and less contentious goal to achieve, comfortably in line with the inspiration that the state should ensure equal opportunities rather than equal outcomes. With regard to education policies, ‘inclusiveness’ was first used in 1997 by the New Labour Government in the UK.46 The formula reveals thus its continuity with the individualistic discourse which inspires the forms of post-welfare state and most notably the suggested model of a market-state: as much as social justice was initially understood as a counterbalance to competition, social inclusion on the contrary relies upon the market.

B.  Market Inclusion and Access Justice If inclusiveness departs from social justice, is inclusive private law concerned with justice at all? Actions from the EU meant to tackle financial exclusion are not only

45 BEUC’s 46 

EU Consumers’ 2020 Vision, 2012, 5.2, 3. Department for Education and Employment, 1997, in L Dunne (2009) 43.

70  Financial and Social Inclusion in the European Legal Order

a matter of market-state oriented welfare but predominantly of economic efficiency, and appear an instance of the particular paradigm of justice which can be detected in much of EU legislation and which has been termed ‘access justice’.47 The notion of access justice—not to be confused with access to justice as the right to have recourse to the judiciary system—has been suggested to lie at the heart of the European ‘regulatory’ private law enshrined in areas such as EU consumer law, discrimination law, telecommunication law, energy law and transport law to name just a few, with a propensity to include citizens as economic actors in the newly liberalised markets.48 It is recognised already in primary law, as ­Article 36 of the Charter of Fundamental Rights states, even without creating any s­ elf-standing individual right, that ‘[t]he Union recognises and respects access to services of general economic interests as provided for in national laws and practices, in accordance with the Treaty establishing the European Union, in order to promote the social and territorial cohesion of the Union’. The article is limited to access to ‘services of general economic interest’, and in that domain it links ‘access’ to the ‘social’ dimension, subordinating the former to the latter. Moving to the contract law domain, access justice confers individuals the chance, or in some cases even a legal right, to conclude a services contract in the first place. The substantive dimension of justice, whether commutative or distributive according to the traditional Aristotelian tradition, becomes of second-order importance, and will possibly play a role only in a later stage, for evaluating the contractual agreement which has been entered into. Given this separation, a notion of access justice does not necessarily replace substantive ones but, rather, complements them. By the same token, the development of an access justice model at the EU level does not necessarily imply injustice in light of other criteria, since the EU model ‘does not exclude a co-existence with differing national models of social justice’,49 which on the other hand could at least theoretically allow for the preservation of different models of social justice in private law elaborated in different EU Member States. In fact, however, the concrete coexistence of a supranational and one or more national models of social justice in contract law is made practically challenging in a setting in which supranational norms take priority over national ones, possibly leading to a substitution of one idea of justice with a different one. This makes the concern about the substantive justice of EU contract law more compelling. The model of access justice seems to depart from the process of socialisation of private law which took place all over the course of the twentieth century in Western Europe and that implied a Materialisierung (materialisation) of private law. In continental Europe, this was often achieved through a reading of contract law in light of the freshly rewritten social provisions of constitutions, used by judges and scholars to include more solidarity elements in interpersonal

47 

H-W Micklitz (2008).

49 

H-W Micklitz (2011) 2.

48 Ibid.

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r­elations, partially abandoning strict formalism and blurring the distinction between public and private law.50 EU directives and regulations in private law tend on the c­ ontrary to bypass issues which could be of importance for a perspective concerned with justice and leave these to the Member States. As Diana Wallis, an outspoken ­former MEP actively involved in the drafting of several instruments of EU private law, commented, I had this nagging doubt that somehow we did not spend enough time talking about the overall justice implications of what we were doing. This in the most basic sense, of examining the fairness of various political options in terms of the outcomes caused by constructing the law in a particular way. The guiding mantra always seemed to be the Internal Market with justice issues hiding in the back ground and presented mainly under the heading ‘access to justice’ rather than the content of the law itself.51

Such a seeming inattentiveness for the theme of social justice has been already denounced several times in EU legal academic literature, leading often to pleads for a major consideration for the role and concept of social justice, often accompanied with concerns about the lack of democratic participation in the process through which the new private law is being created at the supranational level.52 More recently, this possible deficiency of a substantive theory of justice has also been acknowledged by EU public lawyers, presenting it as a shortcoming of the whole European construction, comparable to the long standing question as to a democracy deficit.53 The different dimensions of justice tend to blur in the policy discussions about the issue of financial inclusion, contributing to generating a puzzling confusion. The rhetoric on democratisation of finance and credit has for a long time led to optimistic claims as to the social inclusion of citizens as a necessary consequence of their financial inclusion. This reinforced the importance of ‘access’ to the contract over that of contractual justice. After financial crises showed that market inclusion can have adverse effects in terms of social inclusion, while the financialised economy finds ways to extract value from the socially excluded, a re-definition of the idea of financial inclusion appears necessary.

IV.  The Rise of Inclusion in European Law In the framework of a regulatory multi-level system like the European one, the coexistence of different rationalities and purposes behind the idea of financial inclusion might be particularly problematic. On the one hand, it poses issues of

50 

See MW Hesselink (2014) ‘Post-Private Law?’; MW Hesselink (2008) 13. D Wallis (2015). Study Group on Social Justice in European Private Law (2004). 53  D Kochenov, G de Búrca and A Williams (2015). 51 

52 

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division of competences and, in a second and more important way, it might lead to the takeover of a specific rationality over others. Aspects linked to the internalmarket dimension can be the direct object of intervention by the EU institutions, while the social dimension is mainly a competence for the EU Member States and has only to be ‘taken into account’ or promoted through non-authoritative interventions by the European Union. The tendency for pursuing macroeconomic goals through contract regulation, associated with the maximum harmonisation approach and the principle of supremacy of EU law over national law, makes this risk particularly tangible. To put it more concretely, the risk is that internal market inclusion will be strongly emphasised, rather than a social inclusion aspect within financial inclusion. For these reasons, the issue has been mainly tackled in the ­legislation of the Member States while the involvement of the European Union is less evident. Given this institutional framework, just a few years ago it could have been said that ‘the European Commission appears to prefer national ­solutions to tackling financial exclusion and dealing with exclusion is not at present a key ­feature of its future policy plans’.54 How can a fair balance between those different exigencies be achieved under these circumstances? The inclusion of a greater number of citizens into liberalised markets requires a higher level of protection for consumers from the negative consequences that may arise from their involvement in a highly complex market design.55 Without adequate protection for the citizens included in a potentially risky market segment, the rhetoric of inclusion would amount to little more than a justification for interventions that are aimed at creating a new market for services providers. It becomes vital, then, to underline that improving aspects of social inclusion and consumer protection does not amount to a social justice demand only: as the capitalist economy is based on consumption, the probability that the expansion of the system is built on the fragile foundations of increasingly indebted citizens becomes a worrying problem, whose effects will be felt first by consumers but eventually by the economic system itself. This reveals the inherent contradiction of the model of democratisation of finance: on the one hand, it has to promote access to financial products and thus indebtedness; on the other hand, it needs to avoid over-indebtedness. This aspect has become particularly obvious in recent years on both sides of the Atlantic, but even in the 1970s the necessity of a compromise between the two opposite exigencies began to be noticed. For instance, in the UK, the report which inspired the pivotal Consumer Credit Act 1974 identified credit as an important component of capitalist economies, encouraging the expansion of the credit market but subjected to protective measures to reduce the number of defaulting debtors.56

54 

DG McKillop and JOS Wilson (2007) 10. H-W Micklitz (2010). 56  Report of the Committee on Consumer Credit, Cmnd 4596/1971, in I Ramsay (1989) 315. 55 

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The distinction drawn so far between the purposes of financial, social and ­ arket inclusion is useful for understanding the degree of involvement of m ­European supranational institutions57 in the field. If financial inclusion is intended as a policy to foster, or more exactly to contribute, to the establishment of the internal market, it follows that the European Union is competent to regulate the area. Similarly, if financial inclusion is meant as an instrument to pursue further macroeconomic goals such as economic growth or financial stability—which is now emerging as a new overarching rationale for contract regulation and investor protection—supranational institutions will need to be more involved. In contrast, social inclusion as an aspect of social policy remains at a less well-established level, scattered between the European Union and predominantly the Member States. As to the issue of social inclusion, the Union promotes the open method of coordination to achieve that objective, relying more strongly on actions taken by the Member States than on binding supranational rules.58 While the European Union has only limited competences in social policy, combating social exclusion has slowly emerged as a new aim of the Union as it has expanded its fields of activity. Even so, financial exclusion was not recognised as part of the social policy of the Union for a long time, and the approach to financial services has not given much attention to their social dimension as a consequence, instead addressing them mainly from an internal-market perspective. This appears to follow the path of the evolution of EU consumer law, as at an earlier stage of the development of European regulation of the financial market and before the Maastricht Treaty, consumer protection did not qualify as an autonomous competence of the European community and was instead seen as the task of Member States.59 It took a relatively longer time before references to financial exclusion as an aspect of social exclusion were made in the policy documents of the Union, as a slowly developing, but increasing tendency to consider social and financial exclusion as fields of intervention for the European institutions which has appeared in the legal and policy documents of the Union over the years. This has taken place even without direct and effective interventions following those declarations of intent. Some institutional premises as to the competences of the Union in the area of social exclusion from the financial markets will help clarify the reasons behind this process as well as the legal origin of the internal-market rationality which prevails in the financial inclusion discourse. It will be necessary to provide a fairly an extensive overview of the evolution of EU policies in order to highlight how the discourse on both social and financial inclusion initially developed and how later—it is suggested here, around the mid-2000s—came to coincide.

57 

ie both the European Union and the Council of Europe. M Ferrera, M Matsaganis and S Sacchi (2002). 59  C Bradley (2007) 1218. 58 

74  Financial and Social Inclusion in the European Legal Order

A.  Social Exclusion The French concept of social exclusion emerged at the EU level with the Delors Commission.60 The notion was spelled out in the 1989 Community Charter of the Fundamental Social Rights of the Workers,61 and became more prominent in the Communication of 1992 ‘Towards a Europe of Solidarity: Intensifying the fight against social exclusion, fostering integration’.62 This outlined the EU approach to the topic of social exclusion and already hinted to the necessity of granting access to services in order to counteract that phenomenon. In the same period, the notion gained momentum at the more general level of the Council of Europe. Going further than the older charter of 1961, the revised Social Charter of 1996 introduced a reference to a ‘right to protection against social exclusion’. The problem of social exclusion was recognised, however, mainly in the areas of ‘employment, housing, training, education, culture and social and medical assistance’,63 without a direct link to financial aspects. At any rate, inclusion in a broader sense appeared as a new rising idea requiring a proactive role for states in ensuring that citizens of all conditions would actively participate in the social life of their country. This emerges particularly clearly in the highly amended article dealing with persons with disabilities (initially termed ‘physically or mentally disabled persons’ in the 1961 wording), where the focus shifted from providing ‘rehabilitation and resettlement’64 to promoting ‘full social integration and participation in the life of the community’.65 The evolution of the Social Charter is most telling in that it shows on the one hand, that a discourse on what would be later called social inclusion emerged after the 1960s and became predominant in the 1990s, consistent with the socioeconomic transformations which have discussed in the previous pages, but that, on the other hand, it remained mostly detached from social problems connected to financialisation in the 1990s. One year later, in 1997, the task of combating social exclusion made its appearance in the primary legislation of the European Communities. The older Social Policy Agreement of 1991 (initially opted out by the United Kingdom), which in turn was based on the Community Charter of the Fundamental Social Rights of Workers of 1989, was incorporated into the Treaty of Amsterdam. This conferred on the European Union the task to ‘encourage cooperation between Member States through initiatives aimed at improving knowledge, developing exchanges of information and best practices, promoting innovative approaches and evaluating experiences in order to combat social exclusion’ (Art 137.2). The last sentence of

60 

R Atkinson and S Davoudi (2000). Community Charter of the Fundamental Social Rights of the Workers, 9 December 1989. 62  COM(92) 522 final, Towards a Europe of Solidarity: Intensifying the fight against social exclusion, fostering integration, Brussels 23 December 1992, 8. 63  European Social Charter 1996, Art 30. 64  European Social Charter 1961, Art 15. 65  European Social Charter 1996, Art 15.3. 61 

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old Article 137.2—‘in order to combat social exclusion’—was later deleted by a somehow ‘cosmetic’66 amendment of the Treaty of Nice: that goal had become an autonomous field to which the Union has to ‘support and complement the activities of the Member States’ according to the same Article.67 The Treaty ­nonetheless added a new limitative provision to the Article: ‘excluding any harmonisation of the laws and regulations of the Member States’. Thus, in the same moment in which it made the fight against social exclusion legally relevant, the Treaty of Nice outlined quite a clear distinction between market and social policies methods, whereby the latter appear to be pursuable only by non-binding instruments such as the open method of coordination. The Treaty of Lisbon devoted more consideration to the principle, so that now Article 3(3) of the Treaty on European Union (TEU) establishes a new aim for the EU institutions, stating that the Union ‘shall combat social exclusion and discrimination, and shall promote social justice and protection’. Nonetheless, the emphasis with which the policy aim was proclaimed was not reinforced by any specific competence in that area so that, again, the goal of combating social exclusion remains mainly a field of activity for the national legislators, while the Union merely ‘supports and complements’ (Article 153(1)j of the Treaty on the Functioning of the European Union (TFEU)) the actions taken at the national level, and implements ‘measures which take account of the diverse forms of national practices, in particular in the field of contractual relations, and the need to maintain the competitiveness of the Union economy’ (Article 151 TFEU). The most notable innovation was represented by the introduction of a new ­so-called horizontal social clause in Article 9 TFEU, according to which ‘[i]n defining and implementing its policies and activities, the Union shall take into account requirements linked to the promotion of a high level of employment, the guarantee of adequate social protection, the fight against social exclusion, and a high level of education, training and protection of human health’. This specifies that the social aims will have to be taken into account when ‘defining and implementing’ the policies and activities of the Union, therefore also while ­drafting market-oriented directives. The provision, in other words, builds a bridge linking the different rationales of market inclusion and social inclusion. While the primary competence in social policies remains in the hands of the Member States, it has become legally compelling that new regulatory interventions meant to foster financial inclusion do not neglect its social dimension, independent of the autonomous involvement of Member States. For our purposes, this provision requires consideration of the social dimension of the phenomenon rather than just addressing it from the perspective of the internal market. To be sure, most of the European actions against social exclusion are meant to be realised not through authoritative interventions such as regulations and

66  67 

H Kountouros (2003) 275. On the interpretation of the new wording, see H Kountouros (2003).

76  Financial and Social Inclusion in the European Legal Order

directives—which had been expressly excluded by the Treaty of Nice—but, rather, through an informal coordination of policies at the level of the Member States. The EU can still informally promote the adoption of regulations at the level of Member States, in particular through the institution of an open method of ­coordination on social inclusion.68 This instrument is thought to allow a better coordination of national policies aimed at combating social exclusion, promoting the circulation of best practices while still respecting the principle of subsidiarity, as ‘[c]ombating social exclusion is first and foremost the responsibility of Member States and their national regional and local authorities’.69 The references to social exclusion started increasing in number in the policy documents of the European Union and more actions were taken. The need to promote social inclusion was identified as a main objective for the modernisation of social protection by the Commission in 1999,70 supported in this by the Council Conclusions of 17 December 1999 on the ‘strengthening of cooperation for modernising and improving social protection’, which emphasised that ‘the aim of the European Union should be to ensure a link between economic and social development’, therefore pointing out the necessary interrelation of economic regulation and social policy. In December 2001, a ‘Programme of Community action to encourage cooperation between Member States to combat social exclusion’71 was financed with a Decision of the Parliament and the Council. The programme is part of an open method of coordination and, according to recital 13, ‘[m]easures to combat social exclusion should aim at enabling everyone to support himself or herself, by gaining employment or otherwise, and to integrate into society’. In the Social Policy Agenda 2006–2010, while envisaging an extension of the open method of coordination to new areas, the Commission even proposed 2010 as the ‘year of combating exclusion and poverty’.72 In 2005, the new communication of the Commission on ‘Working together, working better—A new framework for the open coordination of social protection and inclusion policies in the European Union’, identified overarching principles of social protection and social inclusion for an enhanced open method of coordination, aiming at the ‘eradication of poverty and social exclusion’ by ensuring ‘the active social inclusion of all by promoting participation in the labour market and by fighting poverty and exclusion among the most marginalised people and groups’.73 Again in 2007, a new Communication from the Commission on ‘Opportunities, access and solidarity: towards a new social vision for 21st century Europe’ reasserted the aim of reducing social exclusion.74 68 

See KA Armstrong (2010) 30. Council, Communication from the Council, ‘Objectives in the Fight Against Poverty and Social Exclusion’, 2001/C 82/02, 3. 70 European Commission, Communication from the Commission, ‘A Concerned Strategy for ­Modernising Social Protection’ COM/99/0347 final, 3 and 14. 71  Decision 50/2002/EC of the Parliament and of the Council of 7 December 2001. 72  COM(2005) 33 final, 2.2. 73  COM(2005) 706 final, 4. 74  COM(2007) 726 final. 69  European

The Rise of Inclusion in European Law 77

While all these instances show the growing interest of the EU in social exclusion, this was regarded as, in the main, affecting ‘marginalised people and groups’ only.75 Its connection to financial exclusion was not explicitly considered. It should be noted that, in the same period, financial exclusion was already expressly identified as a relevant aspect of social exclusion in some Member States.76 This does not mean that EU intervention were oblivious to financial inclusion. Quite to the contrary, while the welfare agenda of the EU focused on the problems of labour and housing, financial issues were mainly addressed from the internal m ­ arket perspective.

B.  Financial Exclusion Independent of the evolution of the notion of social exclusion discussed above, specific legal aspects that are relevant from the financial exclusion perspective had already been tackled by the European institutions. Since the issuing of the first Consumer Credit Directive77 of December 1986, the European Commission started paying particular attention to the problem of over-indebtedness, although this aspect did not emerge yet as part of the social policy of the European Union. Rather, EU measures promoted access to credit which, lacking adequate protective instruments, might potentially lead to over-indebtedness. Since the 2000s, therefore, the EU has tried to improve the regulatory framework of consumer credit by updating those protective instruments. The link between the social and the financial dimensions was identified more clearly by the European Parliament in its resolution on the Commission’s White Paper on Financial Services Policy 2005–2010.78 In that crucial White Paper, the Commission highlighted the need of ‘[c]ompleting the single market in financial services’ as ‘essential for the EU’s global competitiveness’ to be achieved through ‘better regulation’. The White Paper is fundamental as it explicitly embraced the ideology of financial services as a functional replacement of the welfare state stating clearly that [a]s the public sector gradually withdraws from financing some aspects of social systems, there is a need for increased awareness and direct involvement of citizens in financial issues. To strengthen the demand side and promote good investment choices, e.g. for p ­ ensions, it is essential to increase transparency and comparability and to help consumers understand financial products.79

75 

COM(2005) 706 final, 4. the UK, see HM Treasury, Access to Financial Services. The Report of Policy Action Team 14, 1999, 2: ‘Success in tackling financial exclusion is essential to achieving our wider aims in eliminating social exclusion’. 77  Directive 87/102/CEE. 78  COM(2005) 629. 79  Ibid, 2.6. 76  For

78  Financial and Social Inclusion in the European Legal Order

Transparency, as well as financial education, ie the mechanisms based on the information paradigm, become instruments of privatised Keynesianism. The economic background of that project had already been perceived by the European Economic and Social Committee (EESC), in its Opinion80 on the Commission’s White Paper. While it endorsed the ‘better regulation’ approach suggested by the Commission and recommended strengthening ‘consumer information, financial culture and awareness’,81 the EESC warned against the risks of ‘financialisation of the economy’,82 since: It must be remembered however that, at least in the short- to medium-term, in the wake of consolidation, there are fewer jobs in the financial industry, which gives rise to growing insecurity among the workforce. The EESC stresses the need to take account of the social consequences of consolidation and hopes that the Member States would adopt appropriate social shock absorbers and support professional training and retraining schemes.83

This suggestion relied on the model whereby it is the Member States’ responsibility to deal with the adverse social consequences of the internal market approach. At the same time, the European Parliament stated that ‘granting access to both positive and negative credit data can play a key role in helping consumers obtain access to credit and fight financial exclusion’.84 The Commission in this period started to elaborate a more coherent approach to retail banking services, identifying the lack of access to bank accounts as a problem to be addressed. Setting its consumer policy strategy for the years 2007–2013, the Commission declared that ‘[a]ffordable access to essential services for all is both essential for a modern and flexible economy but also for social inclusion’85 and, identifying more concrete areas of action, it announced that it would ‘analyse obstacles that consumers encounter when opening, closing or switching bank accounts and will tackle competition problems in the retail banking sector’.86 At the same time, the Commission announced that it would adopt a Green Paper on retail financial services and a White Paper on mortgage credit.87 The idea that the promotion of access to basic financial instruments is an instrument to promote social inclusion reappeared in 2008 in the Communication ‘Renewed Social Agenda: Opportunities, Access and Solidarity in 21st Century Europe’.88 This reasserted combating poverty and social

80  European Economic and Social Committee, Opinion on the White Paper on Financial Services Policy 2005–2010, COM(2005) 629 final, 16 December 2006. 81  Ibid, 1.6. 82  Ibid, 1.3. 83  Ibid, 1.3.1. 84  P6_TA-PROV(2007)0338/A6-0248/2007, 33. 85 European Commission, Communication from the Commission, COM(2007) 99 final, ‘EU ­Consumer Policy strategy 2007–2013. Empowering consumers, enhancing their welfare, effectively protecting them’, 4. 86  Ibid, 5.5. 87 Ibid. 88  COM(2008) 412 final.

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exclusion as a goal for the European Union, expanding its area of activity. The new Social Agenda highlighted that 16 per cent of the European population is at risk of poverty, which calls for an effort from the European institution to promote inclusion, possibly issuing a recommendation on active inclusion.89 It was announced that ‘[a]ction is also planned to promote financial inclusion—so that no one in the EU is denied access to a basic bank account’.90 The EU approach in this period predominantly assumed, therefore, social exclusion as a possible consequence of financial exclusion, in cases where citizens were not offered basic financial services such as bank accounts with basic features or credit. In the same period, nonetheless, indebtedness and over-indebtedness started increasing in several European countries, with a considerable increase in S­ outhern European countries in particular.91 This development was determined by the ­easier availability of consumer credit, facilitated by the banking industry as well as by the introduction of the common currency in the Eurozone. This latter is an element which is worth considering more specifically. In fact, the creation of a common currency and, most importantly, the transfer and reshaping of monetary policy competences from the national to the European level should not be understood as an occurrence only accidentally having effects on the credit market and household indebtedness: the Eurozone was clearly meant to represent the completion of a ‘fully integrated’ money market, as recognised by the European Central Bank in 2007,92 and was consistent with an approach meant to favour indebtedness. The existence of several currencies in Europe has traditionally been regarded by contemporary historians as a hindrance to infra-European commerce, even as far back as medieval times.93 Without delving into the economics of the common currency94 it suffices to note that the currency led to a remarkable lowering of the nominal interest rates in several countries. This had the effect of a huge expansive monetary policy which gave rise to an increase in the levels of indebtedness among consumers and, in a few cases, to a pathological overheating of the housing market. The dynamic was particularly clear in Ireland and later more evident in Mediterranean countries such as Portugal, Spain and, in particular, Greece.95 That development can be compared to the much smaller increase of loans extended in other continental European countries like Germany,96 where citizens’ salaries 89 

Ibid, 4.5. Ibid, 4.5. 91  A Chmelar (2013) 3. 92  European Central Bank, Financial Integration in Europe, March 2007, 6. 93  J Le Goff (2005) 114. 94  Most recently and outspoken, J Stiglitz (2016). For an early assessment of the Euro crisis from a Dutch perspective, see C Teulings et al (2011). 95  With regard to Greece, for instance, see F Pasiouras (2012) 101; G Mentis and K Pantazatou (2014) 22. 96  G Mentis and K Pantazatou (2014) 22: ‘In the period from 2000–2009 Greek loans increased 320% while German loans show an increase of only 7.8%. Especially in relation to the household loans, the increase in Greek loans is enormous (almost 600%) while the increase in German loans is around 12%. It is worth mentioning that the income of Greek households is on average almost 40% of the equivalent German income.’ 90 

80  Financial and Social Inclusion in the European Legal Order

and pensions were comparably higher97 and the introduction of the Euro had less immediate impact on households. At the same time, these developments had the effect of relaxing the criteria employed to grant credit, laying the foundations for over-lending practices and possibly over-indebtedness whenever worsened ­macroeconomic conditions would make the refinancing of debt impossible. In the Spanish mortgage market, the easy availability of mortgage credit coupled with steadily rising housing prices led to the unrealistic belief that it would always be possible to repay the loan. The long-term growth in real estate prices was nonetheless a more generalised economic phenomenon taking place in most European states and particularly so in the UK and Ireland, as a result of favourable monetary conditions.98 It was at the level of the Council of Europe that, removed from the internalmarket constraints, the problem of over-indebtedness could be more specifically addressed, and a Recommendation to the Member States on legal solutions of debt problems was adopted in 2007.99 Household over-indebtedness emerged as a worrying social as well as economic problem as ‘over-indebtedness of individuals and families has become an increasingly widespread problem in most member states, which frequently leads to social and health problems and social exclusion of families and may put children’s basic needs at risk’. The Recommendation, which implied that ‘the development of the consumer credit market can be beneficial both for the economic growth of member states and for the well-being of individuals’, stressed the ‘responsibility of member states for the effects of their ­economic and social policies’. The issuing of a recommendation on the problems of indebtedness in 2007 is telling, as it is placed in a particular historical moment for the development of the European economy. That was indeed the heyday of the development of household indebtedness, as well as the immediate eve of the debt financial crisis and the new EU Consumer Credit Directive. The rising attention towards this problem in the European Union is also manifest in the annual reports of the Social Protection Committee, established in 2000 with the explicit aim of promoting social inclusion as part of the open method of coordination between Member States. It is in the 2007 report that the problem of financial exclusion is associated with that of over-indebtedness. That year’s report described over-indebtedness as a growing problem in the EU that ‘can ­jeopardise health, family life, access to housing and employment’ and, moreover,

97 

G Mentis (2016) 229. McCarthy and K McQuinn (2014) 3: ‘The combination of continuing income growth and benign monetary conditions (formalised by Ireland’s entry into the single European currency in 1999), contributed to a major house price boom, which, in later years, prompted a significant increase in housing supply. In an international context, the performance of the Irish housing market between 1995 and 2007 was exceptional; real Irish house prices grew by nearly 9 per cent per annum—the next highest country growth rate in the OECD was 7.6 per cent. Housing supply, which escalated markedly post-2000, averaged 84,000 units between 2004 and 2006 comparing with just over 225,000 units built for the same period in the UK despite a fourteen-fold population differential.’ 99  Recommendation CM/Rec(2007)8. 98 Y

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‘badly affects the living conditions of the families involved and the education of their children’.100 By now, the global financial crisis had entered into view. A more cautious approach meant to diminish the over-indebtedness risk emerges from a 2008 report financed by the Commission on ‘Financial services provision and prevention of financial exclusion’. This recommended that the European institutions should tackle financial exclusion through different instruments, among which the recognition of a ‘duty for lenders to consult credit reporting as well as any other relevant information in order to check a borrower’s ability to pay before granting credit coupled with legislation that enables credit agreement to be considered by the courts and terminated if inadequate checks are made’.101 The role of private law in the financial inclusion policy, and the repercussions on the law, are now clear. In this respect, some European countries had started addressing the problem developing policies meant to counteract the phenomenon of over-indebtedness, including responsible lending regimes and personal bankruptcy regimes aimed at offering debt relief for over-indebted citizens, although the majority of European countries did not take specific action. The definitive articulation of the European model of financial/social inclusion arrives in 2009, with the Joint Report on Social Protection and Social Inclusion of 2009, where the Commission recognises that ‘addressing financial exclusion is vital in any strategy against poverty; the crisis brings the issue even more to the fore’, while financial inclusion was found to be also ‘a pre-condition for sustainable access to the housing market’.102 In this sense, although the crisis starts to show some of the problem of the financialised model, the focus remains on the possible advantages of financial inclusion in terms of social inclusion. The Commission Staff Working Document on which the proposal is based follows the path of the 2008 study ‘Financial Services Provision and Prevention of Financial Exclusion’ in considering the negative social consequences of financial exclusion and, therefore, concludes that ‘financial inclusion, defined as everyone’s capacity to access and properly use the financial services required to participate fully in economic and social life, is to be recognised as a dimension of the broader social inclusion objectives’.103 The 2009 Joint Report of the Commission, addressed to the European Council, highlighted that in some Member States action had already been taken, concerning mostly debt advice and to a lesser extent microcredit and over-indebtedness,104 but that there did not seem to exist a sufficient consensus among Member States

100 European Commission, Joint Report on Social Protection and Social Inclusion [2007] Social ­Inclusion, Pensions, Healthcare and Long Term Care, 57. 101  L Anderloni, B Bayot, P Błędowski, M Iwanicz-Drozdowska and E Kempson (2008) 10. 102  COM(2009) 58 final. 103  European Commission, Commission Staff Working Document, Accompanying document to the Proposal for the Joint Report on Social protection and Social Inclusion 2009, SEC(2009) 141, 52. 104  Council of the European Union, Joint Report on Social Protection and Social Inclusion 2009, 7503/09, 8.

82  Financial and Social Inclusion in the European Legal Order

as to the problem of financial exclusion and the required regulatory responses. The European report therefore identifies some key aspects of financial exclusion and strategies to combat it. This is an extremely important classification, which we will further employ in the next chapters to address the private law approaches to the issue of financial inclusion. These strategies include: ‘1) effective, adequate and affordable access to basic banking services; 2) prevention and rehabilitation of over-indebtedness; 3) promotion of professional and personal microcredit and 4) development of financial information and education for vulnerable consumers’.105 The roadmap to achieve financial inclusion is now clearly defined and the place of private law is clarified. As the effects of the financial crisis became more pronounced in Europe, ­financial reforms are perceived as more urgent. Following the Lisbon Strategy— and its alleged failure to meet its own objectives—a new plan was laid down in 2010 in the Europe 2020 ‘Strategy for Smart, Sustainable and Inclusive Growth’,106 which upgraded ‘social inclusion’ to one of the major objectives to be achieved to make Europe the most competitive economy in the world by 2020. In that agenda, the Commission addressed one of the core areas of financial inclusion, as well as one of the most controversial, ie the availability of credit. The strategy recognised that the ‘availability of easy credit’ had been one of the elements that had unleashed the financial crisis in the US, so the European Union should strive to bring about an efficient and sustainable financial system.107 For this purpose, part of the strategy consisted in refining the open method of coordination, setting up a ‘European platform against poverty and social exclusion’108 with the aim of combating social exclusion as well as promoting social justice, considered to be core aims of the European Union which are grounded on respect for human dignity. As expressed by the Communication on the platform against poverty and social exclusion, the better way to achieve these goals and combat poverty is by ‘[r]estoring economic growth with more and better jobs’.109 The problem of financial exclusion, which is considered to arise from a lack of access to basic banking services and high indebtedness are explicitly addressed as a source—rather than a consequence—of social marginalisation. Additionally, the Commission lays out a plan for a more ambitious programme of financial reforms, articulated in a (quite optimistic) roadmap of various interventions, including an ‘initiative on access to minimum basic banking services’ as well as reform of the Market in Financial Instruments Directive, further amendments to the credit rating agencies regulation and ‘legislation on corporate governance’. In the Commission Work Programme for 2011, the new actions envisaged by the Commission are listed:

105  European Commission, Commission Staff Working Document, Accompanying document to the Proposal for the Joint Report on Social protection and Social Inclusion 2009, SEC(2009) 141, 52. 106  COM(2010) 2020 final. 107  Ibid, 8. 108  COM(2010) 758 final. 109  Ibid, 2.

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‘legislation on access to basic banking services, and action to promote responsible lending and borrowing practice on mortgages’.110 The financial crisis seems to have led to a more cautious approach to financialisation as an instrument to promote social inclusion and a shift towards a stricter regulatory approach. As stated by Commissioner Barnier, ‘Retail products must be safer, information standards must become clearer, and those selling products must always be subject to the highest standards’.111 With regard to credit, the EU approach has shifted from an unrestrained promotion of indebtedness through access to credit, to a more prudent approach which encourages measures to avoid over-extension of credit. Commenting on pension schemes, the 2010 Draft Joint Report on Social Protection and Social Inclusion of the Council of the ­European Union highlighted that ‘the crisis has exposed the vulnerability of funded schemes to volatility in financial markets and highlighted the need for policymakers, regulators and supervisors to promote more prudent management of people’s retirement savings thus finding a balanced way of reaping the advantages of funded schemes’.112 The new Europe 2020 strategy launched in 2010 called Member States to ‘fully deploy their social security and pension schemes to ensure adequate income support’.113 In the following years, a series of relevant measures were taken by the European institutions, consisting in regulations and directives governing several aspects of financial services. Launching a public consultation, as outlined in the Commission’s Green Paper on retail financial services,114 the ­European Commissioner for Financial Stability, Financial Services and Capital Markets Union, reaffirmed the importance of competition in the single market to offer services to EU citizens: ‘[f]inancial products like bank accounts, mortgages and insurance are hugely important in the daily lives of millions of Europeans. … In this, as in other areas, the single market can bring benefits by helping consumers enjoy more competition and pick from the best that Europe has to offer.’115 Expanding the credit market and, at the same time, urging Member States to tackle the problem of over-indebtedness of households, giving them the responsibility to cope with the possible negative side effects of that market, may well be a deficient approach to ensure both consumer protection and the stability of the financial system. To be precise, the asymmetry between EU economic and national social policies might be unsustainable when it comes to the failures of

110 

COM(2010) 623 final, 2.2. European Commission Press Release, Brussels, 3 July 2012, ‘Commission proposes legislation to improve consumer protection in financial services’. 112  Council of the European Union, SOC 115 ECOFIN 101 FSTR 8 EDUC 31 SAN 33, 6500/10, Brussels 15 February 2010, 11. 113  COM(2010) 2020 final, 19. 114  COM(2015) 630 final, Green Paper on retail financial services. Better products, more choice, and greater opportunities for consumers and businesses. 115  J Hill, in European Commission—Press release, ‘Giving Europeans more choice in financial ­services: the European Commission consults Brussels’, 10 December 2015. 111 

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the ­financial/social inclusion model particularly with regard to over-indebtedness issues.116 In light of this, the Commission has recognised in its 2017 Consumer Financial Services Action Plan the inherent risks to the promotion of access to financial services, noting that ‘[w]hile the increased availability and easier access to consumer credit create opportunities for business and result in lower costs for borrowers, there is also an increased risk of irresponsible lending and borrowing causing over-indebtedness. This risk needs to be mitigated.’117

V.  In European Contract Law As a general economic and sociological concept, financial exclusion needs to be further narrowed down in order to be fruitfully tackled with appropriate regulatory instruments. From a contract law perspective, any instrument that makes it easier for citizens to enter the financial market could be prima facie and ­simply considered to be an adequate instrument of financial inclusion inasmuch as it is viewed mainly as access inclusion. Increasing the confidence of consumers, providing them with clear and understandable information, and so on, may contribute to an expansion of the financial market. This has for long time been the approach of the European Union which emerges from the evolution of its policies, as highlighted in the previous section, as well as how it appears to be in practice, specifically turning an eye to the more concrete directives on consumer credit, famously based on the model of the consumer as a homo oeconomicus. This model has been the target of a series of attacks coming from behavioural sciences, and on the basis of those criticisms new ways to improve the quality of the information given to the consumer and based on apposite behavioural experiments are continuously being proposed.118 Both approaches, nonetheless, share the belief that the primary objective of law should be to provide information, in a more or less formal and improved way, to individuals who will then take their own decisions based on this information and, consequently, competition in the market will improve. This model risks overlooking factors which could call for stronger regulation. EU legislation and case-law in the meanwhile have started developing the notion of the vulnerable consumer,119 as a subject who is in particular need of legal protection, which is also proposed in the literature as a model for EU legislation providing access to financial services as a means to achieve social ­justice.120

116 

I Ramsay (2016) 182. European Commission, Consumer Financial Services Action Plan: Better Products, More Choice, COM(2017) 139 final, 2.6. 118  For the whole discussion as to this economic model, see G Kirchgässner (2008). 119  See L Waddington (2013). 120  I Domurath (2013). For a critique of that approach, and rather a proposal to restrict the concept of vulnerability to consumers in need of basic financial services, see N Reich (2015) 145. 117 

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While the concerns that the information model might not be an effective mechanism of consumer protection are well known, it is also disputable that this can be considered an efficient tool of financial inclusion,121 inasmuch as it does not take account of the social dimension of exclusion. For instance, the suggestion advanced in 2011 by the UK Department for Business, Innovation and Skills of ‘promoting more responsible corporate and consumer behaviour through greater transparency, competition, and by harnessing the insights of behavioural economics’ was criticised for its ineffectiveness in promoting more responsible banking.122 If not even transparency and improved information based on more realistic behaviouralist models of a consumer would be sufficient to achieve financial, let alone social, inclusion, those objectives will rather require more structured legal instruments, possibly different than those traditionally employed by EU consumer law. Notably, various studies addressing financial exclusion have highlighted some recurring problems which hinder financial inclusion and different regulatory approaches to overcome them. The fundamental studies commissioned in the UK to explore the dimension of financial exclusion identified a few core areas in which the phenomenon most clearly reveals itself and three elements that need to be regulated in order to ensure better inclusion. These concerns relate to: (1) access to banking; (2) affordable credit; (3) face-to-face debt advice.123 The financial inclusion of a citizen can be realised only if that person is given the opportunity to obtain certain basic services such as a bank account with basic features and to obtain credit for his or her own needs and at an affordable price, while face-to-face debt advice is presented as an efficient instrument to prevent and combat over-indebtedness. The reference to the affordability of credit is r­ elevant, in particular, as it departs from mere access inclusion and includes elements of social protection. At the EU level, as already pointed out, a comparable list of regulatory strategies has been identified, and relate to (1) effective, adequate and affordable access to basic banking services; (2) prevention and rehabilitation of over-indebtedness; (3) promotion of professional and personal microcredit; and (4) development of financial information and education for vulnerable consumers.124

121 

U Reifner (2009) 108. D Gibbons (2016) 98. 123  HM Treasury, Promoting Financial Inclusion, 2004, 1. 124  European Commission, Commission Staff Working Document, Accompanying document to the Proposal for the Joint Report on Social Protection and Social Inclusion 2009, SEC(2009) 141, 52. 122 

86  Financial and Social Inclusion in the European Legal Order

Following this classification, and at the end of this rather lengthy overview of the evolution of the European inclusion policy, it is now time to verify how the numerous, sanguine and often redundant statements of principles contained in the EU policy plans have been translated in concrete actions so far, in particular through regulatory private law interventions. The focus lies on the four main aspects identified by the various reports and studies: access to a bank account; availability of (affordable) credit; instruments to combat over-indebtedness; and financial education. It can already be anticipated that, among the different aspects of financial ­exclusion, most of the focus of the European Union as to the problem of financial exclusion has been placed on the issue of access to a basic bank account. This appears more straightforwardly justifiable in light of the internal-market rationality so that the regulatory competences of the Union appear more clearly defined. At the same time, this is the main goal which has been advanced at the global level by intergovernmental attempts to promote the financial inclusion of ‘unbanked’ citizens, especially in developing countries.125 This is in striking contrast to the emphasis posed by microcredit advocates who instead show that the main financial problem in social development terms is the lack of access to affordable credit—although the effective capacity of microfinance to alleviate poverty is more debatable.126 In this respect, the second fundamental dimension of financial exclusion concerns the availability of affordable credit. As to this, consumer credit has been the object of two fundamental directives, meant to establish a common credit market and offer the consumer a sufficient level of protection, and a more recent one relating to mortgage credit which pursues similar objectives though being inspired by a somewhat different protective approach, clearly linked to the different historical moment in which it was adopted. Serious doubts remain as to whether these interventions also represent effective instruments to promote ‘affordable’ credit, as their primary (though not only) protective mechanism consists in an improved informative mechanism. As to the further aspects, although the impact of over-indebtedness has grown dramatically in Europe especially after the onset of the financial crisis, the delay of the European Union has to some extent been compensated by a more proactive role of the Member States, many of which have now introduced or updated their laws on the subject. EU instruments intended to tackle that problem are still at a very embryonic phase in the EU agenda, although they have already been addressed for several years. In this field, a new division of competence has emerged in Europe, whereby the European Union has focused on preventive measures meant to avoid over-indebtedness, while ex post measures have been developed exclusively by Member States. The strong emphasis on ex ante measures includes a renewed interest in programmes meant to promote the financial literacy of the citizen. The idea behind financial education is that, in

125  126 

Alliance for Financial Inclusion (2011) Maya Declaration on Financial Inclusion. R Rosenberg (2010).

In European Contract Law 87

order to be effectively included in the financial market, the citizen must be provided not only with information but also with the cognitive means to understand that information. Although this aspect leads us away from private law doctrines, it has a direct and surprising impact on contract law. The focus will now shift to each of those three areas, highlighting the economic, market and social dimension of the topic, describing possible solutions already adopted in some national contexts and, finally, the stance taken in EU law.

3 Access to a Bank Account I.  A Gateway to the Market Bank accounts are the most basic and widespread type of financial service. They allow users to perform a series of simple yet fundamental economic ­operations, such as deposit, withdrawal of money, and payments. In common law, the ­possession of a bank account is regarded as a necessary and sufficient precondition for the establishment of a legal relationship between a bank and a customer and, thus, as a prerequisite for the recognition of the duties that a bank owes to its ­customer.1 Statistically, bank accounts are among the first and most basic s­ ervices that an individual purchases in his or her life, so that having access to bank account somehow represents the first step in the process of financialisation of a young citizen. If these services are so basic, it is evident that not having access to them might amount to a form of financial as well as social exclusion in the sense that has been largely described above, and promoting access to bank accounts might be conversely regarded as an instrument to promote inclusion. Promoting access to banking accounts among unbanked individuals has recently also become the core of the action taken at the global level to promote financial inclusion,2 and comparable efforts have been made in Europe as well. There are several dimensions linked to this aspect. It seems useful to consider all those dimensions when examining the evolution of the EU legislation on access to bank accounts, as this evolution reveals the interest and considerations at stake in the field. In its important White Paper on Financial Services Policy 2005–2010, the ­Commission clearly acknowledged that ‘[a]ccessing a bank account is the entry point for most consumers to financial services and markets and increasingly important for citizens to participate in the market and society; even more so within the context of using electronic payments within a Single Payments Area’.3 The importance of acknowledging that consumers need the possibility to have a bank account lies not only in the fact that this is an instrument necessary to

1 

Great Western Railway Co v London and County Banking Co Ltd [1901] AC 414, HL. Alliance for Financial Inclusion (2011) Maya Declaration on Financial Inclusion. 3  COM(2005) 629, 4.4.2. 2 

A Gateway to the Market 89

perform a certain ­number of economic activities, but also in the fact that having access to such a service is the gateway to accessing the internal market. This consideration will become even more important later on with the development of a strategy for the single digital market. In the 2012 European Consumer Agenda, the Commission went on to qualify ‘the problem of denied access of citizens to bank accounts’ as ‘a real issue, not only for disadvantaged consumers who experience financial and social e­ xclusion, but also for many citizens who travel abroad to live, work or study’.4 The perceived significance of access to a bank account in the internal ­market perspective is summarised by the words of a Eurobarometer survey echoing the approach taken by the Commission: ‘a more widespread use of electronic means of payment is certainly useful for boosting intra-Community trade in financial services’.5 The same study continued on this general policy consideration by asking the realistic question ‘[h]owever, do EU citizens actually own a bank or other credit card?’6 In fact, statistics showed that notwithstanding the apparent basic nature of bank accounts, a considerable percentage of European citizens still did not have a bank account, although the scenario is highly fragmented depending on particular countries, as evidenced by the studies of the Commission. But if bank accounts are such a basic service, likely to offer benefits to all market participants, why is there still such a thing as exclusion? Several considerations play a role in answering that question and challenge the rhetoric of the win-win situation. On the supply side, financial inclusion is ­profitable for financial services providers only when benefits outweigh the costs, which means that not granting access to all low-income citizens is more profitable for the operation:7 economic analysis in the UK showed that a current account will only be profitable when it has an average balance of about one thousand euro per year,8 so the incentive to offer services at a basic charge to low-income c­ ustomers is low. On the demand side, individuals themselves might not have particular ­incentives to voluntarily enter that market segment, both for lack of a real need for an account and out of fear of the economic risks associated with access. In fact, a local survey in the US has shown that a considerable number of banked citizens actually preferred to close their account upon discovery of a large number of ‘unexpected or unexplained fees’ associated to the account, and subsequently to conduct their financial dealings in cash only.9 In fact, there are several different aspects linked to access to a bank account which pose questions of social exclusion. Potential charges for inappropriate use

4 European Commission, Communication from the Commission, ‘A European Consumer Agenda—Boosting confidence and growth’, COM(2012) 225, 4.3. 5  Special Eurobarometer 230/Wave 63.2, Public Opinion in Europe on Financial Services, September 2005, 22. 6  Ibid, 22. 7  D Cruickshank (2000). 8 European Commission, DG Internal Market and Services, Study on the Costs and Benefits, July 2010, 52, referring to D Cruickshank (2000). 9  PEW Health Group (2011) 6.

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of an account—which are qualified as possible disincentives to financial inclusion by the EU Commission10—are a considerable risk, in particular for vulnerable consumers. As the bank-customer relationship is, in essence, one of debtor-­creditor in which the bank usually is the debtor, overdrafts represent a radical inversion of that relation, exposing depositors to all the risks connected to debt. Even regardless of the possibility of overdrafts, bank accounts might expose consumers to the further risk of easier legal seizure, although the procedural laws of several ­European countries pose certain limitations on this possibility in order to avoid a situation where the consumer is left without means to conduct a decent life after legal seizure. As if this were not enough, further aspects can represent a deterrent to opening a bank account especially in periods of crisis when, as shown by empirical studies, the trust of citizens in the political and economic institutions of a free market economy generally considerably decreases.11 On the one hand, as the banking system is perceived as unstable—to the point that restoring the confidence in the market emerges as a particular goal for regulation12—the risk emerges that customers might lose their deposits in the event of bank bankruptcy. Legal rules are already in place in order to contain that risk, as the Deposit Guarantee Scheme Directive13 obliges Member States to create Deposit Guarantee Schemes to protect deposits of up to €100,000, while there are plans to introduce a European Deposit Insurance Scheme (EDIS) meant to overcome the fragmentation of the different national schemes.14 On the other hand, the most recent reforms at the European level which have introduced a resolution mechanism of bail-in15 on the basis of the consideration that ‘[i]t is not acceptable that taxpayers should continue to bear the heavy cost of rescuing the banking sector’,16 might facilitate deposit losses beyond the guaranteed threshold. Although, as stated by the Directive, ‘the protection of covered depositors is one of the most important objectives of resolution’ so that ‘covered deposits should not be subject to the exercise of the bail-in tool’ and ‘[t]he exercise of the bail-in powers would ensure that depositors continue to have access to their deposits up to at least the coverage level which is the main reason why the deposit guarantee schemes have been established’,17 the bail-in philosophy may still represent at least a psychological disincentive to financial inclusion.

10 European Commission, DG Internal Market and Services, Study on the Costs and Benefits, July 2010, 41. 11  F Roth (2009). Eurobarometer surveys have also detected a diminished trust in the European Central Bank, see M Ehrmann, M Soudan and L Stracca (2012). 12  CE de Jager (2017). 13  Directive 2014/49/EU, recasting Directive 94/19/EC. 14  Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 806/2014 in order to establish a European Deposit Insurance Scheme, COM(2015) 586 final, 2015/0270(COD). 15  Directive 2014/59/EU. 16  M Barnier, in Press Release, ‘Commission sets out vision for bank resolution funds’, Brussels, IP/10/610, 26 May 2010. 17  Directive 2014/59/EU, recital 71.

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For all these reasons, a measure acknowledging a right to have a bank account should at the same time put some limits which safeguard the customer with regard to limits to legal seizure, as has been suggested by the Commission.18 In addition to these considerations, historical-economic factors also play a role: in new European Member States financial exclusion tends to be more evident and banking accounts are less widespread, as a heritage of the previous socialist legal framework that discouraged private banking, inspired by the idea of the necessity of a single large state bank to sustain industry as the backbone of socialist society.19 The percentage of individuals not having access to a bank account reaches extremely high values in newer EU Member States like Bulgaria and Romania, while it is v­ irtually non-existent in countries with advanced capitalist societies like Finland and ­Denmark.20 This again suggests that it is impossible to discuss financial inclusion in the apparently neutral terms of aligning supply and demand, without considering the economic framework in which this is supposed to take place, as well as the political-economic objectives that inclusion is supposed to pursue. Does the legal framework play a role in the promotion of this type of inclusion? The fact that in the two Scandinavian countries mentioned above there is a legal right to a bank account, while neither legislation nor industry charters tackle the issue of social exclusion in some new EU Member States may lead to the conclusion that there is a strong correlation between financial inclusion and the existence of a legal framework to that end; a consideration which offers an empirical justification for creating an authentic right to access a basic bank account. Nevertheless, this cause-effect is not self-evident and one can legitimately doubt the capacity of such rules to produce social change: a right to a bank account, inasmuch as it implies some initial costs for banks, appears easier and less costly to acknowledge on a statutory basis in a context in which financial exclusion is already nearly non-existent—so that a law in this case would basically codify a practice which already exists in socioeconomic reality. This is distinct from a situation where financial exclusion concerns almost half the population. At the same time, the disadvantages in terms of social exclusion deriving from not having access to a bank account might be more strongly felt in a system where the operation of more economic activities requires access to that financial service than in a context in which common economic activities can be performed via cash. In that latter scenario, which is typical of transitional economies, a mandatory right to access may entail costs that cannot be sustained by developing financial institutions and that, translating into higher costs for those who are already customers, may be even counterproductive in terms of social inclusion: is it judicious to lead socially m ­ arginalised

18 European Commission, DG Internal Market and Services, Study on the Costs and Benefits, July 2010, 70. 19  VI Lenin (1997) 106; see G Garvy (1977) 21 20 European Commission, DG Internal Market and Services, Study on the Costs and Benefits, July 2010, 15–18.

92  Access to a Bank Account

people into the banking system when this leads them to incur high banking fees? In this regard, the problem would arise if legislation would limit itself to the task of providing access to the service, without taking into account the more specific regulation of those financial contracts, including their economic terms. Thus, the mere fact that people do not have access to a basic account should not be taken as per se evidence of social exclusion. The Eurobarometer has confirmed that ‘EU citizens seem to remain strongly attached to the traditional, tangible means of payment in cash for goods or services purchased in their national territory, being the preference of one in two’.21 Empirical studies have shown that a large number of citizens simply choose not to engage financial services mainly because they operate in a context in which cash transactions are more than adequate, so that their financial exclusion does not necessarily amount to a form of social exclusion as well.22 At the same time, this self-exclusion choice should not too quickly be dismissed as an individual rejection of the market, as such choices might rather be determined by very concrete economic considerations that access might in fact entail costs that outweigh the advantages of inclusion. In light of these considerations, even an apparently ‘easy’ field such as bank accounts legislation reveals that financial and social exclusion may again diverge: while the lack of access to those banking services may be undesirable in the ­internal-market perspective, it could be perceived differently in a social perspective. Creating ex lege a right to access to a bank account does not really help to include citizens if they still prefer not to make use of this possibility. This situation has consequences also in the internal-market perspective, as guaranteeing everybody a possibility of acceding to financial service is not necessarily a guarantee that a transborder market in financial service will develop. Similar concerns have been raised in the European private law scholarship and have already been expressed by national legislations confronted with the EU plans to promote further general and consumer contract law harmonisation.23 However, it may be that this objection is particularly apposite in financial services, since given their higher complexity, consumers may remain disinclined to enter transborder contracts.

II.  Legal Frameworks in Europe The legal framework concerning a right to a basic bank account is particularly diversified in Europe. In a considerable number of countries, the issue has come to

21 Special Eurobarometer 230 / Wave 63.2, Public Opinion in Europe on Financial Services, ­September 2005, 22. 22 European Commission, DG Internal Market and Services, Study on the Costs and Benefits,­ July 2010, 5 and 10. 23  See the discussion in K Gutman (2014) 268 ff.

Legal Frameworks in Europe 93

the attention of the legislator in a way that has at least occasionally stimulated the adoption of industry charters. As an overall trend in Europe, it is possible to detect a slow shift from a laissez-faire approach to best practice and, finally, to statutory regulation whenever the self-regulatory approach has proved inadequate. EU measures have arrived on top of these developments. To give an example, France established in 2001 a statutory right of access to a bank account in response to failures of self-regulation by the banking sector, which considered a right to a bank account to be incompatible with the principles of sound banking.24 The same path was followed in 2003 by Belgium, which established the right in its legislation after the ineffectiveness of its Banking Service Charter to properly combat financial exclusion. Belgium, Denmark, Finland, France, the Netherlands, Slovakia and Sweden have all autonomously established a right to access to a bank account, even though on different terms and under different conditions.25 A ­second group of European countries do not have legislation in place which explicitly establishes such a right, and devolve this aspect to the market itself. In this case, nonetheless, one should distinguish those in which absolutely no initiative is taken and those, more numerous, in which forms of self-regulation have emerged and industry charters have been adopted, though occasionally under the encouragement of governments. Through these instruments banks can commit themselves to providing low-income citizens with certain financial services. The best example of this approach is offered by Germany, where the introduction of a legislative right to have a bank account was pleaded for by left parties in the 1990s, but it was eventually the bank industry itself (originally the Zentraler Kreditausschuss, now Die Deutsche Kreditwirtschaft) that established in 1995 a Girokonto für Jedermann, ie a basic bank account for everyone, even if by way of a recommendation. A particularly interesting aspect from a broader policy perspective is that the exigency of a basic account for everyone started being adverted to immediately after the privatisation of the German Postal Service, through which citizens had already had a right to open an account since the beginning of the twentieth century. That shows how access to a bank account can be understood within the framework of the transformation of the state which was discussed earlier. What is more, although the programme emerged as a purely self-regulation initiative, academic commentators and courts proved to be willing to back it by giving it more concrete legal relevance: a doctrinal discussion started as to whether that recommendation placed the banks under an obligation to conclude a contract,26 and courts eventually confirmed that approach, imposing an obligation to contract upon private banks.27 The instrument operates by ensuring basic deposit services are available

24 

S Carbo, EPM Gardener and P Molyneux (2007) 25. Commission, DG Internal Market and Services, Study on the Costs and Benefits, July 2010, 19. 26  DS Berresheim (2005). 27  LG Berlin, Az 21 S 1/08, 8 May 2008. 25 European

94  Access to a Bank Account

to customers as well as providing a particular procedure which customers can use to appeal the refusal of a bank to open a bank account. However, the decisions with which those dispute resolution procedures are concluded are not legally binding. In order to ensure that the initiative achieves its goal, the instrument makes clear that a possible negative credit scoring provided by credit reference agencies should not be taken as sufficient reason alone to deny a bank account. This represents a first response to the possible social exclusion problem represented by the by now widespread tendency to check the debt history and creditworthiness of customers not only for the purposes of giving loans, but also when opening bank accounts. Something comparable has occurred in the UK. This is the country where the issue of financial exclusion has been most investigated. The Government initially tackled the problem after identifying the lack of access to a bank account as one of the most important factors leading to social exclusion.28 The ‘Promoting financial inclusion in 2004’ strategy of the Government identified as priorities the need to guarantee access to a bank account as well as to affordable credit. These efforts, nonetheless, did not lead to apposite legislation, but rather to a best practices code. Already in 2000, the Cruickshank29 report had identified the problem of financial exclusion as linked to a lack of competition and transparency in the financial system. The Government intervened by way of endorsing a payment account though the Post Office, the success of which appears nonetheless relative considering, in particular, the rather limited number of options offered by the Post Office bank account. A 2003 industry agreement on bank accounts was concluded, stating that basic bank accounts had to be fee-free. In other words, selfregulation has been considered a more appropriate way to cope with the problem than legislative and regulatory interventions. Nevertheless, doubts can be cast as to whether in that context those instrument effectively managed to guarantee access, considering that the UK banking systems still reject a high number of applications, often when an applicant cannot comply with regulations requiring them to prove identity or address or, more importantly, because of bad debt history. This latter is an aspect of particular importance, such that, as mentioned earlier, the self-regulation of the German bank industry has stated that bad credit history should not be taken into account as a decisive criterion for acceptance or rejection of an application. Confronted with those difficulties, and in the aftermath of important litigation, the UK Government took stronger action and the legislator started considering the possibility of establishing a mandatory regulatory framework to ensure full access. In 2014, in the shadow of a new EU directive, the Government reached an agreement with nine major English banks pursuant to which those firms would offer unbanked citizens fee-free basic accounts with limited possibilities for overdraft.

28  29 

S Collard (2007) 13. D Cruickshank (2000).

Legal Frameworks in Europe 95

Analogous problems appear to be less evident in other countries where no s­ tatutory framework exists, such as Spain, where self-regulation seems to be associated with high levels of financial inclusion30 and, therefore, there is less discussion as to the need to establish a statutory right to access to a bank account. One possible explanation that has been suggested for this situation is that, unlike in other nations with higher levels of financial exclusion, in Spain ‘current accounts do not generally come with overdraft facilities’ and ‘credit checks are not generally conducted when a current account is opened for a customer’.31 While this latter aspect, as opposed to the German and English more restrictive practices, facilitates the inclusion of unbanked citizens, it is detrimental when it is applied to consumer credit. Limited credit checks and over-lending were some of the causes leading to over-indebtedness of thousands of Spanish consumers as the macroeconomic conditions worsened following the financial crisis. This suggests caution in too hastily equating an immediate access to financial services to financial inclusion, as this might easily translate to social exclusion at a later point. Interestingly, while the emphasis of self-regulation and legislation has been thus far on access, the more concrete aspects connected to the terms and conditions of the contract have, on the contrary, been the object of litigation in court as well as interventions from regulatory agencies. In other words, if self-regulation focused on the access side of inclusion, other parts of the legal system were left to deal with the social exclusion problems originating from a lack of consideration for the aspect of protection. The clearest example of this tendency is provided by the UK, where important developments have taken place regarding charges for overdraft facilities and the way in which this might be regulated through the application of ‘general’ EU contract law: after an attempt to invalidate allegedly unfair bank charges on the basis of the Unfair Contract Terms Directive was rejected by a contested decision of the Supreme Court, the regulatory agency—at that time the Office of Fair Trading—started negotiating with the major banks to agree fairer and more transparent standard terms which could facilitate financial inclusion, while new practices as to how banks should deal with customers in difficult economic situations were introduced in the Lending Code of 2011.32 It should be noted that the Lending Code is an instrument of self-regulation drafted by the British Bankers’ Association, an organisation which represents 90 per cent of the banking industry in the UK. The Office of Fair Trading had already insisted on the attractiveness of a softer co-regulatory approach rather than legislative ­interventions.33 ­Following that approach, and considering the drafting of EU legislation on the subject, the UK Government directly negotiated with nine major

30 

S Carbo, EPM Gardener and P Molyneux (2007) 24. Commission, DG Internal Market and Services, Study on the Costs and Benefits, July 2010, 12. 32  Office of Fair Trading, OFT1319 (March 2011) 4–5. 33  Office of Fair Trading, OFT1216 (March 2010) 54. 31 European

96  Access to a Bank Account

banks in 2014 to ensure access to free-fee basic accounts. As that story is particularly revealing with regard to the most controversial aspects linked to bank accounts in a consumer protection perspective, it will be useful to look more closely at that development in the next section.34

III.  The Problems of Overdrafts The regulatory agency, (the Office of Fair Trading, now replaced by the Competition and Markets Authority), had already lamented the lack of transparency of the terms employed by banks in contracts with their clients. That alleged nontransparency would result, according to the Office of Fair Trading, in a limited capacity for consumers to control the services for which they pay, to understand those charges and ‘to predict when they will be incurred’.35 The most controversial contract term was, in particular, the term concerning unauthorised overdraft fees which was employed by major British banks to charge customers who perform a payment request for which there are insufficient funds in their account to cover. As said, the overdraft is in fact a loan from the bank to the customer, for which the bank can require the payment of interest. In 2006, 23 per cent of accounts incurred at least one insufficient funds charge, while incurring a charge once was associated with a high probability of incurring in a new charge later.36 Despite creating problems for consumers, this practice was nonetheless beneficial for the banking industry, since insufficient funds charges provided for £2.6 ­billion of banks’ revenue on personal current accounts, which meant—together with net credit interest income—85 per cent of the total revenue on personal current accounts.37 While overdraft consumers are charged these prices, banks generally adopt a ‘freeif-in-credit’ policy for accounts not in overdraft. In over-simplified plain terms, this means that the ‘poor’ paradoxically finance the bank accounts of the ‘rich’— although the free-if-in-credit policy is also financed through low interest rates on deposits. As Lord Mance put it, this is a sort of ‘reverse Robin Hood exercise’.38 To solve this issue, which appeared to be detrimental for the consumers and the market but beneficial to financial services providers, the Office of Fair Trading suggested that some form of ‘light touch regulatory intervention’ was necessary in that sector.39 The terms were eventually challenged by the Office of Fair Trading

34 

This section will build upon G Comparato (2013). current accounts in the UK. An OFT market study, July 2008, 109. 36  Ibid, 66–67. 37  Ibid, 3. 38  Office of Fair Trading v Abbey National plc [2009] UKSC 6, at 2 (Lord Walker). 39 OFT, Personal current accounts in the UK. An OFT market study, July 2008, 111. 35 OFT, Personal

The Problems of Overdrafts 97

in a test case in front of the Supreme Court in 2009. More specifically, the term appeared to be unfair in the sense of the Unfair Terms Directive 93/13, implemented in the UK through the Unfair Terms in Consumer Contracts Regulations 199940 (now replaced by the Consumer Rights Act 2015). The Supreme Court had to inquire whether those charges should be considered similar to penalties—so that the standard terms allowing them could be deemed unfair if they determined a significant imbalance in the parties’ rights and obligations to the detriment of the consumer—or whether, as asserted by the banks, overdraft fees are a component of the remuneration for the overdraft ­service offered by the banks and that, therefore, they pertain to the core economic bargain, which is excluded from the fairness test created by the regulations. C ­ orrectly implementing the Unfair Contract Terms Directive,41 regulation 6(2) of the Unfair Terms in Consumer Contracts Regulations 1999 stated that ‘[i]n so far as it is in plain intelligible language, the assessment of fairness of a term shall not relate (a) to the definition of the main subject matter of the contract, or (b) to the adequacy of the price or remuneration, as against the goods or services supplied in exchange’. Since permission to appeal on that particular ground was denied by the Court of Appeal, the question as to whether the terms were drafted in plain and intelligible language—which would have allowed the fairness of even a core term to be assessed—was not considered by the Supreme Court, so that it was common ground that the relevant terms at stake were in plain and intelligible language. Overturning the decision of the Court of Appeal, the Supreme Court found that the overdraft charges were to be considered to form part of the price or remuneration for the ‘package of services’ offered by the banks and therefore covered by the exclusion from the fairness assessment.42 The way in which the Court formed its conclusion has nonetheless been the target of criticisms that can be addressed here in particular from the European private law perspective. The core of the decision of the Court was not the fairness of the charges, but rather the question whether these can be considered a price or remuneration. This appears to be a complicated problem, as these terms may be considered ‘unreasonable charges for consumer default’, embracing clauses ‘imposing liabilities for breach that exceed the real losses’ or ‘in response to consumer actions that are not technically breaches, imposing (via primary obligations) charges and costs that are not reasonably expected in the circumstances’.43 The approach of the Office of Fair Trading had traditionally been to regard the terms as unfair,44 while different judges and jurisdictions tend to solve the question in different ways.45

40 

SI 1999/2083. Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts. 42  OFT v Abbey National plc [2009] UKSC 6, at 47 (Lord Walker). 43  C Willet (2007) 291. 44 OFT, Unfair contract terms guidance. Guidance for the Unfair Terms in Consumer Contracts ­Regulations 1999 (2001) 5.8; C Willet (2007) 292. 45  For a comparison with the German system, see H Kötz (2012). 41 

98  Access to a Bank Account

The Supreme Court however took a different view. This solution has been criticised in the literature46 for being inconsistent with the different approach followed by the Court of Justice of the European Union (CJEU) in a contextual judgment, Caja de Madrid,47 concerning the legitimacy of the lack of transposition in Spanish law of the exclusion of core economic terms from the fairness assessment. The generous interpretation by the CJEU was later illustrated by the Matei48 case of 2015, which allowed for the review of terms in loan agreements allowing for the recalculation of the interest rate. The possible mismatch between the approach taken by those Courts could have emerged had the Supreme Court decided to refer the question to the CJEU for a preliminary ruling. Nonetheless, the Supreme Court decided not to do so, again ignoring the disagreement with the lower courts. Curiously enough, in this case the disagreement was not limited to a difference between the Supreme Court and the lower courts—which already puts higher courts in quite an uncomfortable situation inasmuch as they have to consider that lower judges are unable to understand correctly something which is obvious enough to make a reference to the CJEU unnecessary49—but it was even an internal disagreement. Having decided that the issue did not need to be addressed by the CJEU, the Supreme Court resorted to a mainly empirical economic argument to assess whether the relevant terms should be considered to form part of the price or remuneration for the banks’ services. The judges held that the charges for ­unauthorised overdrafts ‘are a monetary consideration for the package of banking services’ which constitute ‘an important part of the bank’s charging structure, amounting to over 30% of their revenue stream from all personal current account ­customers’.50 Moreover, if banks ‘did not receive relevant charges they would not be able profitably to provide current account services to their customers in credit without making a charge to augment the value of the use of their funds’.51 In this light, Lord Walker clarifies: ‘I do not see how [the Court of Appeal] could have come to the conclusion that charges amounting to over 30 per cent of the revenue stream were “not part of the core or essential bargain”.’52 The Court therefore employed a plainly economic argument, implying that intruding on the autonomy to determine a core issue may lead to higher costs for other parties involved, because of the free-if-in-credit mechanism adopted by the banks. The Supreme 46 

S Whittaker (2011). Case C-484/08 Caja de Ahorros y Monte de Piedad de Madrid v Asociación de Usuarios de Servicios Bancarios (Ausbanc) EU:C:2010:309. 48  Case C-143/13 Bogdan Matei and Ioana Ofelia Matei v SC Volksbank România SA EU:C:2015:127. 49  ‘It may seem paradoxical for a court of last resort to conclude that a point is clear when it is ­differing from the carefully-considered judgments of the very experienced judges who have ruled on it in lower courts. But sometimes a court of last resort does conclude, without any disrespect, that the lower courts were clearly wrong, and in my respectful opinion this is such a case’, OFT v Abbey National plc [2009] UKSC 6, at 1 (Lord Walker). 50  Ibid, at 47 (Lord Walker). 51  Ibid, at 88 (Lord Phillips). 52  Ibid, at 47 (Lord Walker). 47 

The Problems of Overdrafts 99

Court was also well aware of the link between overdraft fees and financing of the particular banking system followed in the United Kingdom, which mostly adopts a free-if-in-credit approach which is different from the one followed, for instance, in France.53 It was exactly from the standpoint of the consumer that the issue had been looked at by the Court of Appeal, which referred to the ‘typical’ (ie average) consumer to understand whether the terms were part of the essential bargain between the parties.54 Incidentally, the same perspective of the ‘average customer’ is adopted in other jurisdictions such as Germany as a criterion to distinguish primary from secondary obligations and consequently decide whether a contract term may be tested by courts.55 The reason for this solution is that the typical consumer has in mind mainly the primary obligations while he or she pays less attention to the secondary ones, regardless of the fact that these are drafted in a plain and intelligible language. Already the study of the OFT had highlighted that ‘[t]he bulk of consumers pay little or no attention to the key elements of either insufficient funds charges or the interest they earn on credit balances. Only five per cent of consumers surveyed considered overdraft fees—arranged and unarranged—important when choosing a [personal current account]’,56 and many were not even aware of the existence of certain fees.57 It can be noted that questions concerning the application of the Unfair Contract Terms Directive provisions to banking contracts became particularly widespread in the following years in many other countries. The use of the Directive allowed EU judges to offer some relief to customers paying the price of too hasty a financial inclusion. The Supreme Court in the UK barred this way, however, for English consumers. Interestingly, nonetheless, this preclusion did not amount to a defeat for considerations of social inclusion. Rather, different legal instruments were employed to fix the system: as the judges themselves recognised, ‘this decision is not the end of the matter’.58 Outside the courtroom, the Government-supported Northern Rock, HBOS and RBS were soon asked to review their overdraft charges terms in order to make them fairer to consumers, but even before the decision of the Supreme Court, the Office of Fair Trading had already started negotiations with industry to introduce changes in standard contracts and in October 2009 announced that banks had agreed to make costs related to personal current account more transparent. The Office of Fair Trading and the industry later agreed to introduce changes in the contract terms in matters relating to ‘the development of minimum standards to cover how consumers are offered the ability to opt out of unarranged overdraft

53 

Ibid, at 1 (Lord Walker). S Whittaker (2011) 112. 55  H Kötz (2012) 343. 56 OFT, Personal current accounts in the UK, An OFT market study, July 2008, 4. 57  Ibid, 5. 58  OFT v Abbey National plc [2009] (Lord Walker). 54 

100  Access to a Bank Account

facilities’.59 At the same time, ‘[o]n clarity and predictability, the OFT expects some PCA providers to introduce new products that provide consumers with greater clarity and predictability around unarranged overdraft charges, including in some cases a shift away from charges based on transactions towards other forms of charging’.60 The UK experience hence shows an intermediate step between self-regulation and regulation by the government, ie co-regulation: Given the significant developments underway, the OFT considers that a market-based approach with banks competing to find the best way of addressing the needs of their customers is likely to be preferable to a regulatory ‘one size fits all’ approach. As a result, the OFT is not recommending legislative change at the present time.61

One year later, the minimum standards for personal current account providers, covering how to offer customers the ability to opt out of unarranged overdraft facilities as well as best practice on how to deal with customers in difficult economic situations who incur unarranged overdraft charges, were finalised and introduced in the new Lending Code of 2011, drafted by the British Bankers’ Association.62 At the same time, the Office of Fair Trading could confirm that a decrease in the average cost of unpaid item charge had taken place.63 While this shows how the conservative approach by the judiciary was in fact counterbalanced by the proactive role taken by regulatory authorities, this story does not at the same time reveal a somewhat ‘happy ending’ to the problem of financial exclusion in the United Kingdom. Quite to the contrary, a more recent study still showed that the number of individuals without a bank account in the UK amounted to 1.7 million people, and had even increased compared to previous years.64 To cope with the more structural problems leading to exclusion, a stronger regulatory approach was eventually taken, following action from the European Union.

IV.  EU Involvement The strong differences in the national legal frameworks concerning bank accounts, the alleged ineffectiveness of some of those regimes and the relevance of bank accounts in an internal-market perspective, are all elements which led the EU institutions to envisage action in order to ensure that a higher number of citizens are provided with access to at least a basic bank account. The recent issuing of a directive for that purpose is only the latest step of a longer process which it is 59 OFT, Personal

current accounts in the UK, Unarranged overdrafts, OFT1216, March 2010, 4. Ibid, 9. 61  Ibid, 54. 62 OFT, Personal current accounts in the UK, Progress update, OFT1319, March 2011, 4–5. 63  Ibid, 5. 64  K Rowlingson and S McKay (2016) 5. 60 

EU Involvement 101

instructive to consider here. The starting point of this development is, again, the 2005 White Paper on Financial Services Policy 2005–2010. After having stressed the importance of bank accounts as the entry point to the financial and internal market, the White Paper categorically concluded that ‘[u]ndue barriers associated with all types of bank accounts (current, savings, securities accounts) must be removed’.65 In 2007, the Commission conducted an in-depth inquiry into the retail banking sector, which found that, with respect to bank accounts, ‘decisions of retail banking customers are also constrained by information asymmetry and high switching costs’,66 and envisaged measures to facilitate the opening and switching of bank accounts. The importance of having access to a bank account for fully participating in the internal market was highlighted particularly strongly in 2010, when the ‘New Strategy for the Common Market’ (the so-called ‘Monti Report’), having noted that financial exclusion was particularly high in Europe and policy responses diverged among Member States, suggested that ‘[a]n EU framework for financial inclusion complementing the ongoing comprehensive reform of financial services regulation at EU level would allow an important part of the population, in particular in the new Member States, to reap more fully the benefits of the single market’.67 To this purpose, the study explicitly advocated that ‘a re-launch of the single market should examine any gaps in the universal service provisions at EU level that could de facto prevent a relevant number of EU citizens from effectively accessing the single market’, such that ‘the Commission should consider proposing, possibly on the basis of Article 14 TFEU, a regulation ensuring that all citizens are entitled to a number of basic banking services’.68 According to this suggestion, therefore, a bank account should be acknowledged as a service of general economic interest, access to which should be granted under article 36 Charter of Fundamental Rights of the EU. The reference to the Charter is particularly relevant here, in that it would extend to banking accounts the requirement of ‘affordability’ which is generally, though with criticisms from some commentators,69 associated to universal services. As the UK case discussed earlier suggests, however, regulating the economic contents of a financial contract, even in order to make it more affordable, is particularly troublesome, given the law and the court’s reference to freedom of contract when it comes to core terms. That difficulty permeates EU contract law as well. In that same year, a detailed study by the DG Internal Market and Services on costs and benefits of access to a basic bank account was published.70 This examined the state of affairs of access to a bank account in several Member States, taking into consideration the legal framework and the costs and benefits that a p ­ ossible 65 

COM(2005) 629 final, 4.4.2. European Commission, Communication from the Commission, ‘Sector Inquiry under Article 17 of Regulation (EC) No 1/2003 on retail banking (Final Report)’, COM(2007) 33 final, 2.4, 33. 67  M Monti (2010) 74–75. 68  Ibid, 74. 69  See M Bartl (2010). 70  European Commission, DG Internal Market and Services, Study on the Costs and Benefits (2010). 66 

102  Access to a Bank Account

right to a bank account would imply. The final report identified five different policy options the European institutions could choose from in order to promote inclusion through access to a bank account. These consist in (1) no further EU action; (2) promoting and sharing best practices; (3) encouraging self-regulation by the industry at EU level; (4) a recommendation; (5) a directive. These options describe the various regulatory strategies which resemble the different approaches taken by Member States to the issue, as seen in the previous section, and that can be employed in basically any field which can be regulated, ranging from a noninterventionist to a strongly interventionist approach. As a matter of fact, each of these options presents advantages and drawbacks. The less interventionist approaches, in particular, are more respectful of differences in the national economic systems: a mandatory right to access to a bank account, for instance, would have very different economic consequences for the banking system of a Nordic country where financial exclusion is virtually non-existent and for that of new Member States where financial exclusion is particularly high. Against this framework, the promotion of best practices or self-regulation would allow a differentiated approach to the matter and fully comply with the principles governing the distribution and the use of competences between states and the European Union. From a contract law viewpoint, these approaches appear to be less intrusive for the private autonomy of the parties but, as a consequence, they are also less likely to meet their policy objectives. The analysis of the various experiences of the Member States indeed suggests that there is a tendency to move from no regulation to self-regulation and eventually to legislative regulatory intervention, attempting to make up for the shortcomings of the best practices approach that have emerged in a few countries. Those experiences suggest that financial inclusion needs to be pushed, as this is not a result which will easily and spontaneously be achieved on the basis of a purely market-based approach. Considering the economic costs in terms of balance of costs and benefits as well as the efficiency of each measure, the study therefore realistically concluded that out of all the suggested options only the latter two were capable of meeting their objective. The study thus suggested the adoption of a recommendation or, as a possible later stage following a first recommendation, a binding directive whereby Member States are required to compel banks to offer a basic bank account.71 Of all these possible instruments, the Commission initially followed the suggestion of the study, opting to issue a recommendation.

V.  The Recommendation Translating into concrete action the policy aims declared several times during the previous years and the suggestion of the 2010 ‘Study on costs and benefits of 71 

Ibid, 78–79.

The Recommendation 103

policy actions in the field of ensuring access to a basic bank account’, the Commission issued a Recommendation to the Member States on access to a basic payment account on 18 July 2011. The existence, recognised by the Commission, of different ‘banking habits within the Union’72 is one of the reasons that led to the issuing of a recommendation, which is a non-mandatory instrument, rather than one of the more intrusive options. This choice came much to the disappointment of those favouring more stringent solutions (among which, as will be discussed later, was the European Parliament) and deviated both from the more interventionist approach suggested by the Monti Report and possibly the Commission’s own promise of ‘legislation’ (though the term might have been used in a broader meaning) on access to basic banking services formulated in the Work Programme for 2011. Several advocates of financial inclusion criticised the choice for a recommendation, claiming that a ‘soft’ approach to the issue was not likely to bring about appreciable results: the main problem would appear to be that establishing a duty to offer financial services to subjects that would otherwise be socially excluded is not necessarily profitable or may even be detrimental to service providers,73 who would not therefore have incentive to offer that service. Costs for banks would be higher in case of a regulation granting a free basic account, which is likely to meet a strong resistance from the banking sector, while a strong regulatory intervention which goes as far as imposing a service free of charge is politically more divisive and difficult to establish legislatively.74 Rather than service providers, it should, however, be noted that the Commission’s recommendation addressed Member States, which were free to comply with the recommendation by means of mandatory legislation, if they so wanted. Concerning its contents, the 2011 Recommendation recognised that the availability of payment services is essential to enable the consumers to ‘fully benefit from the Single Market and for the Single Market to function properly’.75 The main reason justifying the intervention of the European Union is that the impossibility to accede to such services may represent a hindrance to the exercise of Community fundamental freedoms, and the vision of financial inclusion which appears dominant is therefore the market-inclusion dimension. This is of course an expression of the internal-market rationality discussed earlier, which is necessitated by the divisions of competences in the EU system, and which requires the rephrasing of various policy objectives in an internal-market jargon. Regardless of the predominant phrasing of the Recommendation from the internal-market angle, the Commission also acknowledged that ‘lack to access to payment accounts

72 

Recommendation 2011/442/EU, recital 3. J Murray (2012). 74  Although the European Parliament originally envisaged an access to a bank account free of costs, in a recommendation to the European Commission it was agreed on the wording ‘free of charge or at a reasonable cost’ as a political compromise, as emerged in the debate on ‘access to basic banking services’ on 3 July 2012. 75  Recommendation 2011/442/EU, recital 1. 73 

104  Access to a Bank Account

prevents consumers from accessing the mainstream financial series market and thereby weakens financial and social inclusion, often to the detriment of the most vulnerable part of the population’,76 therefore clearly establishing a link between financial and social inclusion. Considering that, as underlined by the Social Protection Committee and the Monti Report, not all Member States have granted a right to open a bank account, the Recommendation aims to establish ‘principles on access to basic payment accounts which is a key element for promoting social inclusion and cohesion’.77 The core provision is article 2 of section II, explicitly titled ‘right of access’, which establishes that Member states should ensure that any consumer legally resident in the Union has the right to open and use a basic payment account with a payment service provider operating in their territory provided that the consumer does not already hold a payment account allowing him to make use of the payment services listed in paragraph 6 in their territory.

Article 6 defines the services that have to be comprised in a basic payment account: in particular, ‘services enabling all the operations required for the opening, operating and closing of a payment account’, deposit, withdrawal and transfer of money. It has been previously pointed out that from the perspective of promoting ­financial exclusion, the experiences of the Member States show that two elements are particularly relevant in relation to a bank account, which have occasionally already given rise to important litigation: overdraft facilities and debt history. As to the first aspect, the Recommendation takes a clear stance, establishing that the service provider ‘should not offer, explicitly or tacitly, any overdraft facilities in conjunction with a basic payment account. A payment order to the consumer’s payment service provider should not be executed where such an execution would result in a negative balance of the consumer’s basic payment account.’ Complying with this regulatory provision might have required a change in several Member States’ legislation and would have undermined those standard terms challenged in the UK before the Supreme Court. No reference is made in the Recommendation to the issue of limits on the possibility of legal seizure, which as has been mentioned earlier, also represents one of the possible problems of access to bank account. It must, however, be said that, in the broader European framework but beyond the European Union, this aspect had already been considered by the Council of Europe, which issued a recommendation on enforcement,78 and most Member States have provisions on this particular aspect, which has a very long established legal tradition. The Recommendation is, however, much less clear regarding the third aspect relevant in a financial inclusion perspective, which is the practice of verifying the

76 

Recommendation 2011/442/EU, recital 2.

78 

Recommendation on enforcement Rec(2003) 17.

77 Ibid.

The Recommendation 105

financial history of the customer. As said, banks in different Member States tended to have different practices in this regard. The last sentence of Article 2 only explains that the right of access ‘should apply irrespective of the consumer’s financial circumstances’. Thus, the provision seems to imply that even a negative debt history should be considered irrelevant for the purposes of opening a basic account. In the area of access to bank accounts, the approach appears to be more liberal than in consumer credit where, on the contrary, the screening of the debt history of the debtor is an important aspect encouraged by legislation. With regard to the individuation of the counterpart of this ‘right of access’—and therefore the question as to who has a duty to provide a basic bank account—service providers do not have an unconditional duty to offer basic accounts to any person but Member States are required to ensure that at least one service provider offers such a service: according to Article 5, applications for access to a basic payment account can also be rejected. In this event, the Recommendation simply delineates an ex post information right of questionable effectiveness, as Member States are required to ensure that ‘the payment service provider immediately informs the consumer of the grounds and justification for such a refusal, in writing and free of charge’.79 This echoes a certain tendency in EU legislation on financial contracts which is most notably visible in the Consumer Credit Directive, in which significant mandatory provisions are not buttressed by sufficiently well-designed sanctions in the case of non-compliance. Because of all these critical aspects, the ‘soft’ approach chosen by the Commission may not be sufficient: one year later, the European Parliament,80 criticising the Commission’s choice to intervene with a recommendation,81 emphasised that stronger regulatory interventions were necessary, at the same time showing a major concern for the social dimension of financial exclusion, rather than a purely ­market-inclusion perspective.82 The European Parliament encouraged the ­European Commission to take a stronger regulatory approach in the field, noting that ‘self-regulation instruments have had positive or mixed results and have, to date, not guaranteed access to basic payment services in all Member States’, since ‘payment service providers, acting in accordance with market logic, tend to focus on commercially attractive consumers, and therefore in certain cases leave commercially less attractive consumers without the same choice of products’. On the 79 

Recommendation 2011/442/EU, Art 5. Parliament resolution of 4 July 2012 with recommendations to the Commission on Access to Basic Banking Services (2012/2055(INI)). 81  In the words of the rapporteur J Klute: ‘We regard the recommendation that the Commission has sent to the Member States as disappointing. Many of the responses from the Member States to the request and to the Commission’s country reports are more akin to satire than to a sensible policy which is relevant to the citizens’, in the words of Evelyne Gebhardt, rapporteur for the opinion of the ­Committee on the Internal Market and Consumer Protection: ‘we were very disappointed … to find that, in contrast to what was announced in the work programme for 2011, there was no legislative proposal, but merely a recommendation to the Member States’. 82  Again, in the words of the rapporteur J Klute: ‘Financial exclusion goes hand in hand with social exclusion’. 80  European

106  Access to a Bank Account

same note, it can be recalled that in 2012 the Commission launched a public consultation on financial services, from the answers obtained it also emerged that the legislative approach would enjoy a wide support, since it appeared that consumers ‘argue in favour of legislative measures at the EU level albeit with some flexibility for national circumstances’.83 More specifically, ‘respondents from this group largely endorsed measures establishing an obligation to guarantee consumers’ access to a basic bank account’,84 although the same view was, certainly unsurprisingly, much less common among the financial sector operators.85 In light of these results, the general perception is that the approach based on a recommendation hinted more to achieving market inclusion than social inclusion. The Parliament therefore called for a directive which establishes a right to a basic payment account ‘free of charge or at a reasonable cost’. In its important resolution—several passages of it deserve extensive quotations—the Parliament interestingly insists on the ‘social inclusion’ aspects of access to basic payment ­services, stressing that this is ‘increasingly becoming a prerequisite for social inclusion in terms of access to employment, healthcare and housing’,86 butt despite that the choice should remain with the consumer: ‘every consumer has the right to choose not to have a payment account or a basic payment account’87 so that, distancing from proposed reforms in certain Member States which on the contrary may de facto impose a duty for citizens to have a bank account by way of regulations which make the payment of certain benefits possible only by bank transfer, ‘consumers should not be obliged to have a payment account or a basic payment account’.88 In its resolution, the Parliament continued to recognise all the sensitive issues of financial and social exclusion, noting that ‘partly as a result of the social and economic crisis, over-indebtedness has become the most significant new social risk across the Union and protection against garnishment, which should be managed and developed exclusively at Member State level, is an important aspect in this regard’,89 and that ‘payment service providers should provide access to a basic payment account free of charge or at a reasonable cost’,90 also paying ‘particular attention to financially vulnerable consumers when offering overdrafts and additional credit products in order to avoid over-indebtedness’91 while ‘Member States should avoid any potential charges for basic payment services from b ­ ecoming a barrier preventing financially excluded consumers from having access to basic payment services’.92 83  European Commission, Summary of responses to the public consultation on bank accounts, ­Brussels, 25 July 2012, 2.3. 84  Ibid, 2.3.3.1. 85  Ibid, 2.3.3.2. 86  European Parliament resolution of 4 July 2012, p 2 (B). 87  Ibid, 2 (D). 88 Ibid. 89  Ibid, 3 (M). 90  Ibid, 3 (K). 91  Ibid, 3 (L). 92 Ibid.

The Problem of Reasonable Costs 107

Defining more clearly the suggestions addressed to the Commission, the Parliament stressed that ‘[t]he directive should provide that Member States must ensure access to basic payment services by obliging, in principle, all payment service providers as defined in Article 4(9) of Directive 2007/64/EC that offer payment accounts to consumers as an integral part of their regular business to provide basic payment accounts’.93 And, again, ‘[c]riteria such as the level or regularity of income, employment, credit history, level of indebtedness, individual situation regarding bankruptcy or expected turnover of the account holder should not be taken into account for the opening a basic payment account’.94 The recommendations of the European Parliament also called for a directive to codify the reasons under which a financial services providers can legitimately refuse or annul the contract with a customer, such as ‘severe and persistent non-compliance with obligations arising from the basic payment account’.95 Overdraft facilities should be allowed ‘to cover temporary negative balances, where appropriate’96 but the fees should be ‘transparent and at least as favourable as usual pricing policy of the provider’.97 That the Parliament pushes for more stringent regulatory interventions also emerges from the last recommendation, according to which ‘the Commission should complement the proposed directive on basic payment accounts by further initiatives aiming at further integration and harmonisation of retail banking services and prevention of financial exclusion’,98 including combating overindebtedness.

VI.  The Problem of Reasonable Costs The mention of a ‘reasonable cost’ for basic bank accounts is theoretically relevant and can have important practical consequences as well, as it would introduce a nucleus of price control in the field. Empirical studies promoted by consumer organisations have already shown that when basic account schemes have been introduced, these have been still quite expensive, although costing less than a normal bank account to run, but, on the other hand, with strong limitations to the services offered or even with some services offered which are more expensive than analogous services offered in traditional bank account schemes, which also offer a wider range of services.99 93 

Ibid, Recommendation 1.2. Ibid, Recommendation 2.8. Ibid, Recommendation 2.9(c). 96  Ibid, Recommendation 3.15. 97 Ibid. 98  Ibid, Recommendation 6.31. 99  For instance, for Italy, see the comparative analysis in Altroconsumo: Conto base: la nostra indagine su banche e poste, 5.6.2012. 94  95 

108  Access to a Bank Account

Nonetheless, what are the standards in light of which to assess the reasonableness of the cost? Is reasonableness to be interpreted as a matter of justice or economic efficiency? The problem is well known in the field of universal services, which in the EU legal framework are characterised by the principles of access, quality and affordability.100 The provisions on affordability are sufficient to be called upon in litigation by customers who seek to avoid prices regarded as u ­ naffordable,101 especially considering that in certain areas such as access to electricity, the costs of the service have risen disproportionally over the latest decade.102 At the same time, and unlike the laws of most Member States, EU law did not elaborate a standard for the definition of a reasonable price and rather generically relies on competition for that purpose.103 At the theoretical level, EU law so far lacks a theory of just price, and this deficit has led to an academic discussion regarding whether or not such a rule is necessary in European contract law.104 In EU contract law, this theoretical gap as to the reasonableness or fairness of a price is clearly exemplified by the Unfair Contract Terms Directive, which prohibits unfair terms rather than unfair prices, and that, significantly, excludes the assessment of the unfair nature of terms relating to the adequacy of the price and remuneration in so far as these terms are in plain intelligible language.105 As is well known, although initial drafts of the Directive contained more substantive rules, the final version of the Directive opted to exclude the core terms of the contract from review, including the price agreed for the goods or services offered. In this regard, EU contract law is not remarkably different from the general contract law to be found in Member States, since ‘no legal system at present regards a contract as void simply because of disparity between performance and counter performance’.106 This approach meant to grant the freedom to set a price is generally taken also by most European countries following a long tradition,107 however, this is counterbalanced by several limits represented most notably by the prohibition of usury. This restriction, nonetheless, created some practical problems in the financial sector. Besides giving rise to the case on overdraft charges discussed earlier, the limitation made it impossible to employ the directive to challenge mortgage credit agreements in foreign currencies108 which were widespread in several Central-Eastern European countries, and that, despite their seeming initial ­ ­convenience, soon proved to be detrimental to consumers, leading many of them

100 

P Rott (2005). Ibid, 337. 102  S Pront-van Bommel (2016). 103  M Bartl (2010). 104  See most recently the contributions of MW Hesselink (2015) ‘Could a Fair Price Rule (or its Absence) Be Unjust?’, J Gordley (2015), H Eidenmüller (2015), E Dermineur and Y Svetiev (2015). 105  Directive 93/13/EEC, Art 4(2). 106  H Kötz (1997) 135. 107  See J Gordley (1991) 109; R Zimmermann (1996) 250. 108  F Ferretti and C Livada (2016) 37. 101 

The Problem of Reasonable Costs 109

into arrears.109 Attempts by national courts to protect those consumers by qualifying them as investors under the Markets in Financial Instruments Directive (MiFID) rules rather than only borrowers under the Consumer Credit Directive were nullified by the opposite conclusion reached by the CJEU,110 although on other occasions the European Court highlighted the importance of making the consumer aware of the peculiar risks inherent to that particular type of loan.111 Conversely, it is telling that the large number of cases originating in Spain concerning unfair terms in loan agreements was also partly determined by the fact that the ­Spanish legislator, in implementing the Unfair Contract Terms Directive, did not also replicate the ‘core term’ exception so that a major number of loan agreements could be tested for fairness. This emerged most clearly in the Caja de Ahorros case, involving the possible unfairness of a ‘rounding-up’ term in variable-rate mortgage loan ­agreements.112 More recently, in the cases leading to the Camino decision of the CJEU, a Spanish Court could invalidate a term imposing a 29 per cent interest rate on late payments without having to find the term non-intelligible and non-­transparent in order to do so. (The question of whether the court could also rewrite the term recalculating the interest term was initially answered in the negative,113 though later decisions by the CJEU took a more permissive stance.)114 Over time, the CJEU even showed a certain propensity to restrict the scope of the core-term exception, thus allowing national judges to review more terms impacting on the calculation of the interest rate.115 It is remarkable that the introduction of a rule on fair price in the acquis became more likely during the drafting process of the long-discussed project of a regulation introducing a Common European Sales Law, as two amendments by the European Parliament (which has always shown a higher inclination towards fair price than the European Commission) to the original proposal extended the scope of unfair terms control also to the adequacy of price and remuneration, deleting the limitation provided for by the current version of the Unfair Contract Terms Directive.116 As the whole initiative for a Common European Sales Law—which

109 

See M Józon (2015); ME Méndez Pinedo and I Domurath (2015). Case C-312/14 Banif Plus Bank Zrt v Márton Lantos and Mártonné Lantos EU:C:2015:794. 111  Case C‑186/16 Ruxandra Paula Andriciuc and Others v Banca Românească SA EU:C:2017:703. 112  Case C-484/08 Caja de Ahorros y Monte de Piedad de Madrid v Asociación de Usuarios de Servicios Bancarios (Ausbanc) EU:C:2010:309. 113  Case C-618/10 Banco Español de Crédito, SA v Joaquín Calderón Camino EU:C:2012:349. 114  Case C-26/13 Árpád Kásler and Hajnalka Káslerné Rábai v OTP Jelzálogbank Zrt EU:C:2014:282. Moreover, in the judgment in Joined Cases C-482/13, C-484/13, C-485/13 and C-487/13 Unicaja Banco, SA v José Hidalgo Rueda and Others and Caixabank SA v Manuel María Rueda Ledesma and ­Others EU:C:2015:21, it was held that a national court hearing mortgage enforcement proceedings could adjust the amounts due under a term in a mortgage loan contract providing for default interest at a rate more than three times greater than the statutory rate in order that the amount of that interest may not exceed that threshold, and possibly declare it unfair. 115  Case C-143/13 Bogdan Matei and Ioana Ofelia Matei v SC Volksbank România SA EU:C:2015:127. In the same year, an analogous argument was made with regard to insurance contracts in Case C-96/14 Jean-Claude Van Hove v CNP Assurances SA EU:C:2015:262. 116  MW Hesselink, ‘Unfair Prices in the Common European Sales Law’ (2015). 110 

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in turn had replaced the more comprehensive and politically unsuccessful idea of a Common Frame of Reference—appears to have been, at least for the time being, dropped from the EU agenda, however, the question of the extension of the unfair terms assessment to price, even if only of sale contracts, has become immaterial.

VII.  The New Directive Following the input from the European Parliament and taking note of the (actually quite foreseeable) fact that only a few Member States adequately complied with the 2011 Recommendation, the Commission was eventually led to take new and more decisive action. As Commissioner Barnier stated, presenting the proposal for a new directive on 8 May 2013 and alluding to a shift towards a stronger regulatory approach, ‘we have given an opportunity for self-regulation but we have seen how far that can go’. After having launched a public consultation on the issue,117 the Commission presented proposals for a directive. The plans of the Commission were received coldly by operators in the financial sector. While those operators were positively disposed towards opening the market of bank accounts in Europe as well as the efforts to introduce more transparency in the field, they considered the previous legal framework adequate and opposed the parts of the proposed directive concerned with counteracting financial exclusion. The biggest apprehension in that perspective was represented, of course, by the suggested possible ­obligation to provide a service free of charge or at an excessively low price.118 Despite these resistances, and after having taken note of the failure of self-regulatory and soft law instruments employed so far, the EU eventually issued a directive on the topic, ie Directive 2014/92/EU of the European Parliament and of the Council of 23 July 2014 on the comparability of fees related to payment accounts, payment account switching and access to payment accounts with basic features. As the Commission stated, the main goals of the new instrument—which is a minimum harmonisation rather than maximum harmonisation directive—were to ensure easier comparability of payment account fees, ‘to make it easier for consumers to compare the fees charged by banks and other payment service providers in the EU on payment accounts’; ‘to establish a simple and quick procedure for changing from one payment account to another, with a different bank or financial institution’, and, more fundamentally, to provide access to payment accounts, with the aim ‘to allow all EU consumers, irrespective of their country of residence

117 European Commission, DG Internal Market and Services and DG General Health and Consumers, Commission Services Working Document—Consultation on Bank Accounts, 20 March 2012. 118  European Banking Federation, Press Release, Brussels, 8 May 2013.

The New Directive 111

in the EU or financial situation, to open a payment account that allows them to perform essential operations (like receiving their salary or pension, transferring funds to another account, withdrawing cash or using debit cards)’.119 The importance of this instrument makes it necessary to present its fundamental features here. The Directive is substantively composed of two parts. The first part introduces rules which make comparability of fees easier, by way of a standardisation of the terminology employed by different services providers in different European countries, and makes switching between those providers easier and less costly. It follows studies for the Commission which revealed the difficulties encountered by consumers seeking to switch accounts: consumers received little or no information from their banks, while banks are not ready to act as the primary contact point.120 Improving the possibility of switching accounts appears necessary from the perspective of ensuring greater competition, but it can also benefit the consumer directly: in fact, switching operates as a disincentive for the bank to charge high fees on accounts. The Commission had acknowledged this already in 2007, noting that ‘once customers are locked in to a banking relationship, the supplier can charge higher prices, since customers will tend to factor their switching costs into any decision to change supplier’.121 The second part of the Directive ensures an authentic right to a payment account with basic features, and in practice translates into hard law the dispositions—mostly unattained—of the previous recommendation on the ­ same topic. Those basic features mostly mean deposit, cash withdrawals, direct ­debits, payment transactions including online payments and credit transfers.122 In order to ensure that the basic account offered does not become an opportunity for the financial services provider to offer other services which are not needed by the consumer, the Directive also disincentives the offering of additional services linked to the bank account. More precisely, the Directive obliges Member States to ensure that all credit institutions or a sufficient number of credit institutions offer consumers ‘legally resident in the Union’123 access to a payment account with basic features. In a case of refusal of the application, for reasons to be determined by Member States (mostly to avoid abuses by c­onsumers), those institutions have to inform the consumer in writing of the specific reasons of refusal, which can then be rehearsed in front of competent authorities

119  European Commission, Memo, ‘Proposal for a Directive on Payment Accounts—Frequently Asked Questions’, 8 May 2013. 120  GfK (2010), The Final Report. For the provision of a “Consumer Market Study on the consumers’ experiences with bank account switching with reference to the Common Principles on Bank Account Switching”. Specific Services N°EAHC/FWC/2010 86 031. 121  European Commission, Communication from the Commission, ‘Sector Inquiry under ­Article 17 of Regulation (EC) No 1/2003 on retail banking (Final Report)’, COM(2007) 33 final, A.5.2. 122  Directive 2014/92/EU, Art 17. 123  Ibid, Art 2(2). This also includes asylum seekers, as to whom Europe has paradoxically not been able to develop a practicable common strategy yet, but who are nonetheless at least entitled to open a bank account, should they be able to establish themselves in Europe.

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or ADR bodies.124 Member States may also set up mechanisms to ensure that unbanked consumers whose application for a bank account has been refused have nonetheless ‘effective access to a payment account with basic features, free of charge’.125 As is commonplace in the drafting technique of the EU, the rationales of the measures are framed mostly in internal-market jargon. The role of financial inclusion in this sense is unsurprisingly to promote the internal market, since ‘crossborder activity in the internal market is hampered by obstacles to consumers opening a payment account abroad’126 and ‘creating the conditions to allow all consumers to access a payment account is a necessary means of fostering their participation in the internal market and of allowing them to reap the benefits the internal market has brought about’.127 And the fact that consumers will be able ‘to move and shop around more easily … will contribute to the further development of the internal market’.128 At the same time, of course, the provisions of the Directive are expected to increase competition in the retail banking sector.129 The recitals of the Directive add, however, a generic reference to the social inclusion dimension, introducing a new terminology in the EU language which is potentially significant. More precisely, the Directive introduces the notion of a ‘modern socially inclusive economy’.130 In such a modern socially inclusive economy, access to payment services becomes a fundamental aspect and particular regard must be given to vulnerable consumers.131 The social dimension of the provisions emerges quite surprisingly in the way in which the Directive, after ensuring access to basic bank accounts to consumers, tries to avoid their social stigmatisation. Certainly, ‘that objective can be better achieved if a larger number of credit institutions are designated’,132 but the recitals of the Directive also refer to more concrete and idiosyncratic aspects: for instance, a way to produce social discrimination is to associate with basic accounts ‘a different appearance of the card, a different account number or a different card number’, a practice that Member State must now prevent.133 The socially important aspect of over-indebtedness is also incidentally considered by the Directive, as one of the factors that have to be taken into consideration by a report based on the review of the Directive to be carried out by the Commission after five years grounded on the statistical information provided by the Member States.134 At the more concrete level of the dispositions rather than

124 

Ibid, Art 16. Ibid, recital 25. 126  Ibid, recital 6. 127  Ibid, recital 3. 128  Ibid, recital 9. 129  Ibid, recital 4. 130  Ibid, recital 7. 131  Ibid, recital 3. 132  Ibid, recital 38. 133  Ibid, recital 38. 134  Ibid, recital 54. 125 

The New Directive 113

the recital, the Directive creates a right to a basic bank account, obliging Member States to ensure that all credit institutions, or a sufficient number of credit institutions, offer consumers ‘legally resident in the Union’135 access to that service. The most interesting aspect of the Directive is the way in which it relates to the economic aspects of the bank account which, as has been touched upon earlier, still represent the most sensitive and relevant aspect. The Directive follows the approach of the Recommendation and, earlier, the Monti Report, prescribing that the basic account must be offered by credit institutions ‘free of charge or for a reasonable fee’.136 There is no concrete determination of what is meant by ‘reasonable’, Member States rather have—instead of defining statutorily the precise cost of a given financial service—to ensure the reasonableness of the fee, taking into account national income levels and the average fees usually charged in the country.137 These two criteria will likely become of particular importance in any litigation to assess what is the reasonable price of a basic bank account, and also to avoid the risk that, as it has been suggested, the vagueness of the notion of reasonableness of the fee might leave room for financial services providers to maintain that the higher costs and risks associated with the bank accounts of lowincome citizens justify imposing higher fees.138 It is interesting to note that the broad term ‘fee’ employed by the legislator covers all charges and penalties,139 in order to appropriately surpass the formal distinction between those two categories, and with that the doctrinal but practically relevant question as to whether overdraft charges are part of the economic core terms of the contract or a type of penalty. On that issue, the new Directive, as distinct from the recommendation, does not rule out that overdraft facilities might be associated to basic bank accounts and instead leaves the regulation of these to the Member States which, without prejudice to the requirements of the CCD, ‘may allow credit institutions to provide, upon the consumer’s request, an overdraft facility in relation to a payment account with basic feature’.140 These might allow for credit institutions to offer overdraft facilities in relation to payment accounts with basic features, and may in that case define the maximum and minimum duration of the overdraft.141 The Directive therefore bypasses the question of the economic aspects of the overdraft facilities, not even following the suggestion of the European Parliament that, though allowed, overdraft charges should nonetheless be ‘transparent and at least as favourable as usual pricing policy of the provider’.142 135  Ibid, Art 2(2). This also includes asylum seekers, as to whom Europe has paradoxically not been able to develop a practicable common strategy yet, but who are nonetheless at least entitled to open a bank account, should they be able to establish themselves in Europe. 136  Ibid, Art 18. 137 Ibid. 138  P Rott (2014) 683. 139  Directive 2014/92/EU, Art 2(15). 140  Ibid, Art 17(8). 141 Ibid. 142  European Parliament resolution of 4 July 2012 with recommendations to the Commission on Access to Basic Banking Services (2012/2055(INI)), 3.15.

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The regulation of overdrafts associated to a bank account with basic features therefore remains a particularly controversial and delicate task. In fact, overdrafts allow for the inversion of the normal debtor-creditor relationship ingrained in the bank-customer relationship, and bring the customer in the potentially complicated position of a bank’s debtor. It is thus time to look at this issue, considering access to credit.

4 Access to Credit I.  From a Right to a Bank Account to a Right to Credit? The 2011 Recommendation on access to a basic payment account made it explicit that ‘[a]ccess to credit should not be considered as an automatic component of or a right attached to a basic payment account’.1 Such a disclaimer, though not reiterated in the 2014 Payment Accounts Directive2 clearly reveals the approach of the Commission, which remains limited to offering consumers the possibility of opening an account but not also giving them the automatic right to obtain credit, let alone affordable credit. Although they both appear to be essential parts of a strategy for addressing financial exclusion, and granting affordable credit is commonly qualified as a core aspect of inclusion, as identified in the UK by HM Treasury,3 the two aspects of access to a basic payment account and access to credit appear to be fully distinct and governed by different principles. The specification of the Recommendation shows the caution of the European institutions in addressing the availability of credit and confirms that, despite the tendency in certain academic circles and among microcredit supporters to emphatically advocate credit as a universal human right,4 legally speaking there is no such thing as a right to credit,5 neither in national legislations nor in supranational charters of rights.6 There was no such right in the years of easy credit and optimism about the coincidence of financial and social inclusion, and even less so now that the financial crisis has imposed a more prudential approach. If the idea of financial inclusion initially embraced the view that credit should be easily granted, now legislation tends to limit its availability in circumstances in which 1  Commission Recommendation 2011/442/EU of 18 July 2011 on access to a basic payment account, recital 11. 2  Directive 2014/92/EU of the European Parliament and of the Council of 23 July 2014 on the comparability of fees related to payment accounts, payment account switching and access to payment accounts with basic features. 3  HM Treasury (2004). 4  See M Yunus and A Jolis (2001) 280, according to whom credit is a human right just like food. For a discussion as to the theoretical foundations of a human right to credit, see M Hudon (2009). 5  S Finlay (2009) 70. 6  M Hudon (2009) 17.

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this could create risks. It is also worth noting that, despite the costs that might initially be associated with the right, opening a bank account to the benefit of a low-income citizen is much less problematic for a bank than giving credit to a customer with low creditworthiness,7 so that it will be easier to establish a mandatory right to a bank account rather than a right to credit, which would encounter strong resistance from industry. The fact that there is no right to credit does not mean, however, that European legislation does not encourage access to it. Quite to the contrary, the several directives issued on the topic show the particular interest of the European Union as well as the underlying idea of the desirability of increasing access in a ­European version of the US democratisation of credit discourse. Consumer credit has been, thus, the target of interventions by the European institutions since the 1980s, when the Directive for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit of 22 ­December 1986 was adopted.8 More than 20 years later, that particularly incomplete Directive, adopted under the unanimity rule, was repealed by the more detailed D ­ irective 2008/48/CE of 23 April 2008.9 Adopted after a decade of discussions with the purpose of ­keeping pace with a rapidly evolving financial market and justified by the need to move from a minimum harmonisation to a full harmonisation approach, the Directive was enacted at the outset of the financial crisis of 2008, which was soon to challenge some of the assumptions on which the new instrument was based. Following the evolution of EU policy which was traced in ­chapter two, a new awareness as to the risks of access to credit eventually emerged. The most serious risk identified was the possibility of over-indebtedness, now considered by the European Parliament as the most pressing social problem in Europe. Hence, the proviso of the Payment Accounts Directive—that access to an account does not automatically involve right to credit—is but one expression of the new p ­ recautionary approach. It is not the question of ‘access to credit’ which remains not considered by the European Union, but rather the different question of ‘affordable credit’—the lack of which might force consumers into subprime markets where higher interest rates are charged, or even into illegal moneylending markets.10 As a result of this evolution, European contract law in the area is currently characterised by the basic contradiction which has been highlighted above: on the one hand, the internal market project promotes indebtedness; on the other hand, it opposes over-indebtedness. Taking into account that there are two opposite demands, the contract law of an ‘efficient and sustainable financial ­system’ as ­envisaged by the Commission11 must strike a balance: on the one hand, m ­ aking 7 

Associazione Bancaria Italiana (2009) 33. 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. 9  Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC. 10  See N Byrne, O McCarthy and M Ward (2007). 11  COM(2010) 2020 final, 8. 8 

Responsible Lending and the Problem of Self-Interest 117

sure that those individuals who face difficulties entering the mainstream financial market have the opportunity to obtain credit on non-discriminatory conditions and, on the other hand, ensuring that such lending does not lead to ­over-indebtedness, a particular risk for low-income citizens. The contemporary debate on financial inclusion in regard to credit is centred on striking the right balance between access to credit, prevention of over-indebtedness and, at the same time, the need to guarantee financial stability. Different regulatory strategies are imaginable to that end and have been at least partially implemented at the ­European level after long discussions and criticisms. These centre on forms of financial support for programmes of microfinance and the contract law principle of responsible lending. The first instrument is the ‘European Progress Microfinance Facility’ launched by the European Union in 2010, with the aim of facilitating the granting of credit from banks to customers who need finance for a small business start-up. The programme is meant to foster productivity in Europe and, therefore, it operates outside the traditional consumer contract law. The programme does not directly finance entrepreneurs but rather operates by providing guarantees for loans under €25k granted by selected credit providers (at the present day, in most M ­ ember States) to customers who would be likely to encounter problems in obtaining a loan without the guarantees issued by the Microfinance Facility. Nonetheless, while the administrative approach of the Microfinance Facility is meant to promote productive credit, European contract law remains mostly focused on B2C relations, so that it almost automatically excludes productive credit and instead regulates consumer credit. The focus of this chapter will now turn to this subject.

II.  Responsible Lending and the Problem of Self-Interest The contract law instrument through which the balance between the promotion of indebtedness and the fight against over-indebtedness has been sought in Europe is the principle of responsible lending.12 Precise legal definitions are generally lacking, but overall one can describe the principle as consisting in the obligation for a professional lender, usually a bank, to grant a consumer loan only after having evaluated whether the borrower is a suitable candidate and is thus likely to repay the debt. Responsible lending can also be associated with a mirror ‘responsible borrowing’ obligation, meant to avoid irrational over-borrowing behaviours on the side of the consumer and, thus, it is an obligation imposed on the customer rather than on the bank.

12 

J Benedict (2008); YM Atamer (2011).

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That a lender should assess whether the borrower is likely to repay the debt appears as something so obvious that the need of creating a specific legal duty would even appear redundant. Traditionally, in fact, the law has generally refrained from elaborating such a duty—if not comprised within a broader duty to exercise care in providing the service—as it started from the basic assumption that the solvency of the debtor is in the self-interest of the lender. This should be sufficient to ensure that the lender will be careful in deciding whom to give credit to and, if it does not do so, it is the lender who will bear the consequences, even if this means neglecting the further repercussions for third parties. This consideration echoes in some criticisms of the principle, which claim that placing an obligation on banks to carefully assess the consumer’s creditworthiness, while not wrong in principle, is redundant, because lenders themselves suffer an economic loss if the borrowers cannot repay their debt, so that they are the first ones to have an interest in the debtor’s solvency.13 Such an argument is flawed for at least two interrelated reasons. First, at an empirical level, even if it is true that in certain countries assessing the solvency of debtors is a common bank practice, standardised at least in self-regulation charters,14 after the outbreak of the financial crisis analyses of the mortgage and consumer credit market in several EU Member States have revealed that credit assessments were barely performed at all by lenders in the years of the ‘easy credit’ ideology and, in other cases, they were performed in a particularly generous way.15 Such behaviour is a consequence of the optimism in the market in some European countries which, after the introduction of the common currency, benefited from lowered interest rates and in which macroeconomic conditions made it convenient to lend money to an increasing number of consumers, with the reasonable expectation that they would be able to repay loans secured on properties in a rising market. This particular problem was aptly addressed more recently by the Mortgage Credit Directive, which made it clear that [t]he assessment of creditworthiness shall not rely predominantly on the value of the residential immovable property exceeding the amount of the credit or the assumption that the residential immovable property will increase in value unless the purpose of the credit agreement is to construct or renovate the residential immovable property.16

After more detailed responsible lending rules have been imposed by law and regulation, financial services providers appear to comply more precisely with their obligations.17

13 

W Kösters, S Paul and S Stein (2004) 95. an overview, see D Davydoff, G Naacke, E Dessart, N Jentzsch, F Figueira, M Rothemund, W Mueller, E Kempson, A Atkinson and A Finney (2010) 65 ff. 15  Paradigmatic in this sense is the case of Iceland, see ME Méndez Pinedo and I Domurath (2014) ‘Iceland’, 246. 16  Directive 2014/17/EU, Art 18(3). 17  In the UK, see Financial Conduct Authority, Embedding the Mortgage Market Review: Responsible Lending Review, TR 16/4, May 2016, which concluded that ‘Firms have recognised and positively 14  For

Responsible Lending and the Problem of Self-Interest 119

Secondly, and at a more fundamental level, the traditional idea that responsible lending is in the lender’s self-interest does not seem to hold entirely true any more in the contemporary financial context, as discussed in chapter one. Against the framework of securitisation practices,18 the solvency of the debtor might be said to be in the general interest of the financial system overall, but not necessarily in the particular interest of the lender in the first place. In that case, the lender loses the strongest incentive to lend responsibly. Financial innovation has directly challenged the economic assumptions upon which traditional contract law is based, and so long as law and regulation take an approach focused on the lender-borrower relation, they fail to acknowledge the further systemic dimension. To understand this aspect, it is advisable to briefly recall the process of securitisation, which has already been introduced in a previous chapter. In its most basic form, the lender does not keep the loan in its balance sheet waiting for the debtor to repay principal plus interests but instead pools it together with other more or less homogeneous loans and then transfers them to another bankruptcy-remote entity, divided into classes of securities with different priorities and further sold to investors. ‘But spreading risk does not eliminate it.’19 In fact, this operation, through which loans are converted into tradable commodities, externalises risk and spreads it over the market. While financial literature emphasises that this provides a more efficient risk allocation, its side effect is that credit risk turns into a systemic risk. In order to mitigate that systemic risk, while maintaining the benefits of securitisation for the banking system, different approaches are conceivable. Securities markets regulations have usually relied on disclosure mechanisms meant to correct information asymmetries in the primary and in the secondary market, making securitisation more transparent,20 but more recently ‘risk retention’ mechanisms have gained momentum. These attempt to ensure the lender maintains a certain degree of ‘skin in the game’, ie the lender maintains an interest in the solvency of the borrower and does not fully liberate itself from the credit risk. Their attempt is thus to relocate credit risk at least in part to its original place. Most notably, in 2015, the European Commission presented a proposal meant to introduce more transparency in securitisation practices, one of the key provisions of which is that ‘[t]he originator, sponsor or the original lender of a securitisation shall retain on an ongoing basis a material net economic interest in the securitisation of not less than 5%’.21 Secondly, more attention is being paid to the quality of the underlying

engaged with the aim of our responsible lending rules. There was no evidence of previous poor practices like self-certification of income or interest only lending without a credible repayment strategy’, 1.5. 18 

On securitisation and responsible lending, see YM Atamer (2011) 181. D Harvey (2008) 30. 20  J Tanega and E Curtin (2009) 3. 21  Proposal for a Regulation of the European Parliament and the Council laying down common rules on securitisation and creating a European framework for simple, transparent and standardised securitisation and amending Directives 2009/65/EC, 2009/138/EC, 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012, COM(2015) 472 final. 19 

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assets and, most recently, the Basel Committee on Banking Supervision Board and the I­ nternational Organization of Securities Commissions (IOSCO) have jointly suggested that ‘investors need to carry out a careful risk assessment of securitisations, including their own evaluation of the credit quality of the underlying assets’.22 Interestingly, although the focus appears to lie on market regulation and supervision, the proposal of the European Commission also clarifies that ‘[t]he assessment of the borrower’s creditworthiness should also meet where applicable, the requirements set out’ in the Consumer Credit Directive and the newer Mortgage Credit Directive.23 Thus, although the Commission downplayed its relevance for consumers by stating that ‘[t]his proposal should not impact on consumers, since securitisations are not intended for consumers’,24 it emerges that a more effective regulation of securitisation requires consideration of responsible lending. This new approach is recognised most notably by the 2014 Mortgage Credit Directive, which at recital 57 recognises that ‘the capacity for the creditor to transfer part of the credit risk to a third party should not lead him to ignore the conclusions of the creditworthiness assessment by making a credit agreement available to a consumer who is likely not to be able to repay it’.

III.  Responsible Lending and European Contract Law Responsible lending can be regarded as an attempt to partially address the shortcomings of systemic risk, although it does not appear to challenge the root of the originate-to-distribute model. The principle was initially elaborated in EU Member States such as France, while the history of its recognition in European contract law is controversial and only partially successful. In theory, imposing responsible lending and borrowing obligations on contract parties would imply a constraint on their freedom of contract and therefore prima facie seems to contradict regulatory interventions aimed at liberalising markets and encouraging the use of credit. Legislation adopted before the crisis and intended more to promote indebtedness than to avoid over-indebtedness generally neglected responsible lending. Both the old (1986) and the new (2008) Consumer Credit Directive share that same political-economic preconception. Both were meant to ‘facilitate the emergence of a well-functioning internal market in consumer credit’25 and, more

22  Basel Committee on Banking Supervision Board of the International Organization of Securities Commissions, Criteria for identifying simple, transparent and comparable securitisations, July 2015, 3. 23  Proposal for a Regulation of the European Parliament and the Council laying down common rules on securitisation and creating a European framework for simple, transparent and standardised securitisation and amending Directives 2009/65/EC, 2009/138/EC, 2011/61/EU and Regulations (EC) No 1060/2009 and (EU) No 648/2012, COM(2015) 472 final, recital 19. 24  Ibid, results of stakeholder consultations and impact assessments, 3. 25  Directive 2008/48/EC, recital 7.

Responsible Lending and European Contract Law 121

fundamentally, they both share the view of a consumer as an economic actor who can benefit from the credit market and be sufficiently protected inasmuch as the consumer is empowered with pre-contractual and contractual information.26 Other possible regulatory approaches were discussed in the years preceding the creation of the 2008 Directive, whose first draft presented considerable differences from the final version,27 but eventually the 2008 Directive ended up mostly following the same regulatory philosophy of the 1987 Directive. As is the norm in EU contract law, the remedy granted to consumers to redress their lack of information is the right of withdrawal. Nevertheless, it is possible to detect an evolution within the 2008 Directive. While other consumer law directives, those which are now repealed and replaced by the 2013 Consumer Rights Directive,28 grant the consumer the right to withdraw from the contract because of particular factual circumstances that impaired the consumer’s capacity to be correctly informed—for instance, because in door-step selling the consumer does not have time to think through the merits of the transaction—those impairing circumstances do not appear to exist in the case of consumer loan agreements, which ex hypothesi may be concluded by a well-informed consumer who decides to pay a visit to the local branch of his or her bank. The Consumer Credit Directive grants the consumer a cooling-off period in any case, regardless of the specific conditions surrounding the conclusion of the credit agreement. This indicates that the consumers have a right to change their minds because of the objective complexity of the contract they have signed. In a way, the information deficit is inherent in the loan agreement, rather than deriving from the circumstances surrounding its conclusion, which amounts to an implicit recognition of the fact that, in a highly complex financial market, the consumer is always in a situation of informational imbalance, which justifies the applicability of the rules on right of withdrawal—although this approach was not replicated in the Mortgage Credit Directive. Recognising the difficulty that consumers face, the Directive also attempts to make the information more easily available and understandable. This aim was later reinforced by the Court of Justice of the European Union (CJEU), which clarified that the burden of proof to demonstrate that the consumer had been correctly informed lies only on the trader.29 The stated purpose of facilitating the establishment of a well-functioning internal market is most effectively pursued through the standardisation—and therefore the improved comparability—of the

26 

S Weatherill (2013) 98. On this evolution, see I Łobocka-Poguntke (2012); and EF Pérez Carrillo and F Gallardo Olmedo (2014) 312 ff. 28  Directive 2011/83/EU of the European Parliament and of the Council of 25 October 2011 on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC of the European Parliament and of the Council and repealing Council Directive 85/577/EEC and Directive 97/7/EC of the European Parliament and of the Council. 29  Case C-449/13 CA Consumer Finance SA v Ingrid Bakkaus and others EU:C:2014:2464. 27 

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information that must be furnished to the consumer, which relates in particular to the determination of the total price of the credit and the interest rate. The Directive even introduced a ‘Standard European Consumer Credit Information’ model, which should ensure that information is provided in a transparent and identical way to all European consumers, to facilitate their ability to comprehend and compare different offers from various lenders. It has been noted that a similar approach, based on standardisation of information, has been taken by the 2014 Payment Accounts Directive on comparability of fees and access to a bank account with basic features. Standardisation of information in this context is of particular relevance, since the Unfair Terms Directive30 allows a fairness assessment even of a core term if this is not transparent. Thus, standardisation of economic information limits the chances to successfully strike down core terms based on their alleged unfairness. The 2008 Directive is less satisfying when it comes to the principle of responsible lending, which was initially included in the first proposal and eventually greatly weakened in the final version of the Directive. That story is widely known and discussed in the literature;31 here it suffices to mention that Article 9 of the first proposal of the Directive, entitled ‘Responsible lending’, provided that ‘[w]here the creditor concludes a credit agreement or surety agreement or increases the total amount of credit or the amount guaranteed, he is assumed to have previously assessed, by any means at his disposal, whether the consumer and, where appropriate, the guarantor can reasonably be expected to discharge their obligations under the agreement’. The provision met with fierce criticisms from several quarters, being strongly criticised, for different reasons, in law and economics ­literature, by the banking sector and even by consumer associations.32 At the time of the drafting of the Directive, the reactions, in particular those from the banking sector, led to the conversion of the envisaged principle of responsible lending into a much less stringent ‘obligation to assess the creditworthiness of the consumer’ (Article 8). The new regime presents two main problems which compromise its effectiveness, as it does not outline how the assessment has to be performed and, most importantly, fails to outline legal sanctions in the case of non-assessment. Article 8 now provides that Member States shall ensure that, before the conclusion of the credit agreement, the creditor assesses the consumer’s creditworthiness on the basis of sufficient information, where appropriate obtained from the consumer and, where necessary, on the basis of a consultation of the relevant database. Member States whose legislation requires creditors to assess the creditworthiness of consumers on the basis of a consultation of the relevant database may retain this requirement.

30 

Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts. See SM Franken (2009). 32  An account of all the reactions to the proposal can be found in I Łobocka-Poguntke (2012). 31 

Responsible Lending and European Contract Law 123

The idea underlying the new provision is expressed more clearly in recital 26 of the Directive, which is convenient to quote extensively: Member States should take appropriate measures to promote responsible practices ­during all phases of the credit relationship, taking into account the specific features of their credit market. Those measures may include, for instance, the provision of information to, and the education of, consumers, including warnings about the risks attaching to default on payment and to over-indebtedness. In the expanding credit market, in particular, it is important that creditors should not engage in irresponsible lending or give out credit without prior assessment of creditworthiness, and the Member States should carry out the necessary supervision to avoid such behaviour and should determine the necessary means to sanction creditors in the event of their doing so.

As a result, it creates an obligation on the creditor not only to provide the consumer with all the necessary, standardised information33 that the consumer might need, but also to check the creditworthiness of the consumer. With that said, the Consumer Credit Directive does not instruct the creditor34 as to what to do once the creditworthiness assessment has been performed: whether the credit should be granted or not remains a decision entirely for the bank to take, which cannot be judicially contested based on the Directive. What is more, the assessment of creditworthiness is relatively free: the Directive establishes an obligation to perform such an assessment but it does not specify how it is to be conducted. The CJEU considered this problem, confirming that the creditor has a wide ‘margin of discretion for the purposes of determining whether or not the information at its disposal is sufficient to demonstrate the c­ onsumer’s creditworthiness and whether it must check that information against other ­evidence’.35 Again, as clarified by the CJEU, the Directive ‘does not require creditors to scrutinise systematically the veracity of the information supplied by the consumer. Depending on the specific circumstances of the case, the creditor may either be satisfied with the information supplied by the consumer, or decide that it is necessary to obtain confirmation of that information’.36 In that same judgment, the CJEU also rejected the suggested possible interpretation that the obligation to provide information and the obligation to assess the credit worthiness of the consumer could be linked, such that preliminarily assessing the credit worthiness of the consumer would be necessary for the lender to then provide adequate information. Instead, the CJEU kept these issues analytically separated on the basis of the diverse purposes of those obligations.37 The only nebulous limit posed by EU

33 

For a critique of the information approach, see I Ramsay (2005) 59; TA Paredes (2003). course the Directive addresses Member States rather than individuals; this simplification has been used, however, to highlight the substantive legal regime designed by the Directive and that ­Member States might implement without modifications. 35  Case C-449/13 CA Consumer Finance SA v Ingrid Bakkaus and others EU:C:2014:2464, 36. 36  Ibid, 37. 37  Ibid, 45. 34  Of

124  Access to Credit

case-law is that ‘mere unsupported declarations made by the consumer may not, in themselves, be sufficient if they are not accompanied by supporting evidence’.38 The Directive’s sting appears limited by the lack of clear remedies in case of non-assessment, and a lack of criteria for determining the adequacy of the assessment. This is not to say that the Directive rules out any civil remedy for the lack of those assessments in the European legal order; rather, it leaves Member States free to determine these remedies in their domestic legislation. Oddly enough, the Directive that was meant to introduce full harmonisation in the sector refers this pivotal aspect to the Member States. Considering these general features of the current regime on consumer credit, it appears that although the new provisions allow for higher transparency and comparability, they are in no way a guarantee of the ‘affordability’ of the credit—save in the long run as a possible effect of enhanced competition between credit suppliers. The mechanism of consumer protection is still centred on an information paradigm. While consumers might likely benefit from more transparent information, it is disputable whether these rules alone are able to produce social inclusion, all the more considering the well-known behaviouralist critiques of the information paradigm. Commenting on the evolution of the 2008 Directive and its differences from the initial proposals, advocates of responsible lending expressed a strongly negative view, lamenting that the amendments ‘deleted all socially significant precautions included in the 2002 draft, such as the purpose to prevent overindebtedness and improve consumer protection’.39

IV.  Access to Information The clearest effect of the Consumer Credit Directive in regard to responsible lending is to ensure a right to access to the relevant databases in other Member States to assess the creditworthiness of the consumer. The Directive therefore expands the information available to lenders, giving them access to information gathered in other databases with a view of allowing them to take a more informed decision, yet without requiring them to do so. European legislation thereby recognises— without, however, regulating it—the important role played by the credit reference agencies, which have the function of collecting information as to the credit history of borrowers, offering this ‘knowledge’ to lenders, who are not obliged to make use of it. The success of credit reference agencies is explained by their positive economic impact on the lender rather than in their potentially prudence-enhancing function. It is well established that as a business practice lenders tend to group different borrowers with similar characteristics into specific risk classes to which a

38  39 

Ibid, 36. U Reifner (2009) 114.

Access to Information  125

single rate is applied, rather than negotiating contract terms with customers individually, something which in a market characterised by asymmetric information can easily lead to credit rationing.40 Nowadays, automated credit bureaus have contributed significantly to reduce those information asymmetries, thus reducing the possibility of credit rationing and adverse selection by creating more accurate risk classes.41 The approach taken in the Consumer Credit Directive, and subsequent Mortgage Credit Directive, would later be complemented by the plans ­outlined in the 2017 Consumer Financial Services Action Plan. The plan recognises that, despite having granted Europe-wide access to information, this is still not working to its full potential because of differences in the way in which credit agencies work in each country: [I]n some Member States, credit registers only report on missed payments (i.e. negative reporting); in others, they also report on the regularity of payments (i.e. positive reporting). Moreover, credit data are usually shared only reciprocally. As a result, credit registers are not interoperable, the relevance of the available data for creditworthiness assessments is unclear, and information is not widely used across borders.42

The Commission envisaged actions to overcome those problems.43 While European plans tend to extend access to credit registers, at the level of the Member States, a discussion is ongoing as to the role of these databases in financial exclusion and, more generally, as to their possible conflict with ­several wellestablished principles of contract law as well as data protection.44 The information gathered by various credit bureaus is employed to generate a score to assess the creditworthiness of citizens, which has a considerable impact on the ability of the citizen to get credit and on certain conditions. Lending to individuals with a negative credit history is riskier for lenders which, in turn, limits the credit offered to those subjects or to ask for guarantees. Usually, therefore, a lower score is associated with higher interest rates, which, as often feared in particular by consumer organisations and academics, can bring consumers into a vicious circle, as lower scores lead to worse credit conditions which in turn lead to higher risks.45 In light of this, though scoring is not a main cause, it can be considered at least as contributing to a perverse dynamic.46 This is a well-known scenario in the US, where credit agencies are even considered to be indirectly responsible for the development of predatory lending practices, as they exclude a considerable portion of citizens from the mainstream credit market, leaving them no other choice but to resort to different segments of the subprime markets. Not even the role of these agencies, whose

40 

DM Jaffee and F Modigliani (1969). TA Durkin and G Elliehausen (2015) 320. Commission, Consumer Financial Services Action Plan: Better Products, More Choice, COM(2017) 139 final, 3.2. 43 Ibid. 44  For a critical perspective on the role of credit reference agencies, see F Ferretti (2010). 45  R Metz (2012). 46 Ibid. 41 

42  European

126  Access to Credit

function appears to extend only to collecting and providing information, seems thus to be neutral. The inherently non-neutral role of credit reference agencies appears all the more clear taking into account the fact that in countries such as Germany, different credit reference agencies adopt diverse, and not entirely transparent, criteria to elaborate their profiles. The concern has often been expressed that the factors on which those scores are obtained are n ­ on-objective, irrelevant or even discriminatory.47 Considering these important aspects related to credit reference agencies, the approach of the Consumer Credit Directive appears rather minimalistic, as it is limited to providing Europe-wide access to those databases. In contrast, at the national level, law has struggled to regulate the phenomenon. Diverse regimes of data protection in this sector have been implemented in various countries,48 and in some Member States specific legislation has been enacted with the aim of making score calculation more transparent and even explicitly prohibiting that certain personal information should be taken into account for the purposes of determining the creditworthiness of citizens.49 In other instances, when heteronomous interventions by the legislator have not taken place, diverse forms of self-regulation or even co-regulation have emerged, while the most important credit reference agencies have predetermined out-of-court dispute settlement mechanisms: the biggest German credit reference agency, Schufa, for instance, has established an independent ombudsman (generally, an academic lawyer) with the task of resolving disputes between the consumer and the credit reference agency. The Ombudsman issues decisions which are non-binding for the consumer but binding for the credit reference agency in disputes with limited economic value. The most frequent request to the Ombudsman concerns deleting negative entries in the registry.50 An even more structured procedure is established by the Dutch credit reference agency Bureau Krediet Registratie (BKR), which has an independent commission formed by at least three members nominated by the President of the Court of Amsterdam on suggestion of the supervisory board of the credit reference agency and which deal with issues of privacy and data protection. This rather formal procedure is concluded with a decision binding for both the consumer and the BKR.51 Following the launch of a consultation on retail financial services in 2015, the European Commission could note from the reactions that it received from the respondents, that ‘[w]hereas many consumer organisations wanted to strictly limit the data firms use to assess consumers’ creditworthiness, firms thought it

47 

D Korczak (2005). See N Jentzsch (2007). 49  R Metz (2012). 50  Schufa Ombudsmann, Tätigkeitsbericht 2013, May 2014, 24. The report of the activities of the ombudsman shows that in 2013 there have been 507 complaints, of them 302 were considered acceptable, increasing in comparison to the earlier years. 51  Reglement Gechillencommissie BKR, Oktober 2013. 48 

Post-Crisis Responses and the Mortgage Credit Directive 127

was critical for them to have access to a wide range of personal data as well as up-to-date credit registers in each Member State’.52 At the same time, ‘[c]onsumer associations expressed concern with the use of big data, also because it might lead to the financial exclusion of certain consumers’.53 The conflicting interests of consumers and financial services providers thus continue to exist.

V.  Post-Crisis Responses and the Mortgage Credit Directive Irresponsible lending practices as determined by the considerations explained in the previous sections have been revealed to be hazardous not only for the ­borrowers but even for the financial system more generally. As has been suggested, ‘[t]he US experience should serve as a warning … about the danger of using securitization conduits to originate low quality loans, and then passing those loans on to unsuspecting investors’.54 In its Europe 2020 agenda, the European Commission seemed to have learnt that lesson, recognising that ‘[t]he availability of easy credit, short-termism and excessive risk-taking in financial markets around the world fuelled speculative behaviour, giving rise to bubble-driven growth and important imbalances. Europe is engaged in finding global solutions to bring about an efficient and sustainable financial system’.55 A broader post-crisis attempt to redefine the regulatory architecture on financial markets at the EU level has tried to fix some of the faults of the originate-to-distribute model by means of amendments to the Capital Requirements Directives which have introduced stricter due diligence and transparency obligations imposed on the originators of securitisation operations.56 The design of European contract law is in need of amendments, however, as the global financial crisis has revealed some fundamental flaws in financial consumer protection frameworks.57 In this deeply changed economic context, it is questionable whether the policy considerations underlying the 2008 Consumer Credit Directive, elaborated in a still optimistic period characterised by a continuous growth of the consumer credit market, is still in line with the new regulatory needs.58 For these reasons, the idea of responsible lending has recently gained new

52  European Commission, Summary of contributions to the Green Paper on retail financial services: Better products, more choice and greater opportunities for consumers and businesses COM(2015) 630 final, 10. 53 Ibid. 54  CL Peterson (2009) 53. 55  COM(2010) 2020 final, p 8. 56  R McCormick (2010) 147. 57  M Melecky and S Rutledge (2011) 19. 58  G Carriero (2009).

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support, as making lending practices more responsible is intended as a potentially useful principle to pursue the overall goal of financial stability, rather than simply being a matter of consumer protection. The new course was already anticipated in the first months of the financial crisis by the European Commission which, outlining its strategy for a quick recovery of the European economy, in 2009 envisaged ways to protect and enhance the confidence of investors, consumers and SMEs, introducing rules on bank depositor, investor and insurance policy holder protection, as well as on responsible lending and borrowing.59 More accurate rules on responsible lending seem to mimic the know-your-product and knowyour-customer rules which are typical of the regulation of investment products, and it can be incidentally noticed how this convergence of the regulation of those ­sectors towards analogous regulatory strategies seems to confirm the observation made in economics that processes such as securitisation are ‘blurring the boundaries between loans and bonds’.60 In the 2012 European Consumer Agenda, the Commission promised it would evaluate the implementation of the Consumer Credit Directive to verify whether issues ‘such as smaller loans, deferred debit or responsible lending, which are mainly left for Member States’ discretion, need to be revisited’.61 At the global level, the necessity to protect consumers by promoting responsible practices and ensuring that the financial services providers act in the interest of the investor were recognised at point 6 of the G20 High-Level Principles on Financial Consumer Protection of 2011. As the introduction explains, ‘consumer confidence and trust in a well-functioning market for financial services promotes financial stability, growth, efficiency and innovation over the long term’.62 For this reason ‘financial consumer protection should be reinforced and integrated with other financial inclusion and financial education policies. This contributes to strengthening financial stability’.63 Such a use of consumer protection, as well as programmes meant to promote financial literacy and risk management capacity generally,64 as instruments to promote financial stability can be striking since, as highlighted in the academic literature, this ‘departs from historical justifications of consumer protection as contesting the distribution of market power or responding to consumer vulnerability’.65 In other terms, the new approach qualifies responsible practices more as an instrument to achieve the macroeconomic goal of financial stability than to protect investors and consumers per se. What emerges is thus a qualification of consumer protection as subordinated to the goal

59 

COM(2009) 114 final, Driving European Recovery. B Casu and A Sarkisyan (2015) 355. Commission, Communication from the Commission, ‘A European Consumer Agenda—Boosting confidence and growth’, COM(2012) 225, 4.4. 62  G20 principles, 4. 63 Ibid. 64  D Bryan and M Rafferty (2011) 50. 65  T Williams (2013) 25. 60 

61 European

Post-Crisis Responses and the Mortgage Credit Directive 129

of financial stability, linking the microeconomic to the macroeconomic dimension. These principles, agreed to by the representatives of the main world economies, triggered a series of reforms inspired by the neoliberal paradigm66 aimed at strengthening responsible lending obligations in several nations. In that same year, 2011, the European Commission, translating in practice the recommendations of the G20 summit, presented a proposal for a directive on credit agreements relating to residential property,67 in which more attention was paid to the assessment of the debtor’s creditworthiness. Despite the impetus created by the global recommendations, the Commission’s proposal did not come out of the blue, as a new directive had been under consideration for several years. The Consumer Credit Directive explicitly excluded mortgage credit agreements from its scope of application. The area of residential property indeed appeared to be too specific to be covered by the rules of the Consumer Credit Directive, and was considered in need of a more pointed intervention, all the more in a period in which the Schrottimmobilien scandal which emerged in that sector in Germany had generated a certain legal and economic turmoil in that country. Such neutrality was supported by the CJEU, which kept mortgage law and the Consumer Credit Directive strongly separated by means of a particularly narrow interpretation of the disputed concept of ‘linked contracts’, which generated controversy at the national level first, and then later at the ­European level.68 The debate on mortgage credit, as well as the intention to keep it separate from the provisions of the Consumer Credit Directive, is well exemplified by a Green Paper produced by the European Commission in 2005. As the Green Paper clearly acknowledged, the economic scenario at that time was marked by a growth of mortgage lending ‘fostered both by macro-economic factors (such as the fall in interest rates and the strong growth of house prices in some countries) and structural developments (such as the increasing liberalisation and integration of EU financial markets)’.69 In this scenario of a booming economy, the focus of the Commission was again mostly concerned with the internal market dimension of financial inclusion considered as an equivalent of social inclusion. The main concern appeared to be the usual legal diversity in Europe: ‘what is apparent is that the EU mortgage credit markets, despite sharing some common trends, remain very diverse’.70 The approach envisaged by the Green Paper was thus again a minimalistic one, based on the promotion of the internal market and the idea that consumers can be protected by means of more accurate information, despite the fact that the Commission is ‘aware of the impact of this market on the well-being

66 

T Wilson (2013). COM(2011) 142 final. 68 Case C-481/99 Georg Heininger u. Helga Heininger v Bayerische Hypo- und Vereinsbank EU:C:2001:684. On the ‘Heininger saga’, see N Reich (2005). 69  Green Paper Mortgage Credit in the EU, COM(2005) 327 final, 5. 70  Ibid, 5. 67 

130  Access to Credit

of EU citizens’ and that ‘there is a huge social and human dimension attached to housing and credit, including aspects such as over-indebtedness’, referring to its policy on poverty and social exclusion.71 The market inclusion approach, very similar to the one in the 2008 Consumer Credit Directive, emerges also from the treatment of creditworthiness assessment, as to which the Commission ‘considers that the priority could be to ensure cross-border access to databases on a nondiscriminatory basis’.72 The preferred regulatory technique adopted so far was one based on self-regulation and soft law rather than stronger legislative approaches. The result of this was the Voluntary Code of Conduct on Pre-contractual Information for Home Loans, which mostly prescribed that general and personalised information should be provided by the lender to the consumer. In this case too, however, the self-regulatory approach was not a success,73 particularly because of the vagueness of various provisions. Following the well-trodden path of initially relying on soft law instruments and then, after having recognised their ineffectiveness, opting for a stronger regulatory approach, a new Directive on mortgage credit was finally adopted after years of discussions, under the impetus of the social distress caused by the crisis, and revisiting the approach of the earlier drafts of the Consumer Credit Directive. The way in which the proposal for the Directive was presented in the accompanying staff document to the new European Consumer Agenda is paradigmatic in that it states: ‘[t]he proposal aims to prevent the sort of irresponsible lending and b ­ orrowing practices that have fuelled the financial crisis and had a negative impact on consumers, lenders, the financial system and the economy at large. The proposal will also take the first steps towards creating a single market for mortgage credit by removing or reducing obstacles’.74 This presents the prevention of irresponsible lending as the primary goal of the proposal, while the internal-market objective of creating a single mortgage market appears ancillary. Eventually, the Mortgage Credit Directive75 was adopted in 2014, permeated by a stronger regulatory attitude than the previously debated rules. The Directive is clearly of its moment. The explanatory memorandum of the proposal states that ‘[t]he present proposal has to be seen in the context of efforts to create an internal market for mortgage credit and against the background of the financial crisis’,76

71 

Ibid, 3–4. Ibid, 11. R Volante (2007) 159. 74 European Commission, Commission Staff Working Document, Report on Consumer Policy (July 2010—December 2011) Accompanying the document Communication from the Commission to the ­European Parliament, the Council, the Economic and Social Committee and the Committee of the Regions A European Consumer Agenda—Boosting confidence and growth (COM(2012) 225 final), B ­ russels 22 May 2012, SWD(2012) 132, p 19. 75  Directive 2014/17/EU of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010. 76  COM(2011) 142 final. 72  73 

Post-Crisis Responses and the Mortgage Credit Directive 131

and recognises that irresponsible lending practices have played a major role in the development and spread of the global crisis. It thus exemplifies a development in the conception of credit at the EU level, which besides the function of ‘consumer credit as lubricant’ now increasingly considers also its possible feature of ‘potentially dangerous product’, trying to achieve regulation which takes into account both dimensions in order to enhance competition and product safety.77 Going much further than the approach envisaged by the Green Paper on Mortgage Credit on creditworthiness, which like the 2008 Consumer Credit Directive is mostly concerned with ensuring access to databases on a non-discriminatory basis, the new Directive contains a new chapter 5 on ‘Creditworthiness assessment’, clearly more detailed than the analogous provision contained in the Consumer Credit Directive. The new rules contained in Article 18 prescribe that ‘before concluding a credit agreement, the creditor makes a thorough assessment of the consumer’s creditworthiness. That assessment shall take appropriate account of factors relevant to verifying the prospect of the consumer to meet his obligations under the credit agreement.’ Most importantly, the Directive specifies that ‘the creditor only makes the credit available to the consumer where the result of the creditworthiness assessment indicates that the obligations resulting from the credit agreement are likely to be met in the manner required under that agreement’. That was an aspect that, to the contrary, had not been explicitly considered in the final version of the Consumer Credit Directive. Some of these rules represent a direct response to the problems which became apparent in the European mortgage markets during the financial crisis, such as Article 18(3) which prescribes that ‘[t]he assessment of creditworthiness shall not rely predominantly on the value of the residential immovable property exceeding the amount of the credit or the assumption that the residential immovable property will increase in value unless the purpose of the credit agreement is to construct or renovate the residential immovable property’. The provisions of the Directive are further specified by the guidelines issued by the European Banking Authority78—which in reality appear also deficient regarding what should guide the creditworthiness assessment.79 The Consumer Credit Directive remained purposely silent on this pivotal aspect,80 implicitly leaving Member States the freedom to determine the civil consequences of a lack of assessment in spite of its, self-declared but practically partial,81 maximum harmonisation nature.82 This paved the way for divergent approaches in Europe,83 which 77 

I Ramsay (2016) 162. Banking Authority, Final Report. Guidelines on Creditworthiness Assessment, EBA/ GL/2015/11, 1 June 2015. 79  F Ferretti and C Livada (2016) 19. 80  S Grundmann and C Hofmann (2010) 481. 81 See Case C-602/10 SC Volksbank România SA v Autoritatea Naţională pentru Protecţia Consumatorilor—Comisariatul Judeţean pentru Protecţia Consumatorilor Călăraşi (CJPC) EU:C:2012:443. 82  O Cherednychenko (2011). 83  For example, in Greece the consumer would be relieved from the obligation to pay the total cost of the credit. 78 European

132  Access to Credit

have recently been increasingly conditioned by the growing case-law of the CJEU on the effectiveness and dissuasiveness of those remedies.84 The Mortgage Credit Directive seemingly goes a step further, sanctioning that where there is a negative creditworthiness assessment, credit should simply not be granted for a loan. Some commentators have thus noted how in the ‘post-crisis era’ freedom of contract is being increasingly constrained by a hard paternalistic attitude of legislators and regulators, which rather than simply requiring that the consumer be informed as to the risks of a certain economic operation, instead prohibits operations when the risk is too high.85 Not surprisingly, similar to criticisms of previous versions of the Consumer Credit Directive in which responsible lending had a more prominent role, this stronger regulatory shift has been criticised from different angles. On the one side, the traditional party-autonomy-based concern finds the provision is too intrusive, since if both parties, conscious of the risks of the operation, agree to conclude the contract on those conditions, they should be left free to do so, as party autonomy includes also a freedom to take risks, in particular with regard to the purchase of financial investment products.86 This objection does not convince, in light of the new approach developed at the global level which tends to qualify such contractual risk as a systemic risk. This consideration supersedes an objection based on the freedom of the contract parties to take risks, as these are likely to have thirdparty effects. Overall, the argument rooted in the principle of private autonomy, possibly even strengthened by references to the dubious constitutional nature of freedom of contract,87 remains particularly fragile in a purely legal perspective, and tends to qualify the question of the limits of freedom of contract in a balancing exercise between opposing fundamental principles. Certainly, the principle of private autonomy appears per se a useful argument to guarantee the ‘purity’ of the system of private law from possible intrusions of economic considerations; ­however, the reach of autonomy is debatable where it is affected by a strong imbalance in power, entailing risks for third parties. While information duties may address the imbalance between the parties while remaining within the framework of party autonomy, the problem of externalities and effects at the macroeconomic level remains more complex. Even avoiding allegedly paternalistic consumer protection approaches, this alone would be in principle a sufficient ground for limitations on party autonomy.88 Certainly, this consideration should not be taken as a sufficient justification for any limitation to the freedom ‘to take risks’, since it remains to be seen whether the particular limitations on party autonomy are designed well enough to achieve their objectives.

84 

Case C-565/12 LCL Le Crédit Lyonnais SA v Fesih Kalhan EU:C:2014:190, para 55. O Cherednychenko (2014) ‘Public Supervision over Private Relationships’. 86  H Barbier (2011). 87  Critical towards the tendency to constitutionalise freedom of contract, see S Weatherill (2014). 88  D Immergluck (2009) 15. 85 

The Public-Private Problem 133

On the other hand, it is exactly this view of systemic risk which has determined different and more serious criticisms, concerned with the fact that the safeguard of the stability of financial institutions—which is emerging as one of the rationales not only for administrative but also for the new private law89—could instead be better ensured by banking supervision.90 This argument interestingly re-proposes the division of labour between public and private law which has already been mentioned earlier in this book with regard to matters of justice, transposed this time in the realm of economic efficiency. Thus, the same objection that was presented in that context can be employed in this: even if it might be true that private law is not sufficiently well placed to promote financial stability, it can at least be expected not to promote instability and therefore not to tolerate practices which can be considered irresponsible. This point leads us to two further considerations: first, it remains to be seen whether and to what extent the new rules are fully part of private rather than ­public law; secondly, to what extent can private law contribute to the goal of financial stability?

VI.  The Public-Private Problem The interaction between the public and the private dimension of this problem is an intricate issue. To be sure, the question as to the distinction between public and private law might appear to be an academic one, and it is definitely not of ­particular interest for the European Union, but it still has practical relevance. In more concrete terms, should a breach of the rules imposed by the credit directives be backed by administrative or civil sanctions? The Mortgage Credit Directive leaves Member States free to shape the ‘administrative measures’ to be taken in case of breach of the mandatory rules, quite unexpectedly favouring a regime of administrative supervision instead of one of civil liability,91 which can testify to the tendency to include contract-related rules in supervisory regimes.92 This means, however, that in practice remedies for non-responsible lending, despite a tough formulation of the principle, may in fact be less effective and less protective for the consumer than those adopted implementing the less tough provisions of the C ­ onsumer Credit Directive. The supervisory approach could have an important function for market surveillance but be of less immediate importance in the remedial perspective for private individuals. Such an approach is stated clearly in Recital 83 of the Directive, which reads that ‘Member States may decide to

89 

G Comparato (2015). C Hofmann (2013) 452. Ibid, 453. 92  O Cherednychenko (2014) ‘Public Supervision over Private Relationships’, 45. 90  91 

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t­ranspose certain aspects covered by this Directive in national law by prudential law, for example the creditworthiness assessment of the consumer, while others are transposed by civil or criminal law, for example the obligations relating to responsible borrowers’. Ironically, if the initial concern of the 2005 Green Paper on Mortgage Credit was legal fragmentation, the regulation of responsible lending in Europe still appears fragmented, as different national regulators remain ‘free to adjust their responsible lending policies to the sources of risk that they seek to control’.93 Considering the national implementations of the Directive, it appears that ­legislators have often opted for a stronger private law approach in which the duty to check the credit worthiness is made part of contract law rules and, in consequence, its breach can lead to contract law sanctions and remedies.94 The opportunity also to draw civil law remedies for the protection of the contract parties has already been taken in national legal scholarship interpreting the Consumer Credit Directive, especially in light of the consideration that the rules also perform a function of individual protection, which for systematic reasons justifies their (partial) inclusions on civil codifications on the one hand, and remedies drawn from the general law of obligations on the other hand.95 Such a solution would also then be compelled by the requirements of effectiveness of EU law, since a purely supervisory model tends to limit the possibilities for a private individuals to obtain justice in single cases, which in contrast a civil procedure would allow.96 This solution appears all the more likely even in light of European law itself and its most recent interpretation in the case-law of the CJEU. This is true if one considers what the CJEU has already subtly accepted in the case of the duties stemming from the Markets in Financial Instruments Directive (MiFID),97 which exclusively m ­ entions ‘administrative sanctions’, while judicial remedies could also be created based on general contract law. In Genil v Bankinter, dealing with the civil consequences of the violation on the side of an investment firm of the obligation to ‘obtain the necessary information regarding the client’s or potential client’s knowledge and experience in the investment field relevant to the specific type

93 

V Mak (2015) 428. instance, see in Germany the new paragraph 505b(2) of the BGB: ‘(2) Bei ImmobiliarVerbraucherdarlehensverträgen hat der Darlehensgeber die Kreditwürdigkeit des Darlehensnehmers auf der Grundlage notwendiger, ausreichender und angemessener Informationen zu ­Einkommen, Ausgaben sowie anderen finanziellen und wirtschaftlichen Umständen des Darlehensnehmers eingehend zu prüfen. Dabei hat der Darlehensgeber die Faktoren angemessen zu berücksichtigen, die für die Einschätzung relevant sind, ob der Darlehensnehmer seinen Verpflichtungen aus dem Darlehensvertrag voraussichtlich nachkommen kann. Die Kreditwürdigkeitsprüfung darf nicht hauptsächlich darauf gestützt werden, dass in den Fällen des § 491 Absatz 3 Satz 1 Nummer 1 der Wert des Grundstücks oder in den Fällen des § 491 Absatz 3 Satz 1 Nummer 2 der Wert des Grundstücks, Gebäudes oder grundstücksgleichen Rechts voraussichtlich zunimmt oder den ­Darlehensbetrag übersteigt.’ 95  E Heinrich (2014) 51 ff. 96  E Heinrich (2014) 152. 97  Case C‑604/11 Genil 48 SL and Comercial Hostelera de Grandes Vinos SL v Bankinter SA and Banco Bilbao Vizcaya Argentaria SA EU:C:2013:344, para 57. With note by S Grundmann (2013). 94 For

The Public-Private Problem 135

of product or service, his financial situation and his investment objectives’98— a ­provision which is evidently analogous to the rules on the creditworthiness assessment—the Court stated that ‘it is for the internal legal order of each Member State to determine the contractual consequences where an investment firm offering an investment service fails to comply with the assessment requirements laid down in Article 19(4) and (5) of Directive 2004/39, subject to observance of the principles of equivalence and effectiveness’.99 This quote lends itself to different interpretations, but seems to indicate that Member States not only can establish civil ­remedies in case of violation of that obligation, but they are even expected to do so, even if it is up to them to decide how. Obviously, it is their own competence to decide whether to design new specific remedies for those situations or simply to apply general contract law doctrines, as long as the practical result of the remedy, regardless of how this is legislatively or dogmatically construed, complies with the requirements in terms of effectiveness of the sanction imposed by EU law. The compatibility of civil remedies for violations of obligations of this kind was confirmed in an even more recent judgment of the Court dealing with nonassessment of credit worthiness before giving a loan to a consumer. In Crédit ­Lyonnais the Court found that a national system of penalties which states that the irresponsible lender is not entitled to receive the contractual interest but might still receive the possibly even more advantageous interest at the statutory rate, would be, pursuant to the requirements of that Directive, ‘effective, proportionate and dissuasive’100 only if ‘the amounts which the creditor is in fact likely to receive following the application of the penalty of forfeiture of entitlement to contractual interest are not significantly lower than those which it could have received had it complied with its obligation to assess the borrower’s creditworthiness’.101 In this way, not only is the possibility of deriving civil consequences from violations of the responsible lending obligation confirmed, but it is made subjected to the principle of effectiveness. That principle was already explicitly considered by the Directive and, therefore, is already part of EU secondary legislation, but at the same time it is gaining increasing significance in European contract law as a ‘general principle’ which can possibly lead to the upgrading of national law when this appears to be not sufficiently protective for consumers, as has forcefully been shown by Reich.102 In other terms, the use of the principle of effectiveness could grant the CJEU a quite wide (and even undetermined) margin to indirectly shape civil remedies of national contract law, which in turn can be of particular institutional relevance, as it would represent a way through which the CJEU could gain to a certain extent the role of judge of last instance—a function that was not ­originally assumed by the Court, but that a growing number of judgments in ­certain countries now 98 

MiFID, Art 19(4). C‑604/11 Genil 48 SL and Comercial Hostelera de Grandes Vinos SL v Bankinter SA and Banco Bilbao Vizcaya Argentaria SA EU:C:2013:344, para 58. 100  Consumer Credit Directive, Art 23. 101  Case C-565/12 LCL Le Crédit Lyonnais SA v Fesih Kalhan EU:C:2014:190, para 55. 102  See N Reich (2014) 97. 99  Case

136  Access to Credit

seem to attribute the Court.103 At any rate, the practical impact of the principle of effectiveness in the post financial crisis litigation is still difficult to foresee and fully appreciate: in the case-law of the CJEU on consumer protection in mortgage enforcement procedures, started after the celebrated Aziz104 and Sánchez ­Morcillo105 cases, the use of that principle has been not always consistent, even leading one commentator to find a contrast between ‘­traditional’ and a ‘socialoriented’ interpretations of effectiveness, which might in the end undermine the effective legal protection of consumers in those procedures.106

VII.  Financial Stability and Exclusion The reasons behind the seemingly stronger regulatory approach of the Mortgage Credit Directive appear to be various concerns including, most prominently, macroeconomic ones. While both consumer credit directives predominantly pursued the goal of creating an internal credit market, the new instrument attempts to ensure the stability of that market and its resistance to economic shocks. Summarised by the Commission, the objectives of the Mortgage Credit Directive are ‘to create an efficient and competitive single market for consumers, creditors and credit intermediaries with a high level of consumer protection and to promote financial stability by ensuring that mortgage credit markets operate in a responsible manner’.107 Financial stability has emerged as a new overarching principle that EU instruments, including those having a most direct impact on contract law relations, have to take at least into consideration. This growing interest of the European Union in instruments which ensure financial stability by banning or limiting those economic transactions which might have detrimental macroeconomic effects is evidenced particularly clearly by the new MiFIR regulation.108 The regulation entrusts EU and National Supervisory Authorities with the power to temporarily prohibit or restrict the selling of financial instruments when there is a significant investor protection concern or a threat to the orderly functioning and integrity of financial markets or the stability of the financial system. The provisions of the Mortgage Credit Directive, enacted in that same year, appear as at least partially inspired by analogous concerns, although they notably shift the financial

103 

H-W Micklitz and N Reich (2014). C-415/11 Mohamed Aziz v Caixa d’Estalvis de Catalunya, Tarragona i Manresa (­Catalunyacaixa) EU:C:2013:164, para 14. 105  Case C-169/14 Juan Carlos Sánchez Morcillo and María del Carmen Abril García v Banco Bilbao Vizcaya Argentaria SA EU:C:2014:2099. 106  F Della Negra (2015). 107 European Commission, Memo, ‘Creating a Fair Single Market for Mortgage Credit—FAQ’, ­Brussels, 10 December 2013. 108  Regulation (EU) 600/2014 of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012. 104 Case

Financial Stability and Exclusion 137

stability concern from public authorities, which have to intervene to temporarily restrict the selling of risky products, to private parties, by placing restrictions on their autonomy to enter into financially risky contracts. This does not imply that the financial stability goal has replaced internalmarket rationality. As both the Consumer Credit Directive and the Mortgage Credit Directive are in force and regulate different yet interlinked areas, the coexistence of their different approaches gives rise on the one hand, to distinctions in legal treatment which can appear paradoxical or unjustified,109 but that, on the other hand, can be acceptable in light of the further macroeconomic negative consequences linked to mortgages and the foreclosures which can follow consumer defaults. Hence, a more stringent credit worthiness assessment appears justified when it comes to mortgage loans as they might lead to more detrimental consequences. As Recital 27 of the Mortgage Credit Directive claims, Given the significant consequences for creditors, consumers and potentially financial stability of foreclosure, it is appropriate to encourage creditors to deal proactively with emerging credit risk at an early stage and that the necessary measures are in place to ensure that creditors exercise reasonable forbearance and make reasonable attempts to resolve the situation through other means before foreclosure proceedings are initiated.110

Protection against foreclosure is one of the most evident expressions of social considerations in private law, which has over time improved the position of the defaulting borrower, towards whom mortgage law traditionally took a hash stance.111 Nonetheless, as responsible lending is becoming qualified as an instrument to achieve financial stability rather than protecting consumers as such, there emerges the risk of a new bifurcation between the purposes of financial and social inclusion. This becomes evident if one considers the economic reality in which these rules are embedded. Previously, we have seen that the easier availability of credit was coherent with a macroeconomic scenario of lowered interest rates which favoured indebtedness, while stronger rules on responsible lending have conversely started being advocated in a period of financial instability and credit crunch. In its continuous attempt to regulate the market, the law often ends up mirroring it, as it is known that lenders tend to relax credit standards in ‘good’ times and over-tighten them in ‘bad’ ones.112 In a period in which banks are in need of recapitalisation, to become more resistant after the shock caused by the crisis and to comply with the new more stringent capital requirements set

109 

I Ramsay (2016) 171. Mortgage Credit Directive, recital 27. 111 The most notorious example of that approach was offered by the English case Four-Maids Ltd v Dudley Marshall Properties [1957] Ch 317: ‘I said there, and I repeat now, that the right of the ­mortgagee to possession in the absence of some contract has nothing to do with default on the part of the mortgagor. The mortgagee may go into possession before the ink is dry on the mortgage unless there is something in the contract, express or by implication, whereby he has contracted himself out of that right’ (Harman J). 112  CN Rouse, C Bell and A Graham (2011) 21. 110 

138  Access to Credit

by ­regulation, is it possible that responsible lending becomes a new instrument through which a credit crunch is justified and fostered? Monetary policies are best placed to avoid the risk of credit crunch, and avoid a situation where even potentially creditworthy borrowers are excluded from the credit market. While that appeared to be one of the reasons why the liquidity provided for by the European Central Bank (ECB) failed to reach households and businesses in the first place, the ECB later established new criteria and conditionality requirements with a view to counteracting the credit crunch. The efficiency of these measures was immediately questioned by commentators, pointing out that ‘[t]he sanctions mechanism for banks that don’t provide credit to the economy on the potential 1000 bn Euro with a very low cost (0.25%) appears very feeble. Thus we don’t expect a big improvement on credit crunch.’113 By the same token, even if quantitative easing programmes launched in 2015 also transfer more liquidity to the economy, and leaving aside the famous oppositions and legal disputes which originated in Germany,114 there are also doubts whether that liquidity might immediately reach the real economy where it is more needed, rather than taking other directions following the freedom of circulation of capital and thus sustaining the financial economy. The discussions as to the possibility of an extremely non-conventional monetary policy tool as ‘helicopter money’, meant to bypass the filter of commercial banks and directly link central banks and customers, is clear evidence of that difficulty. In other terms, while monetary policies are of pivotal importance in setting the conditions which determine the development of the credit market, the activity of central banks alone is insufficient to counteract the credit crunch without considering the actual behaviour of the microeconomic actors which are also involved in the money supply system. Such a scenario of renewed exclusion determined by the credit crunch can be prompted or counteracted by different understandings of responsible lending. So far, references to responsible lending in European legislation point to a quite minimalistic conception, characterised by a certain emphasis on borrowing rather than lending. At the same time, these obligations have been criticised for their rigidity, discouraging more fine-tuned individual assessments of creditworthiness which would allow for a more inclusive and well-informed approach to responsible lending.115

VIII.  Back to Trust Despite the post-crisis increased reliance on the principle of responsible lending as a device to strike a balance between access to credit and prevention of systemic 113 

D Limonta, M Marcellino, F Paneli, A Stanzini, ME Traverso and A Martino (2014) 22. T Tridimas and N Xanthoulis (2016). 115  T Wilson (2013) 131. 114 

Back to Trust 139

risks, European contract law still employs a somewhat one-sided approach to that principle, turning it de facto into a responsible borrowing obligation. The ­academic literature has highlighted that when responsible lending obligations are too strongly shaped as de facto responsible borrowing obligations, and where an accurate supervisory infrastructure is lacking, this kind of obligation will lead to restrictive lending practices increasing financial exclusion.116 Consistent with a certain moral narrative particularly widespread in the European context according to which debt is fundamentally the debtor’s fault, both the Consumer Credit Directive and the Mortgage Credit Directive, though in different terms, take the approach that it is mostly the borrower’s responsibility to provide the lender with the most accurate information possible, creating an unbalanced treatment between lender and borrower which paradoxically disfavours the consumer. It is well-known that the Consumer Credit Directive does not create any responsible lending obligation on the side of the lender, which does not appear to even have any explicit good faith obligation towards its counterpart.117 On the opposite side, Recital 26 of the Directive reminds us that consumers have ‘to act with prudence and to respect their contractual obligations’. The reference to the need ‘to act with prudence’ hints to a ‘responsible borrowing’ obligation for the consumers, while the obligation ‘to respect their contractual obligations’ is clearly redundant and purely pedantic, but assumes a particular meaning in a context in which mechanisms of debt discharge were being discussed and introduced in several countries in order to alleviate the condition of over-indebted borrowers. This view emphasises the role and responsibility of private households in the credit market, somewhat neglecting the supply side.118 The Mortgage Credit Directive contains provisions which give Member States the opportunity to confer the lender a right to terminate the contract if the lender discovers that the borrower has provided inexact information, and even hints to possible ‘sanctions where consumers knowingly provide incomplete or incorrect information in order to obtain a positive creditworthiness assessment, in particular where the complete and correct information would have resulted in a negative creditworthiness ­assessment’.119 On the other side, the civil remedies that the borrower can rely on in case of irresponsible behaviour on the side of the lender are much less clear. This curiously appears to be a twisting of the original consumer-protection philosophy, which regarded the consumer as the weaker party suffering from a fundamental lack of information, while the new developments seem to consider that it is, rather, the lender who suffers from such an information asymmetry and therefore ­establish mechanisms to make up for such a gap. This tough approach appears to be the result of a combination of a preconception as to the moral

116 

Ibid, 126. N Reich (2014) 202. S Cosma (2016) 322. 119  Mortgage Credit Directive, recital 58. 117  118 

140  Access to Credit

f­eatures of indebtedness—which always existed in Europe but was reinvigorated after the period of the democratisation of credit had played it down to the benefit of a new conception of debt as a productive factor—and a new emphasis on stronger measures, with the aim of avoiding macroeconomic negative effects. The information asymmetry affecting the provider of the financial service is now recognised as a considerable problem for the system so that the Mortgage Credit Directive, following the path most notably taken by the MiFID, embarks upon a new knowledge-based approach, requiring lenders to be knowledgeable and competent. Recital 32 makes it clear that it is appropriate to ensure that the relevant staff of creditors, credit intermediaries and appointed representatives possess an adequate level of knowledge and competence in order to achieve a high level of professionalism. This Directive should, therefore, require relevant knowledge and competence to be proven at the level of the company, based on the minimum knowledge and competence requirements set out in this Directive.

While it is self-evident that having accurate information as to the financial ability of the borrower is necessary to lend responsibly, it is also worth noting that such an approach is partial as it neglects structural reasons and behavioural aspects on the side of the lender. The lender might have a strong interest in granting credit even when this is not in the best interest of the borrower for the reasons that have been explained above: practices meant to reduce the credit risk might contextually reduce the lender’s own interest in the borrower’s solvency. The disturbing question arises ‘can banks simultaneously shed credit risk while retaining the incentive to screen and monitor borrowers?’120 As has been authoritatively suggested in the US, the ‘bounded rationality’ of lenders and borrowers offer a sufficient justification of an at least ‘slightly paternalistic’ regulatory approach.121 The Mortgage Credit Directive touches upon the problem of lender’s incentives, recognising the role that factors such as remuneration policies and conflict of interests can have in the determination of irresponsible behaviours on the side of the provider of the service. The Directive contains, therefore, a specific Article 7 on ‘Conduct of business obligations when providing credit to consumers’, which is meant to limit the occurrence of conflicts of interests. Notably, the remuneration policy should ‘promote sound and effective risk management’ and ‘not encourage risk-taking that exceeds the level of tolerated risk of the creditor’122 when performing credit worthiness assessments, while the remuneration structure of those providing advisory services should not ‘prejudice their ability to act in the consumer’s best interest and in particular is not contingent on sales targets’.123 Again, the capacity of these provisions effectively to prevent irresponsible behaviours will depend on

120  A Sufi (2012) 87, with references and discussion of the literature on the problems of information and incentives in financial intermediation. 121  CR Sunstein (2006). 122  Mortgage Credit Directive, Art 7(3)b. 123  Ibid, Art 7(4).

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their implementation, which might again go in the direction of supervisory law or rather private law. Either way, by moralising the debtor and trying to ensure that the lender is knowledgeable and responsible, European contract law now appears to have reintroduced ‘interpersonal trust’ into the creditor-debtor relationship. Going beyond the initial focus on the strengthened regime of responsible lending, advocates of consumer rights in various Member States more recently have been partially critical of the rest of the Mortgage Credit Directive, lamenting that this also imposes a set of rules which are less protective than those already in place in some of the EU Member States, and fearing that its implementation might constitute an occasion for an undesirable lowering of the protection standard.124 It should be noted, however, that in contrast to the Consumer Credit Directive, the Mortgage Credit Directive does not generally pursue full harmonisation, so that more protective rules at the national level should not necessarily be amended. Commenting on the then proposal of a mortgage directive, the Economic and Social Committee was concerned that the proposal might still be not enough, c­ alling for an explicit recognition of ‘the fundamental principle of responsible lending for responsible borrowers’,125 which would imply the lender’s liability for irresponsible lending and is presented as an instrument to prevent overindebtedness. As the Committee emphatically noted, ‘[t]he root of the crisis … is over-indebtedness amongst borrowers, a phenomenon which must be prevented at all costs’.126 Since it has already been mentioned several times, the following chapter will look more closely at the phenomenon of over-indebtedness and at the way in which this is addressed in European private law.

124 

For Italy, see Altroconsumo (2016). Economic and Social Committee, Opinion on the ‘Proposal for a Directive of the European Parliament and of the Council on credit agreements relating to residential property’, 29 October 2011, para 3.3.9. 126  Ibid, 2.10. 125  European

5 Over-Indebtedness I.  How Much is too Much? Granting access to a bank account and credit can help the financial inclusion of citizens for a while, but might paradoxically lead to their exclusion on the long run. In that case, rather than being the logical other side of the coin of inclusion, exclusion rather appears as the consequence of an imperfect inclusion, possibly affecting the same subject although in different moments.1 This is a particularly concrete risk in times of crisis, when worsened macroeconomic figures can lead to, among other consequences, a decrease in the value of properties on which loans are secured and an increase of unemployment, which then might compromise the capacity of debtors to fulfil their obligations. Inclusion mainly pursued as market inclusion but lacking sufficiently protective rules to take the interests of customers into account may eventually be detrimental to the interests and the welfare of citizens as well as of the overall system in the interest of which inclusion has to operate. In its continuous expansion, the financial market requires an increase in the money supply, created in the original form of loans and, therefore, debt. Providing consumers with unrestrained credit can be particularly dangerous where the consumer is not able to repay the debt or has to rely on new credit—as a consumer loan, overdraft or running-account credit—in order to pay off previous outstanding debts. The risk in this context is of over-indebtedness, which might further entail risks of payment shortfall and foreclosure. The importance of this socioeconomic, rather than purely legal, concept is such that the focus of this chapter will be on this topic. Some preliminary conceptual clarifications are required. One should be cautious as to the difference between indebtedness—which may even include the case of being ‘very’ indebted—and over-indebtedness. Indebtedness, ie having debts, is a normal and even physiological economic situation which can neither be equated with some kind of moral deficiency nor considered economically unsound, although there is a particular negative moralistic conception of debt still

1  On different aspects of the relation between inclusion and exclusion related to over-indebtedness, see I Domurath (2017).

How Much is too Much? 143

­ idespread in Europe. The whole law of obligations presupposes the existence of w debts, without which the very relationship of debtor-creditor and financial obligations could not logically exist. Financial inclusion promotes indebtedness, as its ethos sets indebtedness free from the moral negative characterisation historically associated to it: the financialised citizen is not just a debtor but it is, rather, a kind of sovereign consistent with the idea of democratisation of finance. On the contrary, having more outstanding debts than can be serviced is an anomalous situation commonly referred to as over-indebtedness. Putting it in biological terms, while indebtedness is physiological, over-indebtedness is pathological. But just like with the distinction between physiology and pathology, a considerable problem lies in striking a line between indebtedness and over-indebtedness. Legal definitions would be helpful for that purpose, as they might clarify the precise contours of over-indebtedness. Currently, there are plenty of definitions in the literature, very few in the legislation of some European states, and not a single legal definition at the EU level.2 The lack of clear and shared understandings of the phenomenon represents mostly an operational problem in that it hinders the possibility of gaining a clear and homogeneous picture of the real number of over-indebted citizens in Europe and the possibility to design appropriate regulatory interventions. In the most general terms, over-indebtedness can be considered as ‘the result of an imbalance between the consumer’s expenditure (included the reimbursement of capital borrowed and interest) and the consumer’s income, which leads to defaulting payments. This situation may be temporary or longer term’.3 A more specific and concrete definition appears complicated and yet necessary to keep over-indebtedness distinct from indebtedness which, read in light of the definition of over-indebtedness, consists in a debtor having an amount of debt which is not disproportionate in relation to the assets of the debtor and its reimbursement capacity. Data showing an increase in indebtedness are read with concern by consumer advocates, while these are considered less worrisome by those who highlight the advantages of consumer lending. It has been noted with regard to the US economy that statistical data showing increased consumer lending should be read carefully in conjunction with other economic figures, since while it is undeniable that consumer lending has increased since the post-war period, that figure has to be combined with the correlative growth of household income and assets which took place in the same period and which, in that view, show that such debt ratios do not lead to ‘economic calamity’.4 However, increases of indebtedness

2 See D Davydoff, G Naacke, E Dessart, N Jentzsch, F Figueira, M Rothemund, W Mueller, E ­Kempson, A Atkinson and A Finney (2010), with an overview of definitions at 109–11. 3  G Betti, N Dourmashkin, MC Rossi, V Verma and Y Yin (2001) 113. 4 TA Durkin and G Elliehausen (2015) 313–14; TA Durkin, G Elliehausen, ME Staten and TJ Zywicki (2014) Chapter 4.

144  Over-Indebtedness

should not be underestimated: regardless of the most recent and growing economic evidence that private households can indeed play a role in the production of economic calamities,5 it is worth noting that in that same period inequality has grown6 while poverty appears to have become again a worrisome problem for Europe,7 which appears to contradict one of the fundamental assumptions of democratisation of finance. Even if it is assumed that growing indebtedness is generally not problematic, a growing number of reports, in particular in Europe, show an increase in household over-indebtedness. This has been particularly evident in those countries which have been more strongly been gripped by the financial crisis of 2007–2008 and the economic measures adopted to restore financial stability, in several occasions implemented as a condition for receiving some kind of economic support from supranational institutions.8 In the ­country which has become paradigmatic for that development, Greece, it has been estimated that indebtedness due to mortgage and credit loans affected 2 ­million people,9 with possibly 700,000 being over-indebted.10 The effect of financial crises reveals a further difference between indebtedness and over-indebtedness, which can cause some confusion in reading empirical data on those figures. The immediate effect of a crisis on household finance is to turn indebtedness into over-indebtedness and lead to a credit squeeze, so that data on new indebtedness generally diminishes, as banks are less willing to lend, while data on over-­ indebtedness, showing existing debts, generally increases. Confusing the two categories and reading only the data on indebtedness would therefore lead to the unfortunate trompe l’oeil that in recent years the social problem of debt has diminished rather than increased. The increase of over-indebtedness which is often not captured by statistics on financial debt is also due to the fact that over-indebtedness does not only refer to financial debts that consumers have towards banks, but might also include other debts such as utility bills, costs of living, taxes and so on, which can be particularly onerous for citizens and are often the first debts not to be repaid, representing also a possible alarm bell for a rapidly worsening household indebtedness. In fact, arrears on utility bills have proven to be particularly grave inasmuch as they can lead to social exclusion of the citizen, but their legal treatment has generally received much less attention—and has remained mostly characterised by a liberal

5 

Ò Jordà, MHP Schularick and AM Taylor (2003) 3–28; AM Taylor (2012). On inequality especially in Europe, see C Saraceno (2015). Pointing to the impact of post-crisis measures on the increase of poverty and inequality in Europe, see Oxfam (2015). 7  Eurostat (2015) 136. 8  I Domurath, G Comparato and H-W Micklitz (2014) 15. 9 G Mentis and K Pantazatou (2014) 20 referring to data of the Bank of Greece, Bulletin of ­Conjunctural Indicators, November–December 2013. 10  P Gutiérrez de Cabiedes Hidalgo and M Cantero Gamito (2014) 114, referring to data of the ­General Council of the Judiciary, Data on the effect of the crisis in the judiciary, third quarter 2013. 6 

How Much is too Much? 145

and competition-oriented approach—than has the issue of financial services.11 In theory, thus, a citizen could be over-indebted even without having been previously financially included. When over-indebtedness stems from financial debt, nonetheless, peculiar consequences might derive therefrom, further exposing the citizen to the risk of social exclusion. In the case of a default on a mortgage loan, most notably, it is easy to identify the immediate consequence, ie home eviction. This has been particularly dramatic whenever the economy has experienced the bursting of a housing bubble, such as, notably, the case of Spain. This was tellingly the social and economic background in which the famous Aziz case developed, continuing an already established line of preliminary references from Spanish courts to the Court of Justice of the European Union (CJEU) as to the interpretation of the Unfair Contract Terms Directive. In Greece, as well, it is calculated that at the peak of the crisis in 2012 there were approximately 517 evictions per day, although this figure does not distinguish between evictions due to unpaid mortgage instalments and unpaid monthly rent.12 The need for the legal system to consider this particularly severe social consequence of eviction appears even from the judgment of the CJEU in the Aziz case, where the Court referred to the importance of protecting the dwelling of the consumer—a reference which was reiterated and vested with constitutional references in later case-law.13 In that case, the Court stated that its reasoning ‘applies all the more strongly where, as in the main proceedings, the mortgaged property is the family home of the consumer whose rights have been infringed, since that means of consumer protection is limited to payment of damages and interest and does not make it possible to prevent the definitive and irreversible loss of that dwelling’.14 Besides this instance of constitutionalisation of private law in light of social fundamental rights by way of an implicit reference to a constitutional principle which is recognised by Article 34(3) of the Charter of Fundamental Rights,15 it remains to be seen whether EU private law offers any strong substantive protection against home evictions. Most notably, as an example of post-crisis legislation, the Mortgage Credit Directive prescribes that ‘Member States shall adopt measures to encourage ­ creditors to exercise reasonable forbearance before foreclosure proceedings are initiated’.16

11  On the relevance of energy debts in the framework of the regulation of over-indebtedness in ­ ermany and the failures to introduce sufficiently protective social measures for vulnerable ­consumers, G see P Rott (2016) 193. 12  G Mentis and K Pantazatou (2014) 23. 13  Case C-34/13 Monika Kušionová v SMART Capital, as EU:C:2014:2189. 14 Case C-415/11 Mohamed Aziz v Caixa d’Estalvis de Catalunya, Tarragona i Manresa (Catalunyacaixa) EU:C:2013:164, para. 61. 15  G Comparato and H-W Micklitz (2013). 16  Mortgage Credit Directive, Art 28.1.

146  Over-Indebtedness

II.  Legal Responses Contrary to the prejudice that extending credit to lower-income citizens will necessarily lead to their over-indebtedness, microcredit advocates have notably warned against the idea that money should be given only to those who already have money, highlighting the importance of lending to the less creditworthy, for example in order to allow them to start up small entrepreneurial activities.17 This highlights the importance of evaluating credit worthiness on the basis of the envisaged use of the credit rather than on the current assets of the debtor. Transposing the line of reasoning of microcredit advocates into European contract law, it is worth noting how that argument is by definition inapplicable to consumer credit, which is only granted to a customer who acts ‘for purposes which are outside his trade, business or profession’, therefore primarily meant to finance consumption rather than production,18 so that, although consumer credit is sometimes used in practice to finance small businesses,19 in principle the possibility that the money lent will produce an income sufficient to fulfil the monetary obligation has to be excluded. Probably the only direct exception to this is money borrowed to finance professional or university education, which over time will increase the employment possibilities of the borrowers as well as their reimbursement prospects. Incidentally, it is also worth mentioning that this argument has been strongly criticised, especially in the US, because of the alleged excessive onerousness of study loans20 which de facto does not lead to a full democratisation but instead replicates existing social structures, even contributing to a worsening of the levels of inequality in the country.21 The fact that consumer lending is usually not meant to support productive investments implies that, compared to commercial loans, the risk of over-indebtedness is higher—in fact the risk is paradoxically higher than in the case of microcredit extended to citizens with no assets. At the same time, evaluating the capacity of the debtor to reimburse the creditor becomes more difficult, as it has to be based only on the actual assets, personality and debt history of the debtor, independent of the use that the debtor will make of the money lent. In other terms, the general rules and criteria employed to assess creditworthiness for commercial loans cannot straightforwardly be transferred to the structurally different case of consumer credit. Nevertheless, even if the impossibility of paying

17 

See M Yunus and A Jolis (2001). There is a wide debate in legal scholarship and case-law as to the borders of the concept of a consumer, and in particular if this notion is or should be extended to small and medium enterprises, which seem to be functionally more easily comparable to a consumer rather than a professional. It is not necessary in this place to go through that debate and the different ways in which ‘consumer’ is defined in national legislations and jurisprudence and it can suffice to refer to, among others, H Schulte-Nölke, C Twigg-Flesner and M Ebers (2008). 19  I Ramsay (2016) 163. 20  AM Collinge (2009). 21  S Mettler (2014). 18 

Legal Responses 147

off the debt might expose both the debtor and the creditor to negative consequences, it remains to be seen whether the occurrence of such a situation justifies specific legal interventions meant to cope with the default. From the perspective of traditional private law, the impossibility to repay a debt is legally nothing else than a non-performance of a monetary obligation stemming from a contractual relation binding two private parties. Why should the case of over-indebtedness be any different? Except for the case in which the non-fulfilment of the obligation is a reaction against the previous non-fulfilment of the obligation of the counterpart (inadimplenti non est adimplendum), private law has habitually neglected the motives and the reasons lying at the basis of the debtor’s inability to perform an obligation, regarding them as legally irrelevant like most of the debtor’s personal motives, at least so long as they are not communicated to the other contract party. Only force majeure, or an ‘act of God’ as in the traditional common law jargon, ­making the fulfilment of the obligation impossible, relieves the debtor from his or her obligation since, as the Romans said, ad impossibilia nemo tenetur. ­Paradigmatically, nonetheless, the doctrine of force majeure does not affect the obligation to pay a sum of money. Money is by definition fungible, which leads, among other relevant consequences—such as the fact that money deposited into a bank becomes the banker’s money22—to the conclusion that it will always be objectively possible to fulfil a monetary obligation, while the subjective incapacity to perform the obligation does not free the debtor from his or her obligation.23 This is remarkably conveyed by the German expression Geld muss man haben, which was the starting point of this book, and which despite its pervasiveness in fact represents more of a slogan to be inferred from several provisions than a clearly outlined legal principle.24 It is noteworthy that in the discussion which preceded the 2001 reform of the German law of obligations, the original draft proposal of reform acknowledged the debtor would have certain remedies as long as the ‘debt does not consist in a sum of money’.25 That draft rule was not eventually adopted, so that the reform took quite a broad approach to frustration (§275), while it repealed the rule (§279) which offered the most stable legal basis for the ‘Geld muss man haben’ principle. Despite this, the principle still permeates the code and is still explicitly referred to in order to deny debt relief in the case of a mere lack of financial resources on the side of the debtor.26 Against this general framework, debt discharge has traditionally been acknowledged as a pure unilateral concession of the creditor.

22 

Foley v Hill (1848) 2 HLC 28, 9 ER 1002. In light of the proposal for a reform of the German law of obligations, see C-W Canaris (2001) 51–52. 24  D Medicus (1988) 497. 25 Diskussionsentwurf eines Schuldrechtsmodernisierungsgesetzes des Bundesministeriums der Justiz vom 4.8.2000, §275 Abs 1. 26  PW Heermann (2003) 43; H Brox and W-D Walker (2007) 212. 23 

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While traditionally general private law appears insensitive to the question of ­ rivate over-indebtedness, to the point that the principle that one must have p money has been defined an anti-social principle,27 this branch of the legal system has now started developing forms of debt discharge rooted in the consideration that inability to pay might result from legally excusable factors. In Nordic countries, for instance, the doctrine of ‘social force majeure’28 was elaborated in the early 1990s to offer a more flexible understanding of the traditionally restrictive force majeure doctrine giving more relief to non-negligent debtors, and mitigating the sanctions against the consumer if the delay in payment of the debt is caused by factors such as illness and unemployment. Even more relevant, consumer bankruptcy regimes have been introduced in most countries. While the idea that one must have money remained the general principle of the regime for civil debtors, a diversified insolvency regime was reserved to commercial debtors, this difference in legal treatment was traditionally justified on the basis of a twofold argument: on the one hand, insolvent merchants were considered not necessarily at moral fault for their economic default, which could depend on purely market conditions and, on the other hand, a specific insolvency regime was considered desirable to avoid a larger domino effect, as a merchant was likely to be indebted to a large number of other merchants. These considerations are well ingrained in the modern legal consciousness. Notably in Italy, a country which tried to unify civil and commercial law by means of its wide-ranging civil codification and yet limited the scope of application of bankruptcy law only to commercial debtors, the reasonableness of the distinction between civil and (some) commercial debtors was challenged several times in the 1970s in front of the Constitutional Court. The Court nonetheless confirmed the constitutional lawfulness of the difference in legal treatment, justified in terms of the systemic risk which existed in the case of bankruptcy of businesses but which, on the contrary, the Court considered to be non-existent when civil debtors became insolvent.29 Nevertheless, considering the development of the financialised economy discussed earlier, has it not become evident that consumer insolvency might also pose a systemic risk? Hence, aware of that systemic dimension, several countries including Italy have more recently introduced new legislation to cope with excessive debt,30 and different models of consumer bankruptcy have emerged and spread all over the world in the last ­decades.31 At the same time, the progressive extension of bankruptcy to civil debtors hints at a decrease in the moralistic understanding of debt in the same way in which commercial bankruptcy is also justified by utilitarian rather than moral considerations.

27 

U Reifner (1979) 310 and critique by D Medicus (1988) 493 ff. T Wilhelmsson (1990); (1992) 180. 29  C Cost, 23 March 1970, n 43; C Cost, 16 June 1970, n 94. 30  See MJ Mouzouraki (2016) 235. 31  J Ziegel (2005). 28 

Causes of Over-Indebtedness and their Legal Appreciation  149

In short, the (renewed) convergence of legal regimes applicable to civil and commercial debtors testifies two fundamental changes in the understanding of civil debt: on the one hand, the recognition of the economic role of the civil debtor and the attenuation of the moral bias of debt; on the other hand, the recognition of the possibility of harmful macroeconomic effects of household overindebtedness. As over-indebtedness can affect the life of the borrower in a dramatic way as well as representing an economic loss for creditors and, in consequence, for the stability of the financial system, the changed role of debt in society authorises the law to elaborate specific solutions which take into appropriate consideration both the social and the economic dimension of over-indebtedness.

III.  Causes of Over-Indebtedness and their Legal Appreciation A distinction between two general categories of causes of over-indebtedness can be drawn, consisting in ‘internal’ causes linked to the behaviour of the debtor, and ‘external’ causes originating beyond the debtor’s will and control. This distinction is most usually expressed in the terminology elaborated by the Bank of France, which distinguishes active from passive over-indebtedness. While it is pointed out that there are cases of economic ‘misbehaviour’ in which individuals to take on more debt than they are possibly able to repay, conceivably even misleading lenders as to their credit worthiness, it is nowadays widely acknowledged in the literature that the main reason for over-indebtedness is that people have fallen into a difficult financial situation because of circumstances like unemployment or divorce.32 Running against the moralistic paradigm of the imprudent consumer who is unable or even unwilling to pay off his or her dues because of economic incompetence or bad faith, more often than not debtors are just hit by external adverse elements on which they have little or no control. Thus, although being analytically distinct, active and passive over-indebtedness are often interrelated.33 This insight is not new at all, and the phenomenon was described in the 1970s, when it was revealed that the first cause of over-indebtedness is usually an unforeseen loss of income following personal events over which the debtor has generally no power.34 In fact, even immediately before the onset of the financial crisis of 2007–2008, passive over-indebtedness had been detected as a much more ­frequently occurring circumstance than active over-indebtedness.35

32 

H-W Micklitz (2011) ‘Introduction’ in ‘Consumer Bankruptcy in Europe’ 1. I Ramsay (2011) 12. 34  D Caplovitz (1974) 57. 35  Three cases of over-indebtedness out of four are considered to be ‘passive’ rather than ‘active’ over-indebtedness in France: Banque de France (2008) 4. 33 

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After breaking down the idea of over-indebtedness into active and passive over-indebtedness, further distinctions can be drawn within the latter category. It appears useful to distinguish between ‘micro’ and ‘macro’ factors leading to ­passive over-indebtedness. Micro factors are those that relate to events in the life of one particular consumer—illness, divorce, death of a relative and so on, and these are the categories on which the authors introducing the concept of passive over-indebtedness have mostly focused upon. At the same time, the financial crisis has shown the importance of ‘macro’ factors which affect the repayment ability of the consumer but that do not originate in his or her own personal sphere: economic recession is the most important example. The importance of these further factors has been considered with increased awareness only more recently: a 2014 study commissioned by the European Economic and Social Committee, having examined statistical data on over-indebtedness in the different countries of the European Union concluded that ‘a weak macroeconomic scenario would seem correlated with debt difficulties’.36 Deterioration in macroeconomic conditions has a direct impact on the lives of individuals, so that a link between macro and micro factors is created. The most typical link between the two dimensions is offered by the case of unemployment of an individual following a dismissal on economic grounds. It goes without saying that even if unemployment is a specific ­condition of a particular debtor, this is often rooted in negative macroeconomic conditions, which might worsen a financial situation which is often already precarious: ‘a person or household managing stretched credit commitments until a major income or expenditure shock (such as relationship breakdown, illness or unemployment) meant that they could no longer maintain repayments on their credit products’.37 This dynamic is paradigmatically exemplified in the facts leading to the Aziz case, which originated from a debtor unable to pay his (particularly onerous) mortgage instalments following his dismissal because of the economic crisis. This distinction between micro and macro factors, having acknowledged that the two are strongly interrelated, is relevant in a practical sense. Unlike the difference between active and passive over-indebtedness, which is relevant for establishing whether there has been negligence from the side of the insolvent debtor, the distinction between micro and macro factors can be of relevance in determining the likelihood of insolvency and over-indebtedness. This is particularly important in the case of creditworthiness assessment, which could take into account the general macroeconomic conditions rather than simply rehearse the characteristics and assets of the prospective debtor. Furthermore, macro factors can be the result of specific economic and political choices. This justifies the general political consideration that the first instrument to combat over-indebtedness is not at the level of specific consumers but rather at the level of the macroeconomic policies pursued by the states and, most importantly, by the European Union. As has been

36  37 

A Falanga (2014) 9. J Elson (2016) 44.

Causes of Over-Indebtedness and their Legal Appreciation  151

suggested by Philippe Lamberts, a member of the European Parliament,38 the discussion as to over-indebtedness has so far focused too much on its consequences rather than on its causes. The major element leading to over-indebtedness appears to be inequality, favoured by macroeconomic policies at odds with the goals set in the Europe 2020 strategy. In that view, it is suggested, a possible solution would be to impose not only budgetary targets on Member States but to associate those with social targets. Leaving broad political considerations aside and focusing only on private law, it is still useful in the legal dimension to be reminded that, whether over-­ indebtedness is a consequence of personal life events or worsened macroeconomic conditions, the impossibility of paying off the debt is not rooted in the behaviour of the debtor or the creditor. This consideration challenges not only the traditional private law principles, but even the principle of responsible lending itself, which is well-suited to address causes of active over-indebtedness but less so causes of passive over-indebtedness. Confronted with the consumer-protection oriented draft of the Consumer Credit Directive and with a view to safeguarding the autonomy of both the lender and the borrower, some commentators had already criticised the principle of responsible lending, as this seems to require the lender to read into the future of the personal life of the borrower.39 Fatalistic considerations about the pointlessness of trying to predict the future may seem to be too philosophical to be sufficient to reject a policy requesting a more accurate consideration of the impact of possible future events on contractual relations. On a closer look, nonetheless, they do not seem trivial in light of the distinction between active and passive over-indebtedness: while assessing the likelihood of active over-indebtedness is relatively easy, as it consists in the appreciation of the possible economic behaviour of the consumer, causes of passive over-indebtedness are less foreseeable for both parties, and make any disclosure obligation much less useful. This is clearly evidenced by the case of growth trends in the housing market: in a context in which real estate continues to increase in value, lenders may be led to assume that those with a mortgage loan on their property will be able to repay. Paradoxically, the continuous granting of loans contributes to the increase in housing prices. This growth can generate a housing bubble which, after its inevitable collapse, eventually destroys the ability of the borrower to repay. This is the reason why, more recently, new measures such as the Mortgage Credit Directive, have created guidelines as to how these circumstances should be responsibly assessed, and even explicitly forbids the lender taking into consideration the evolution of the market value of real estate before making the lending decision.40 In any case, the appreciation of the worthiness of the consumer is a problematic task and, although a responsible lending obligation might certainly avoid later

38 

P Lamberts (2014). W Kösters, S Paul and S Stein (2004) 95. 40  Mortgage Credit Directive, Art 18(3). 39 

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problems, in other circumstances the impossibility to repay is neither foreseeable nor the fault of the borrower. Given the limitations in both traditional private law and even the principles which have developed more recently, there emerges the need for a holistic approach to over-indebtedness.

IV.  A Categorisation of Private Law Responses to Over-Indebtedness Under the umbrella of a broad understanding of private law, a distinction may be drawn between contract law and non-contract law tools to be employed in the fight against over-indebtedness. In general, contract law tools include responsible lending and responsible borrowing obligations, application of general ­principles and doctrines such as good faith, change of circumstances, or even, as it has emerged more recently in the case-law of the CJEU, the fairness test outlined in the Unfair Contract Terms Directive. Depending on the particular case and the idiosyncrasies of each national legal system, each of these doctrines then allow for the application of a specific remedy such as termination, renegotiation of the contract, damages, possible acknowledgment of a right of withdrawal and so on. Non-contract law instruments, though having a direct impact on the contract, do not affect the contract itself but rather the legal treatment of the debt. Most notably these embrace consumer insolvency procedures including pay-out plans or (total or partial) debt discharge, which instead of perpetrating the somewhat punitive contract law approach to the debtor, instead aim for the debtor’s rehabilitation and the destruction of debt.41 It can be summarised that contract-law instruments affect the source of the debt, while non-contract law tools intervene on the debt itself. Furthermore, over-indebtedness can be counteracted in two ways: preventing it from arising or curing it once it has already emerged. This founds a further distinction between ex ante and ex post tools. At the same time, each of these approaches can be pursued either with contract law instrument or with non-contract law instruments, leading to a categorisation which distinguishes ex ante contract law, ex post contract law, ex ante non-contract and ex post non-contract law instruments. Following this scheme, responsible lending and borrowing obligations appear as typically ex ante contract law measures, change of circumstances as an ex post contract law tool, financial education as an ex ante non-contract law tool and personal insolvency as an ex post non-contract law tool. In its fight against over-indebtedness, each legal system can opt for any (or none) of these instruments. Their legal and economic effects, however, are quite

41 

U Reifner (2003).

A Categorisation of Private Law Responses to Over-Indebtedness  153

different, so that the choice for one approach or the other will not be neutral. Questions of ‘credit crunch’ come immediately to mind as a consequence of the choice of one of those instruments. Strong responsible lending obligations can lead to a contraction in the extension of credit, especially in economic periods following an economic crisis characterised by high uncertainty about the future; individual bankruptcy regimes do not immediately lead to that consequence but might still produce economic losses on the side of the creditor, which on the long run might pose disincentives to the extension of loans. A question as to which instrument is the best would be a naive one, as there is, in the abstract, no single answer to that question: rather, the answer will depend on policy considerations in each legal system which have less to do with doctrinal legal considerations and more with a socio-economic calculus: how much of a credit crunch can the economy bear? How restrictive or expansionary is a central bank’s monetary policy? Is there a problem of under-capitalisation of the banking system? The most appropriate approach will likely be a combination of the various tools to different degrees, taking into consideration the interrelation between those instruments. In the European legal context, finding that combination requires consideration of the division of competences between the EU and its Member States. In the current distribution between the two levels of the European legal order, EU law has so far mostly focused on ex ante contract law instruments, while national law has relied in particular on ex post non-contract law instruments to tackle over-indebtedness.

A.  Contract Law Ex Ante Instruments Contract law in Europe has an impact on questions of over-indebtedness mostly with respect to ex ante remedies. The reasons for this are rather intuitive and to some extent even inherent to the very conception of a contract. Contract law is based on the principle of self-responsibility, the foundation for the very idea of party autonomy, which implies that the individual is free to determine autonomously her or own interests while other subjects bear no responsibility for the economic choices of their counterpart. As outlined in the previous sections, however, a new awareness as to the further social and economic consequences of over-indebtedness is emerging and affecting traditional legal rationality. This development is, at the moment, quite embryonic and not yet entirely settled in contract law and legal scholarship, which for example tends to consider— occasionally in contrast with the explicit considerations of the legislator enshrined in preparatory works and recitals—that while the function of rules on creditworthiness assessment is the protection of the consumer, such protection does not also imply a prevention of over-indebtedness but rather the safeguarding of the contractual will of the contract party, which remains entirely autonomous in much as it is responsibly fed with correct information. Interpretations by national

154  Over-Indebtedness

legislations oscillate between a view which holds that the lender has a duty to inform the consumer when a loan could negatively impact the economic and social ­conditions of the borrower,42 and another view more strictly adherent to the coherence of the system which tends to narrow down the margins of that duty in light of the principle of self-responsibility.43 Hence, the fight against over-indebtedness might encounter difficulties in ­taking root in contract law rationality. What is more, even recognising that one of the functions of contract law should be the prevention of over-indebtedness, this still does not imply that this branch of the law is sufficiently well placed to effectively comply with its new function. In fact, the phenomenon of over-­indebtedness empirically and usually emerges from an accumulation of several liabilities generally deriving from different, sometimes unrelated, contractual relations with a multiplicity of creditors, for instance electricity bills, mortgage loans, consumer loans, health insurance and so on. It is thus not always possible to identify one single contract responsible for over-indebtedness, but, at most, a particularly onerous one or one which, being riskier than others, is more likely to lead to that condition may be found. What contract law can mostly do ex ante is therefore to ensure that the emerging obligation will not foreseeably lead to over-indebtedness. This can be obtained through at least two strategies, one regulatory and one based on information. The first, more interventionist,44 regulatory approach consists in setting some limits by way of regulation or judicial interventions to potentially dangerous or risky financial ‘products’, for instance, by setting interest rate caps. Usury laws in this sense are the most archetypical instrument of over-indebtedness prevention, but not the only one. Particularly relevant are the instruments meant to avoid the diffusion of ‘toxic’ products, ie highly risky financial products which are generally negotiated between professional traders but that, with the growing financialisation of society and democratisation of finance, have started being offered to retail investors as well. The popularisation of those instruments, initially meant as speculative products and later sold to consumers as an instrument to protect their savings, has often led to considerable losses for retailers, to the point that in the aftermath of different financial scandals a stronger product regulation or even an overall ban on the most dangerous instruments has been pleaded for on both sides of the Atlantic.45 In the UK, the Financial Conduct Authority has intervened on high-cost short-term loans by setting a £15 limit on default fees, a 0.8 per cent interest rate cap per day, and an overall 100 per cent total cost cap, establishing a paradigmatic approach in a country traditionally libertarian with respect to ­limits on interest rates. The interventionist approach avails itself notably of ­supervisory

42 

C Wendehorst (2011) 25. E Heinrich (2014) 91 ff. 44  Paternalistic is also employed but with a pejorative connotation. 45  E Warren (2007) who famously and provocatively compared the safety standards of financial products like mortgage credit with that of consumer products like toasters. 43 

A Categorisation of Private Law Responses to Over-Indebtedness  155

and regulatory agencies, which can intervene both ex ante and ex post, in other words either pre-approving certain financial products before they are placed on the market, or limiting or prohibiting their diffusion after they have already been placed on the market (and likely created harm). Each of these variations has advantages and disadvantages: while the ex ante approach is sufficiently protective in theory, it is, on the other hand, perhaps difficult to detect beforehand which product will be likely to cause harm and is feared to be an obstacle to financial innovation. Ex post interventions can certainly be more selective, but they generally leave open the question as to how the damages which have already been produced should be remedied. That is a question which remains mostly to be dealt with in individual disputes. A more liberal approach, in contrast, relies on information. It consists in making contract parties aware of the consequences that could derive from the contract, though information duties and soft responsible borrowing and lending principles, without, however, overruling the parties’ decisions. To remain with the example of toxic products, these would not be banned from the market, but particular care would be requested from users dealing with them, such that the financial services provider should ensure that the investor is fully aware of the characteristics and consequences of the products he or she is purchasing. This result can be achieved through different legal doctrines and regulatory strategies, typically imposing fiduciary obligations, disclosure obligations or sanctions on the parties who are non-compliant with their duties. More subtly, a set of incentives in a broad way (‘nudges’, as is now trendy to call them in the ‘liberal paternalistic’ behaviouralistic perspective)46 can also be engineered to produce that intended result. Given this difference, what is the approach taken by EU private law to strengthen the ‘protection’ side of financial inclusion? On the one hand, that law appears to have favoured a liberal approach in the area of credit, while on the other hand, some forms of ‘financial product regulation’ can be detected when it comes to investment services. Despite the emphasis on the adjectives basic and affordable usually associated to access to a bank account and to credit, European contract law has in practice placed a quite limited emphasis on them, while most attention has been focused on the principle of responsible lending as an instrument of ­prevention.47 The final version of the Consumer Credit Directive, after several amendments, appears to be clearly based on the information model, while the Mortgage Credit Directive shifts the balance towards a more regulatory approach. Nonetheless, detailed information duties and vague responsible borrowing/­lending obligations which leave Member States mostly free to determine the remedies for the violation of those obligations, as well as the lack of interest caps in the Consumer Credit Directive and Mortgage Credit Directive, appear more respectful of the autonomy

46  47 

RH Thaler and R Sunstein (2008). D Vandone (2009) 75; H-W Micklitz (2010).

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of Member States, but do not necessarily appear sufficient to counteract overindebtedness. The Economic and Social Committee in 2011 concluded that, even with regard to the Mortgage Credit Directive which has otherwise been described as a step towards more accentuated paternalism,48 ‘the measures aimed at ensuring responsible lending are not enough in themselves to improve market conditions and help to prevent over-indebtedness’.49 But that is not the full picture, and one should also consider the several reforms which have altered the infrastructure of financial markets both at the European Union and at the Member States to identify how a more prominent shift towards the interventionist approach, although not in its ex ante version, has taken place. The European Union has partially embraced an ‘intervention-based’ supervisory model,50 as supervisors have gained more powers to limit or ban financial products considered dangerous for investors. At the EU level, the most considerable innovation is represented by the establishment of the European Securities and Markets Authority (ESMA) based in Paris, which has the objective ‘to protect the public interest by contributing to the short, medium and long-term stability and effectiveness of the financial system, for the Union economy, its citizens and ­businesses’.51 Although the main operative task of this authority is a coordinative one, while more concrete prohibitions might be performed by national authorities, the ESMA also has the power to ‘temporarily prohibit or restrict certain financial activities that threaten the orderly functioning and integrity of financial markets or the stability of the whole or part of the financial system in the Union in the cases specified and under the conditions laid down’52 in other European pieces of legislation, as well as assessing the need to prohibit or restrict certain financial activities, informing the Commission in order to facilitate the possible adoption of new legislation.53 As specified in those other pieces of EU legislation, the ESMA has the power to restrict short-selling54 and ‘the marketing, distribution or sale of certain financial instruments or financial instruments with certain specified ­features’.55 This is complemented by the activities of national authorities, an illustrative example of which is again the Financial Conduct Authority in the UK

48 

O Cherednychenko (2014) ‘Freedom of Contract in the Post-Crisis Era’. Economic and Social Committee, Opinion on the ‘Proposal for a Directive of the ­European Parliament and of the Council on credit agreements relating to residential property’, 29 October 2011, 1.7. 50  N Moloney (2014) 983. 51  Regulation No 1095/2010 of 24 November 2010 establishing a European Supervisory ­Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC, Art 1.5(a). 52  Ibid, Art 9.5. 53 Ibid. 54  Regulation No 236/2012 of 14 March 2012 on short selling and certain aspects of credit default swaps (Short-Selling Regulation). 55  Regulation No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (MiFIR), Art 40.1(a). 49  European

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(created in 2012 replacing the Financial Services Authority), which has important powers to intervene in the market by banning harmful products and deceptive actors. It is worth noting that given this two-level framework, the intrusive powers of the ESMA have already given rise to tensions and disputes with national authorities.56 Despite its institutional focus and because of the power to directly influence the selling of financial products, the new regime has important repercussions on contract law as well.57

B.  Contract Law Ex Post Instruments Contract law can also have an ex post function. Obviously, private autonomy allows for a new contract to modify or extinguish an existing monetary obligation stemming from an existing contract through renegotiation but, more importantly, contract law also offers instruments to invalidate that previous contract source of an excessively onerous debt. The 1993 Unfair Contract Terms Directive, whose main characteristics have already been mentioned, is particularly useful for that purpose. Thanks to its wide scope of application, which covers financial contracts as well as its quite effective fairness test, the instrument has been used to strike down contract terms which allowed for, among other things, easier home repossessions in case of default on payments of monthly instalments in mortgages contracts. That development is very well known so that it does not need to be addressed specifically again here. Instead, the focus will be on general, mostly national, contract law. In this regard, one principle appears to be of particular interest and has been referred to in the literature and occasionally in case-law as a possible instrument for fighting against over-indebtedness, ie the doctrine of change of circumstances, as an expression of the rebus sic stantibus principle.58 This principle, widely recognised in most European countries, allows for contract termination, amendment or suspension of performance, when there has been such a fundamental change of circumstances that presumably parties would have not agreed to the terms of the contract had they known about that future event. A change of circumstances could, hypothetically, cover cases of economic and debt crisis, which are known to be determining factors leading to over-indebtedness. Nonetheless, as it derogates from the (modern understanding of the) fundamental pacta sunt servanda principle, the doctrine is subjected to strict limitations in most jurisdictions, which make its applicability remarkably troublesome. First, all European systems, either in their codifications or in case-law, limit the application of the principle to contracts which are not of an aleatory nature, thus

56  Case C-270/12 United Kingdom of Great Britain and Northern Ireland v European Parliament and Council of the European Union (Short-Selling case) EU:C:2014:18. 57  F Della Negra (2016). 58  J Pulgar (2014) ‘A contractual approach to overindebtedness’; J Pulgar (2014) ‘La protección ­contractual del sobreendeudamiento’.

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almost constantly excluding investment contracts. At the same time, when a contract is not of aleatory nature, the circumstance which would allow for the termination must be exogenous to the sphere of action of the parties, unforeseen and even unforeseeable. Rephrasing this doctrine in terms of the fight against overindebtedness, only passive over-indebtedness stemming from non-aleatory contracts could theoretically be covered. The pivotal question hence becomes whether the financial crisis can be qualified as an overwhelming factor which makes the performance of the contract according to the original terms impossible. A major difficulty lies in the fact that the event must be unforeseeable, while the limitative approach usually taken in contract law is that a financial crisis is not an unforeseeable event. In fact, the possibility of invalidating retail investment contracts from which high debt has arisen has been explored in several European countries but in none of them has it led to beneficial consequences for indebted consumers, save in the case of Portugal. There, a swap contract was terminated because of a change of circumstances, ie the financial crisis controversially qualified by the Court as ‘in no way foreseeable’,59 which made the contract in the end contrary to the requirements of good faith. A comparative analysis of the facts of that case, considered from the perspective of different European national jurisdictions, has however confirmed that this approach is unlikely to be generally effective elsewhere, so that the Portuguese case appears more like an exception than a viable alternative.60 On a second look at the Portuguese case-law, not even the ruling of the Supreme Court led to a general recognition of the applicability of change of circumstances to risky financial products, as lower courts, which tend to consider quite carefully whether swap contracts should be annulled, persistently state that the 2008 financial crisis cannot be considered as an unforeseeable event.61 The decision of the Supreme Court needs furthermore to be understood keeping in mind a second relevant aspect, ie the degree of financial literacy of the claimant, which will be dealt with more specifically in chapter six. The line of reasoning which excludes the relevance of financial crises for the application of change of circumstances is prevalent,62 yet normatively disputable. To be sure, economists have shown that financial crises are to a certain extent even unavoidable63 such that their occurrence can be regarded as generally foreseeable. However, it is a completely different task to foresee when exactly and for which reasons they will occur as well as in which way they will impact the contractual relation. More decisively yet, the financial crisis is just one of the elements

59 

Supremo Tribunal de Justiça, 10 October 2013. the articles by R Momberg, JCM Dastis, D Philippe, S Lequette, RE Cerchia and JPM Fernández in European Review of Private Law, Volume 23 (2015). 61  ‘Tribunal de Paredes rejeita anular contrato swap feito com BES’, Publico, 21 September 2014. 62  See for instance the decision by the High Court of Ireland in Park East South East Construction Limited v Benesch [2013] IEHC 464. 63  HP Minsky (1982). 60 See

A Categorisation of Private Law Responses to Over-Indebtedness  159

of a series of events which can lead to worsened macroeconomic circumstances and thus to a change of circumstances. In other terms, a financial crisis (even if one accepts that this is not covered by the change of circumstance doctrine) can lead to an economic crisis which could in turn determine extraordinary events— unemployment, wage cuts and so on—which make it impossible in practice to repay a debt. This dynamics also emerged in a different context in an English commercial case concerning the interpretation of a ‘material adverse change’ clause in a loan agreement between two Spanish firms.64 Despite the traditional restrictive approach of courts to those clauses, as they allow termination of a loan agreement when a yet unspecified event significantly affects the borrower’s ability to perform, the clause was upheld and read against the background of the worsening economic climate following the Spanish housing bubble collapse. It is crucial to notice that it was precisely in Spain, a country strongly impacted by the crisis, the Supreme Court eventually broadened the traditionally narrow approach to change of circumstances, admitting that the economic crisis legitimised the application of the doctrine, and also referring to transnational private law as evidence supporting the new approach.65 Confirming its approach taken in 2013, the Court held that ‘the current economic crisis, with deep and prolonged effects of economic recession, can plainly be regarded as an economic phenomenon capable to determine a serious disturbance or change of circumstances’.66 In light of this, the Court permitted the renegotiation of the economic contents of an advertisement contract after the economic crisis led to considerable losses for one of the party, which lost 67 per cent of its commercial orders. In light of this, it emerges that although it is structurally ill-placed to conceptualise the phenomenon of over-indebtedness, even traditional general contract law can at least in theory play a role in the fight against that problem, inasmuch as it provides for some instruments to invalidate onerous contracts under certain, in reality particularly restrictive, circumstances.

C.  Non-Contract Law Instruments Acknowledging the limitations of a purely contract-law approach to over-­ indebtedness, it will be necessary to consider alternative solutions. Debt advice ­mechanisms whereby an over-indebted consumer is offered counselling by a public

64 

Grupo Hotelero Urvasco SA v Carey Value Added SL [2013] EWHC 1039 (Comm). Tribunal Supremo, No de Resolución: 333/2014, 30 June 2014. See P Abas (2015). 66  Full quotation: ‘Esta tendencia hacia la aplicación normalizada de esta figura, reconocible ya en las Sentencias de esta Sala de 17 y 18 de enero de 2013 (núms 820 y 822/2012, respectivamente) en donde se reconoce que la actual crisis económica, de efectos profundos y prolongados de recesión económica, puede ser considerada abiertamente como un fenómeno de la economía capaz de generar un grave trastorno o mutación de las circunstancias, también responde a la nueva configuración que de esta figura ofrecen los principales textos de armonización y actualización en materia de interpretación y eficacia de los contratos.’ 65 

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service, ­private company or consumer organisation, appear as a first informal step to help a troubled debtor manage his or her resources more efficiently and ­possibly assist and direct the debtor towards more incisive debt relief mechanisms. The law can also involve debt advice bodies in a bank-customer relationship in order to give more effectiveness to the advice; for instance, in the UK regulation states that a residential mortgage lender should ‘liaise, if the customer makes arrangements for this, with a third party source of advice regarding the payment shortfall or sale shortfall’.67 Debt relief or consumer bankruptcy have been most often discussed and proposed in the literature on over-indebtedness and its possible solutions. Additionally, these instruments, despite the more recent attention that they have enjoyed from legislators and scholars, have in fact an ancient European root, in the forms of moratoria or ‘lettres de répit’, which came to mitigate the harshness of the legal treatment reserved by private law to the debtor in exceptional cases, even after the law merchant had already established mechanisms to cope with the insolvency of the commercial debtor.68 The focus here can, however, only be placed on contemporary law. In fact, while the US had started downplaying the moralistic conception of debt allowing for consumer bankruptcies as early as the nineteenth century,69 it was only in the 1980s that the importance of consumer bankruptcy regimes started being perceived by most other countries around the world.70 It is only more recently that European countries have started introducing legislation on the subject. Among the first jurisdictions to take important steps in this direction was France in 1989,71 later followed by Scandinavian countries and Germany. The UK Insolvency Act 1986 already paved the way to personal insolvency, but it only through the Enterprise Act 2002 that it became a fully viable option for consumers. The more recent events linked to the financial crisis have been particularly relevant in accelerating the circulation of consumer bankruptcy models in Europe, and one needs only mention that legislation on debt restructuring was introduced in Greece in 2010. In addition, in 2011, a new law on the subject was passed in Iceland, while in 2012 rules were introduced in Portugal, Spain and Italy, and personal bankruptcy law was reformed in Ireland. The mechanisms adopted are in fact quite diverse and well documented in an already rich literature,72 which has traditionally brought to the fore a twofold difference; first, between the US and Europe and, secondly, within Europe between a German court-based and a French administrative model, focusing on the institutional design of the remedy to draw distinctions. At the level of content, however, some common features can be identified in those schemes. In most countries that

67 

MCOB, 13.3.2A(2) R. AD Manfredini (2013). 69  BH Mann (2002). 70  J Ziegel (2005). 71  89-1010, Loi Neiertz, later transposed in the Code de la Consommation. 72  K Anderson (2004); most recently, I Ramsay (2017). 68 

A Categorisation of Private Law Responses to Over-Indebtedness  161

have personal insolvency legislation, the debtor is required to elaborate a repayment plan with his or her creditors to ensure that at least part of the debt is repaid. Furthermore, debtors have to go through a certain ‘limbo’ period of time in which they will be de facto again financially excluded and during which they may be even required to follow financial literacy programmes. Disparate requirements also limit the availability of these procedures to certain debtors in order to reduce the likelihood of opportunistic behaviour detrimental to creditors: in particular, there are several temporary limitations to the possibility of using a debt relief procedure if the debtor has already participated in it previously. It is often suggested that these approaches reveal a moral dimension enshrined in European legislations which contrasts with the liberal approach taken by US law, which on the contrary considers consumer bankruptcy as a normal event of the market that has to be remedied in order to bring an economic actor such as the consumer back to the market as soon as possible.73 Thus, while in Europe these mechanisms seem inspired by the intention to protect a citizen in economic hardship, the US approach would reveal a more pronounced marketbased rationality. In light of these considerations, insolvency regimes around the Western world have been described as inspired by philosophies ranging from conservatism to moderate and ultra-liberalism.74 Nevertheless, rather than necessarily different moral considerations somehow linked to the values of a particular national community—a view which seems confirmed in different instances even on e­ tymological grounds as in the famous case of the German word Schuld but that has also been challenged for lacking more concrete empirical evidence75—the ­different approaches taken in Europe and the US seem to reflect different stages and paths of political and economic development. Whatever the explanation for the difference between US and Europe might be, the result is that the legislation of various European countries appear to take a more punitive stance towards consumers, who can have access to debt relief only if they prove to genuinely deserve it, possibly undergoing a lengthy procedure before the fresh start can be achieved. This approach leads to the risk of social stigmatisation, which can be deleterious for the debtor in view of his or her possible later financial reinclusion. The often unexplainably long period of financial segregation in which laws may keep the bankrupted debtor can not only represent a disincentive to make use of those legal procedures, but can also be considered to be one of the causes of the failure of those instruments in providing a genuinely ‘fresh’ start to the debtor. Research in the Scandinavian countries has amply demonstrated that debtors going through those procedures tended to encounter financial, psychological and even health problems, while several of them still remained excluded from the labour market even three years after the completion of the procedure, which can take up to

73 

An overview in I Łobocka-Poguntke (2012). J Ziegel (2005). 75  J Spooner (2013). 74 

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10 years before full debt discharge is achieved.76 Facing these objections, and in order to offer consumers rehabilitation without excessively negative social ­connotations, some countries have established alternative and less burdensome procedures.77 In Germany, for instance, these concerns have led to reform introducing a reduction of the required length of the limbo period, provided that the consumer has paid off at least part of the debt.78 In fact, even in the case of commercial bankruptcy and despite one of the justifications concerning its reduced moral component, national bankruptcy laws have often taken a harsh punitive approach towards the insolvent merchant: before a reform in 2006, Italian law even deprived the bankrupted entrepreneur of the right to vote for five years. The European Commission has also recently averred to the existence of the problem with regard to commercial insolvency, pointing to the necessity of reducing social stigma, intended as a psychological deterrence to entrepreneurialism.79 In this sense, the reforms going on in Europe would seem to reveal a prima facie a tendency to converge towards the American ‘fresh start’ approach. As explicitly pointed out by the UK Government on the eve of the 2002 reforms to its insolvency law, ‘[w]e appear to be moving towards the models present in the United States, Canada and Australia where consumer bankruptcies form a very significant majority of cases’.80 On a closer look, nonetheless, this convergence does not appear to be taking place. On the one side, legislation of countries which have more recently followed the German model has opted again for procedures involving long periods of time, such as in the case of Italy: the judge can pronounce the end of the procedure only after the liquidation plan of the debtor’s assets has been fully carried out and in any case not earlier than four years after the presentation of the liquidation instance. From that moment on, the debtor has one year to ask to be finally set free of the residual debts (with the exception of particular categories of debts such as maintenance claims and compensation debts) before finally enjoying a fresh start.81 Considering that this legislation was introduced as an emergency measure during the debt crisis, it may be wondered whether such a long period of time before the law can produce its economic effect is compatible with the

76 

R Ahlström (1998). For the UK, see J Tribe (2016) 141. 78  Gesetz zur Verkürzung des Restschuldbefreiungsverfahrens und zur Stärkung der Gläubigerrechte, 15 July 2013. 79 COM(2015) 550 Upgrading the Single Market: more opportunities for people and business, 6: ‘The effects of bankruptcy also deter people from entrepreneurial activity. The fear of the social stigma, legal consequences and the inability to pay off debts is stronger in Europe than in many other parts of the world, for example because of much longer debt discharge periods. This is a significant disincentive for entrepreneurs to start up a business. Entrepreneurs need to know that they will have a second chance.’ 80  UK, Department of Trade and Industry. Insolvency—A Second Chance. The Insolvency Service. Presented to Parliament by the Secretary of State for Trade and Industry by Command of Her Majesty, July 2011, 1.47. 81  Law 3/2010, Art 14-terdecies. 77 

A Categorisation of Private Law Responses to Over-Indebtedness  163

speediness required by an emergency situation.82 Furthermore, even if legislation has introduced theoretically fundamental mechanisms, their practical relevance is often neutralised by concrete problems. Paradigmatically, in Greece the existence of procedural burdens might de facto neutralise the possibly positive effects of the procedures of which civil debtors can avail themselves, including most notably lengthy civil trials,83 the difficulty of achieving an amicable agreement acceptable for the creditors84 and the lack of independent debt advisers who could help the consumer in out-of-court procedures.85 Given the existence of legislative burdens, a series of more informal initiatives have emerged to cope with the issue in the shadow of the law. First of all, financial services providers themselves have in several instances launched programmes to pre-empt the emergence of over-indebtedness, by monitoring and advising customers and, in extreme cases where the debtor faces serious problems in paying back the debt, elaborating new repayment plans. In some instances, programmes meant to combat over-indebtedness have emerged from a cooperation between financial services providers and associations sponsored by local authorities, such as in the notable case of the Chambre Régionale du Surendettement Social (Crésus) in France, which tends to act in advance by screening financial services users to detect those at risk by means of specific indicators and ranking people on particular scales of risk. More recently, the European Commission has recognised the importance of debt advice, noting ‘a great diversity in the way debt advice is currently provided in the EU’.86 More particularly, debt advice ‘is largely underdeveloped in some countries and regions and, in some cases, its effectiveness may be low due to limited knowledge of how this advice should be provided, or due to limited awareness of such advice among consumers’,87 although the concrete way in which the Commission intends to tackle the issue does not seem entirely clear yet. It is also worth noting that studies show that in the US debt advice tends to be employed by more affluent categories of consumers, so that its possible benefits often fail to reach middle-class consumers who might often be more in need of it.88 On the other side of this hypothetical convergence between European and American model, quite curiously, the American approach is itself undergoing modifications: in 2005, a most controversial and long-debated reform of bankruptcy legislation was passed.89 The name of the law, Bankruptcy Abuse

82 

G Comparato (2016) ‘The Italian Law against Over-Indebtedness’. See G Mentis and K Pantazatou (2014). 84  TG Katsas (2016) 263. 85  MJ Mouzouraki (2016) 245. 86  European Commission, Consumer Financial Services Action Plan: Better Products, More Choice, COM(2017) 139 final, 2.6. 87 Ibid. 88  DD Winchester (2015). 89  Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. 83 

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­ revention and Consumer Protection Act of 2005, bears the mark of the phiP losophy underlying the intervention: consumer bankruptcy is regarded as an ‘abuse’ which has to be prevented. Due to the lobbying of the banking industry, the new law hence aimed to limit the possibilities for consumers to file bankruptcy and to reduce the amount of money debtors were allowed to shield against creditors’ claims during bankruptcy. It is in reality debatable whether that reform achieved its objective to reduce the total number of bankruptcy filings, partly because the following ­financial crisis led again to an increase in number of insolvent ­consumers.90 At the same time, researchers have suggested a link between the new law and the financial crisis itself, as one consequence of the reform was to cause mortgage default rates to rise.91 Regardless of the empirical relevance concerning the application of the new law, it is interesting to note that the possibility to enjoy a fresh start is subjected among other things to the requirement that debtors attend an instructional course on financial management. Programmes of financial literacy have therefore been somehow linked to the possibility of obtaining debt relief, in an attempt to prevent over-indebtedness from arising again in the future. This choice seems to confirm that the new approach in legislation is to acknowledge personal ­bankruptcy but to balance it with the goal of financial education, leading to a combination of ex ante and ex post instruments to address over-indebtedness.

V.  European Over-Indebtedness Law Against this transnational background, what is the stance of European Union law as to ex post mechanisms? The trenchant deduction which could be reached in 2012 was that ‘the European legislator has done next to nothing to get to grips with over-indebtedness from a European perspective’.92 The impression is that EU legislation has mainly viewed over-indebtedness as a negative consequence of access to the financial market that has to be prevented, but seems to have

90  TA Durkin, G Elliehausen, ME Staten and TJ Zywicki (2014), 583–84 describe the trend before and after the enactment of the new law: ‘Spurred by high unemployment, massive wealth destruction in the residential real estate and stock market, and record levels of home mortgage foreclosures, there were 1.1 million to 1.5 million consumer bankruptcy filings in the United States in 2010–2012, according to the Administrative Office of the US Courts. These filings continued a long-term generally rising trend, temporarily with some interruptions but more significantly interrupted after 2004 by enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). This law partially tempered a century-long movement in the United States toward increasingly generous bankruptcy filing rules for consumers. The filing rates from 2009 to 2012 returned to the high ­bankruptcy filing rates preceding them, although exceeded by the record 2 million in 2005, a figure that was artificially inflated that year by a “rush to the courthouse” to file in the period immediately preceding the effective date of the new law.’ 91  W Li, MJ White and N Zhu (2011). 92  H-W Micklitz (2012) 419.

European Over-Indebtedness Law 165

referred this preventive task mainly to the Member States.93 The EU ­legislator has, rather, enacted conflict of laws rules94 which can cover some personal ­insolvency proceedings but that exclude many of the proceedings introduced later in national legislation, refraining from regulating substantively the applicable legal regimes.95 Nevertheless, the problem of over-indebtedness has gained the attention of the European institutions for several years, and even if there has not been any considerable binding measure taken at the European level, European institutions have launched a discussion as to the possibility of establishing a common legal framework. Since the issuing of the first Consumer Credit Directive, the Commission has shown an interest in the area of over-indebtedness, funding several studies96 in order to get a clearer picture of a problem which has remained hard to grasp from a European perspective, given the unclear and inhomogeneous ­definitions of over-indebtedness and the different approaches of Member States.97 As acknowledged by the Council of the European Union in 2001, ‘information on indebtedness and over-indebtedness, despite the work done by the Commission, nevertheless remains inadequate, in particular owing to the lack of a systematic study of over-indebtedness, resulting from the incomparability of data, where such data are available in the Member States, and the lack of a harmonised definition of over-indebtedness’.98 Over-indebtedness has been mostly conceived as something to be prevented, rather than cured, and therefore ex ante measures were called for as an instrument ‘to promote the development of cross-frontier credit’.99 The approach envisaged at the beginning of the 2000s consisted thus in ‘complementing the measures to promote the development of cross-­border credit with measures to prevent over-­indebtedness throughout the one credit cycle’.100 The Economic and Social Committee tried to translate policy into more concrete action proposals, producing a report on household over-indebtedness in 2002,101 which formulated recommendations for Member States and the European Commission on the basis of the assumption that a well-­functioning internal market justified the need for a European approach to the subject and the harmonisation of both substantive and procedural rules on the subject.102 However, and again, these s­uggestions were not

93 

See Consumer Credit Directive, recital 26. Council Regulation (EC) 1345/2000; Regulation (EU) No 1215/2012. 95  F Ferretti and C Livada (2016) 26. 96  Starting from N Huls, U Reifner and T Bourgoinie (1994). 97  See G Betti, N Dourmashkin, MC Rossi, V Verma and Y Yin (2001). 98 Council Resolution of 26 November 2001 on consumer credit and indebtedness, 2001/ C 364/01, 9. 99  Economic and Social Committee, Opinion on ‘Household over-indebtedness’, 2002/C 149/01, 1.10, mentioning a 2001 meeting of the Internal Market, Consumer Affairs and Tourism Council. 100 Council Resolution of 26 November 2001 on consumer credit and indebtedness, 2001/ C 364/01, 12. 101  Economic and Social Committee, Opinion on ‘Household over-indebtedness’, 2002/C 149/01. 102  MM Leitão Marques and C Frade (2003) 137. 94 

166  Over-Indebtedness

translated into ­binding legal instruments so that, in spite of a growing concern for the risks connected to the liberalised credit society and the attention for the matter of over-­indebtedness, the European institutions were still ‘far from showing any commitment to p ­ reparing a common legal framework, either in the form of a Regulation or a Directive, to tackle the problem of consumer over-­ indebtedness’.103 Most recently, the European Commission has taken a clearer position, endorsing the creation of personal bankruptcy regimes in Member States. In its recommendation on a new approach to business failure and insolvency, the Commission in fact suggested that ‘[a]lthough consumer overindebtedness and consumer bankruptcy are also not covered by the scope of this Recommendation, Member States are invited to explore the possibility of ­applying these recommendations also to consumers, since some of the principles followed in this Recommendation may also be relevant for them’.104 Some slightly more concrete guidance came from the Council of Europe rather than the European Union. At the 26th Conference of European Ministers of Justice in 2005 in Helsinki a resolution on ‘Seeking Legal Solutions to Debt Problems in a Credit Society’ was adopted.105 Having underlined ‘the importance of preventing problems arising from over-indebtedness and, where necessary, seeking solutions to enhance the proper prevention and management of debt problems, as well as the sense of responsibility of creditors and the individual debtors’,106 the resolution entrusted the European Committee on Legal Cooperation (CDCJ) to ‘prepare an appropriate instrument defining legislative and administrative measures, and proposing practical remedies’.107 As a consequence of this involvement, a Group of Specialists on Seeking Legal Solutions to Debt Problems (CJ-S-DEBT) was appointed and entrusted to prepare a draft Recommendation. On this basis, Recommendation (2007)8 of the Committee of Ministers to member states on legal solutions of debt problems108 was issued. This Recommendation explicitly refers to over-indebtedness as a cause of social exclusion that has to be prevented and whose consequences have to be alleviated by the Member States. More specifically, the instruments through which this objective should be achieved are identified in ‘financial literacy on the rights of consumers in general, and budget management in particular, as part of the national education system’,109 access to financial advice and counselling and a reference to the regulation of credit: ‘providing the necessary measures and regulations to ensure responsible practices during all phases of the credit relationship including marketing of credit as well as

103 

Ibid, 140. EU Recommendation of 12 March 2014 C(2014) 1500 final, recital 15. 105  MJU-26 (2005) Resolution 1 Final. 106  Ibid, 4. 107  Ibid, 12. 108  Recommendation CM/Rec(2007)8. 109  Ibid, 2.b. 104 

European Over-Indebtedness Law 167

the ­collection and use of credit data and other financial information’.110 As to this latter aspect, the Recommendation of the Council of Europe is consistent with the minimalistic approach of the Consumer Credit Directive, while the emphasis on financial literacy reveals the ‘active over-indebtedness’ bias. Both the minimalistic approach of the Consumer Credit Directive and the emphasis on financial literacy are again linked to the understanding of the consumer as a rational economic actor expected to be sufficiently protected inasmuch as he or she is sufficiently informed. As to the ex post actions, the Recommendation of the Council of Europe lists ‘mechanisms necessary to facilitate rehabilitation of over-indebted ­individuals and families and their reintegration into society’,111 ranging from the protection of the essential assets of the debtor to the introduction of measures ‘allowing partial or total discharge of the debts of individuals and, where applicable, families in cases of over-indebtedness where other measures have proved to be ineffective, with a view to providing them with a new opportunity for engaging in economic and social activities’.112 The Recommendation in fact offers little guidance as to the policy instruments that are most apt for tackling over-indebtedness, as it basically and sometimes redundantly113 lists all possible approaches to the issue already in force in several European states. Legal instruments at the European level continue being quite disappointing with regards to an efficient fight against over-indebtedness vis ex post mechanisms aimed, partially or totally, at relieving the debtor. This state of affairs exists regardless of the fact that, according to a commentator, the European Union actually has a legal basis to intervene in the issue of over-indebted consumer bankruptcy given the fact that certain differences in national insolvency procedures might constitute a restriction of free movement, as already ascertained by the CJEU,114 which would empower the EU institutions to take action.115 Thus, over-indebtedness may be treated as an internal-market problem, rather than as a social exclusion problem. The possible emergence of the phenomenon of ‘insolvency tourism’ may in fact contribute to this internal-market perspective. In the absence of uniform procedures and requirements for filing bankruptcy in the various Member States, but given the principle expressed by the CJEU that ‘Article 45 TFEU must be interpreted as precluding national legislation, such as that at issue in the main proceedings, which makes the grant of debt relief subject to a condition of residence in the Member State concerned’,116 the possibility of insolvency tourism under

110 

Ibid, 2.d. Ibid, 4. 112  Ibid, 4.h. 113 For instance, Recommendation on enforcement Rec(2003) 17 had already urged Member States to protect certain essential assets and income of the defendant, and most Member States have ­implemented measures with this purpose. See J Niemi (2009) 98 ff. 114  Case C-461/11 Ulf Kazimierz Radziejewski v Kronofogdemyndigheten i Stockholm EU:C:2012:704. 115  J Niemi (2012). 116  Case C-461/11 Ulf Kazimierz Radziejewski v Kronofogdemyndigheten i Stockholm EU:C:2012:704, para 54. 111 

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the ­European regulation on insolvency proceedings, which applies to both commercial and personal insolvencies,117 is already emerging. Certainly, the numbers concerned are not yet significant,118 in particular because of the practical difficulty of forum shopping for vulnerable consumers, which is a mechanism availed of mostly by more sophisticated individuals.119 At any rate, the phenomenon, although limited, can possibly also make the issue of EU relevance from a substantive point of view. The possible impact of EU consumer law on national consumer insolvency is evident. Indeed, the CJEU has already shown how the unfairness test created by the Unfair Contract Terms Directive is capable of intruding on national consumer bankruptcy procedures.120 At the same time, the Commission continues to show interest in the topic, and several studies on over-indebtedness in Europe have since been financed.121 Considering the increasing references to the need of tackling over-indebtedness formulated in particular by the Economic and Social Committee in the post financial crisis era, as well as the implicit endorsement of personal bankruptcy regimes made by the Commission in 2014, it seems realistic to expect new interventions in the future, although it remains to be seen whether such EU interventions will still be socially needed, as most Member States have already introduced legislation on the issue, albeit with different degrees of success.

117 

Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings. T Hoffmann (2011); T Hoffmann (2012). 119  F Ferretti and C Livada (2016) 35, according to whom ‘[t]he emphasis given to COMI relocation lies far from the reality of millions of over-indebted vulnerable consumers’. 120  Case C‑377/14 Ernst Georg Radlinger and Helena Radlingerová v Finway a.s. EU:C:2016:283. 121  D Davydoff, G Naacke, E Dessart, N Jentzsch, F Figueira, M Rothemund, W Mueller, E Kempson, A Atkinson and A Finney (2010). 118 

6 Financial Education I.  Just Gonna have to be a Different Man In the previous chapter, it was noted that consumer bankruptcy laws might occasionally require that the insolvent debtor, in order to benefit from debt discharge, has to go through a programme of financial education, in order to be schooled about the responsible use and management of money and credit and, thus, learn how to avoid over-indebtedness in the future. This requirement might be justified by the empirical finding that even having benefited from the discharge procedure, one in four US American consumers faced difficulties in paying their debts only one year after the conclusion of the procedure, which seems to confirm that debt discharge alone is not a sufficient mechanism to take people out of social exclusion in the long run if this is not associated with broader policies.1 That view, nonetheless, reinforces the idea that over-indebtedness is mostly an active phenomenon brought about by the borrower’s behaviour and that, as such, it can be counteracted by educating the borrower in the responsible use of money. The promotion of financial literacy has gained momentum at the international level in recent year, allegedly as a strategy to achieve financial inclusion and prevent the economic and social problem of over-indebtedness. This approach is motivated by the view that financial products are particularly complex and obscure contracts, and it is easily imaginable that not all citizens will be in the best position to understand the legal and economic consequences of the transactions they enter into, and might not be able to benefit from those services that could enhance their welfare. It has already been correctly evidenced in the literature that, especially in the financial sector, the sociological model of a rational and wellinformed consumer—epitomised in the Gut Springenheide case of the CJEU2—is in fact often simply a myth, which questions the adequacy of current legal frameworks based on that rational model.3 In the US, in particular, there is a wide,

1 

KM Porter and D Thorne (2006). C-210/96 Gut Springenheide GmbH and Rudolf Tusky v Oberkreisdirektor des Kreises ­Steinfurt—Amt für Lebensmittelüberwachung EU:C:1998:369. 3  V Mak (2012). 2 Case

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though also disputed,4 empirical literature documenting a lack of financial literacy among citizens5 which, combined with cognitive limitations and biases including both self-confidence and distrust of the financial market more generally, increases the possibility that consumers might take harmful financial decisions, offering a sufficient justification for regulation.6 Thus, while it is generally affirmed that offering more information to consumers is an instrument to empower them and make them aware of the risks inherent in financial contracts, even imposing disclosure obligations on the side of the financial services provider might be not very effective, if the consumer is not able to fully comprehend the information which is being given to them, and ‘[t]he resources expended on empowering investors, particularly on the disclosure side, are likely to be misapplied without supporting education strategies’.7 In other terms, while financialisation assumes a citizen who is ready and confident to enter the financial market, reaping the benefits of that economic construction, empirical reality shows that in fact that citizen does not seem to exist in practice. As an expert group on financial education in the EU recognised, ‘the kinds of problems experienced by European consumers have shown that they need very basic skills and knowledge’.8 If the existence of citizens with low levels of financial literacy is acknowledged, there are at least two solutions which could be used to address the problems that they might encounter via the financial market policies of financial inclusion. The first solution is to upgrade the regulatory framework in order to offer enhanced protection to those subjects who are most in need of it, in effect opting for an interventionist approach integrating the insights of behavioural sciences into consumer law.9 The other strategy is to help citizens to gain those basic financial skills so that they can fully participate in the financial market, namely through promoting financial education. In the former case, the legal rule is changed; in the latter, the addressee of the rule is changed. Thus, while the usual approach of non-interventionist legislation has been to remedy the informational deficit imposing disclosure obligations upon services providers, the approach of financial education aims to offer customers the cultural instruments needed to understand that information. Financial education appears primarily as an instrument of

4  TA Durkin and G Elliehausen (2015) 316 argue that ‘neither existing behavioral evidence nor conventional economic evidence supports a general conclusion that consumers’ credit behavior is not rational or that markets do not work reasonably well’. Even in the case of residential mortgages, B Bucks and K Pence (2008) suggest that most borrowers are able to understand the terms of the contract, although ‘some borrowers with adjustable rate mortgages underestimate the size of the caps on potential changes in their note rates’, G Donadio and A Lehnert (2015) 336. 5  D Bernheim (1995); in connection to the issue of over-indebtedness, see A Lusardi and P Tufano (2009) showing that even the capacity to self-assess whether one is over-indebted is put at risk by a low level of financial literacy. 6  An overview in JY Campbell, HE Jackson, BC Madrian and P Tufano (2010) 9 ff. 7  N Moloney (2010) How to Protect Investors, 389. 8  Expert Group on Financial Education (April 2009) 2. 9  V Mak and J Braspenning (2012).

The Rise of the Policy of Financial Education 171

consumer empowerment, meant to make up for the limits of the information model and, based on this idea, programmes of financial education have been enhanced and advocated, in particular in the US, as instruments to be used to limit the high number of consumer bankruptcies.10 This policy is thought to contribute to a fuller financial inclusion of the subject, as it considers that most consumers are not excluded or self-excluded simply from financial services, but even from the knowledge as to the way in which those financial services work. In other terms, ‘[a] higher level of financial literacy means that consumers are better equipped the moment they enter the financial marketplace. They are more able to assess the risks of financial products that they consider purchasing.’11 While the policy measures which have been discussed so far have fostered the financialisation of the citizen, the citizen does not yet seem to be ready to be financialised, and needs particular training to that end.

II.  The Rise of the Policy of Financial Education Even if more precise definitions seem to be lacking, financial literacy can be taken to refer to the level of knowledge of the financial market by the consumer, while financial education is a form of programme promoted either by public authorities or private institutions in order to inform an allegedly financially illiterate citizen. Initially endorsed by the financial firms themselves and later taken over as a regulator’s responsibility in Anglo-Saxon countries, financial literacy programmes have developed under the influence of the global expansion of financial markets.12 The intention to promote financial education has been expressed by various global institutions: entities such as the Organisation for Economic Co-operation and Development (OECD) have been proactive in both measuring the levels of financial illiteracy among individuals around the world and encouraging financial education since the 2000s,13 and the goal became pivotal among the objectives of the OECD, in particular after the 2008 crisis.14 Analogous initiatives in different countries are endorsed by the World Bank. Narrowing the focus to the European level, the predilection of the European Union for financial literacy and counselling has been affirmed numerous times at the European level in the last few years: in the White Paper on Financial S­ ervices Policy (2005–2010),15 in the 2004 Green Paper on Retail Financial Services,16 10 

J Fox, S Bartholomae and J Lee (2005). V Mak and J Braspenning (2012) 39. See T Williams (2007) 228. 13  Among others, OECD, Recommendation on Good Practices for Financial Education Relating to Private Pensions, 2001; OECD, Financial Education Project. Background and Implementation, 2003. 14  LE Pinto (2012). 15  COM(2005) 629. 16  COM(2007) 226. 11  12 

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in the 2007 European Parliament resolution on financial services policy17 and in the ECOFIN Council conclusions of 8 May 2007, to name just a few. The interest for financial education is also manifested by the conference hosted by the European Union on 28 March 2007 in Brussels, devoted to the theme ‘Increasing financial capability’. While financial education did not appear in the EU Consumer Policy Strategy 2007–2013,18 it assumed instead a prominent position in the new Consumer Agenda19 adopted in 2012, replacing the 2007–2013 strategy. In all the instances mentioned, the EU institutions pointed out the importance of the policy, but emphasised that financial education is a primary competence of the Member States. A step towards the development of a European approach to financial education was taken in the Communication on financial education of 18 December 2007. In this document, the Commission highlighted that financial education is beneficial to individuals in that financially educated individuals ‘are less likely to purchase products they do not need, be tied into products that they do not understand, or take risks that could drive them into financial difficulty’, so that financial education appears as an adequate means to promote the stability of the financial system and ‘help address problems of financial exclusion’.20 In this situation as well, the Communication recognised that the main responsibility for financial education remains within the Member States.21 However, and taking into consideration the legal basis offered by Article 169 TFEU which authorises the Union to promote consumers’ right to information and education, it identified a set of eight common principles that should underlie the Member States’ actions in the field. These delineate the need for a life-long financial education which should start as soon as possible, be carefully targeted to meet the needs of the ­individuals,22 and delivered both by public authorities and financial services providers ‘in a fair, transparent and unbiased manner’ and ‘always in the best interests of the consumer’.23 With a decision in 2008, the Commission also set up a financial education expert group, which ‘contribute[s] to sharing and promoting best practice on financial education’ and supports the Commission.24 Since then, the expert group has gathered several times, producing a number of reports and formulating suggestions for the Commission such as, for instance, introducing a ‘European driving licence for financial services’.25 The metaphor of the driving licence is quite

17 P6_TA-PROV(2007)0338/A6-0248/2007.

18 European Commission, Communication from the Commission, ‘EU Consumer Policy s­trategy 2007–2013. Empowering consumers, enhancing their welfare, effectively protecting them’, COM(2007) 99 final, 5.5. 19  COM(2012) 225. 20  COM(2007) 808 final, 4. 21  Ibid, 9. 22  Ibid, 8. 23  Ibid, 9 24  Commission Decision 2008/365/EC, recital 8. 25  Expert Group on Financial Education (April 2009) 5.

The Rise of the Policy of Financial Education 173

indicative of the way in which financial services are viewed in this context: just like a car, financial services are fundamental and useful ‘products’ which serve the interest of the user, they can however also become extremely dangerous when put in the hands of inexpert users, who should therefore be taught how to best deal with them. Indeed, to expand upon the metaphor of the driving licence, it is also worth noting in passing that cars are also object of detailed product regulation and that consumers are protected against the damage created by defective cars; in contrast, such a product regulation model appears much less developed in the financial field. It has also been suggested that financial literacy can be compared to learning the skills for driving the car, but this is different from financial education in broader terms, which can be compared to learning more critically about the role of cars in our society.26 The group also recommended that the European Commission insert a declaration on the importance of financial education in the conclusions of the G20. This reference did indeed, eventually, appear in the G20 High-Level Principles on Financial Consumer Protection of 2011, which recognised that ‘financial consumer protection should be reinforced and integrated with other financial inclusion and financial education policies. This contributes to strengthening financial stability.’27 The instrument of financial education, therefore, appears to be intended to be used to achieve both consumer protection—as emphasised in the EU documents before the financial crisis—and financial stability, as it became the prevalent concern at the global level after the crisis. Despite this topic’s growing importance, positive EU law seems to lag behind. The focus of EU contract law mostly relies on disclosure obligations and, despite the fact that disclosure obligations can be more effective if associated with programmes of financial education—as envisaged by the financial education expert group—on the basis of public-private partnerships,28 it has been suggested that ‘[t]he law as it stands, therefore, seems ill-equipped to offer protection to consumers and to prevent them from rash and bad decision-making’.29 In more recent EU measures, discussed in the previous chapters, there appears to be a growing emphasis on the need to promote financial education among consumers. For instance, while the Consumer Credit Directive referred in vague terms to the need for Member States to promote responsible practice which ‘may include, for instance, the provision of information to, and the education of, consumers, including warnings about the risks attaching to default on payment and to over-indebtedness’,30 the more recent Mortgage Credit Directive compels Member States to ‘promote measures that support the education of consumers in relation to responsible borrowing and debt management, in particular in r­ elation

26 

U Reifner and A Schelhowe (2010) 33. G20 principles, 4. 28  Expert Group on Financial Education (April 2009) 4. 29  V Mak and J Braspenning (2012) 39. 30  Directive 2008/48/EC, recital 26. 27 

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to mortgage credit agreements’.31 Moreover, the Commission will regularly assess those measures taken at the national level with a view to identifying a set of best practices.32 Additionally, the Payment Accounts Directive refers to the need to promote financial education, specifically addressing ‘the most vulnerable consumers’ who should be ‘provid[ed] … with guidance and assistance in the responsible management of their finances’,33 although this is specified in a recital rather than in the more normative part of the Directive.

III.  Critical Aspects of the Policy of Financial Education Despite its growing importance and almost universal acclaim, the concept of ­financial education does not appear to be free from criticism, so it will be necessary to highlight both its political-economic dimension and its impact on private law. The problem appears to be that the vagueness of the notion, similar to what has been described for the notion of inclusion itself, allows for extremely different interests and agendas to be surreptitiously advanced through it. The need to promote financial literacy has been advocated particularly strongly by those institutions such as the OECD which have also been active in the promotion of the financialisation of economy and of the state. National governments and central banks in Europe have adhered to this project, acknowledging the further implications for the political economy of the states. The underlying policy is well expressed by the Italian Government and the Bank of Italy in their report on financial literacy in Italy for the G20 and the OECD, stating that ‘[t]he gradual shrinkage of public welfare resources, the launch of the supplementary private pension system, and the transformation of the few outstanding defined-benefit schemes to the defined-contribution regimes, all contribute to transfer financial responsibility away from the State towards individuals and households, thus requiring strengthened financial capabilities among the public at large’.34 The need to promote financial literacy is, in this sense, presented as a consequence of deeper transformative processes that the state is undergoing and, at the same time, necessary both in the perspective of consumer protection and for purposes of improved competition since ‘informed and financially literate consumers are essential to the effectiveness of price and quality competition’.35 Thus, promotion of financial literacy among

31 

Directive 2014/17/EU, Art 6.

32 Ibid. 33 

Directive 2014/92/EU, recital 49. Bank of Italy (2013) 148. 35  I Visco (2010) 3. 34 

Critical Aspects of the Policy of Financial Education 175

citizens appears not only as a way to offer them the necessary instruments of ‘selfdefence’ in a possibly difficult environment such as the financial market, but also as an instrument to facilitate a shift towards individualised responsibility. As has been noted in the literature, ‘[w]hen using education to mold consumer preferences, regulators appear to reverse the idea of market failure posing a risk to consumer welfare, focussing instead on the risk of consumer “failure” jeopardizing the health of financial markets’.36 This contrasts with the understanding of financial education by consumer rights advocates who ‘believe that it is not the consumer who should adapt to the financial system but the financial system that should adapt to consumer needs’.37 Programmes of financial education recommended by the above-mentioned institutions are generally preceded by studies commissioned to investigate the existing degree of financial literacy in specific countries among the primary and secondary student populations who are the main target of those programmes.38 Regardless of specific national variations, these recommendations generally hint at the insufficiency of the awareness of the financial market and to the necessity of improving that awareness by way of a renewed attention to the issue of financial literacy in schools.39 At the same time, since financial issues are complex matters to be taught, teachers themselves have shown to be in need of some sort of training, so that the provision of financial education appears as a two-level process, in which both the students and the teachers undergo training. Financial education appears to be a quite general and vague label under which extremely different education strategies can be conceived, so that describing a sole model of financial education is currently impossible. In Europe, and even within different regions of the same European countries, a great variety of forms and schemes enabled at the various levels to promote financial literacy can be detected.40 The greatest ambiguity exists as to who has to provide for financial education in practice, as in this highly decentralised process a plurality of private and public local actors are involved. The EU Consumer Agenda 2012 acknowledges that ‘there is an active role for institutions like banks, central banks, financial market supervisory authorities, deposit and investor protection schemes in raising financial literacy’.41 In general terms, programmes are most often provided by national central banks, independent consumer associations and research centres (the most remarkable case is the Institut für Finanzdienstleistungen founded by the consumer lawyer Udo Reifner in Germany), financial newspapers or commercial

36 

T Williams (2007) 243. U Reifner and A Schelhowe (2010) 33. M Habschick, B Seidl and J Evers (2007) 3. 39  The provision of financial education in schools was discussed by the Expert Group on Financial Education (November 2009). 40  See M Habschick, B Seidl and J Evers (2007). 41 European Commission, Communication from the Commission, ‘A European Consumer Agenda—Boosting confidence and growth’, COM(2012) 225, 4.2. 37  38 

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banks, which have occasionally provided courses on financial education directly to pupils. In certain instances, specific charters of understanding and conventions are concluded between private organisations and local councils, so that public education in this area is de facto outsourced to private subjects. The choice of one of those alternatives—financial education as provided by public authorities, the financial sector or civil society—is by no means neutral. In particular, when financial education is offered by financial services providers, a series of legal concerns are triggered. These involve, first of all, aspects of unfairness in business practices if the programmes are employed by the provider to promote its own services to a particularly vulnerable group of people such as students and school pupils. Given this possibility, the suggestions of the European Commission that education has to be promoted ‘in a fair, transparent and unbiased manner’ and ‘always in the best interests of the consumer’,42 are most appropriate, although their non-binding nature might represent a serious limitation. Since financial education has to be promoted primarily in schools, more fundamental and worrisome concerns regarding the quality of the educational system nevertheless emerge. Thus, in this sense ‘the OECD has become one of the most influential transnational organizations in education’,43 and this has already been criticised for its allegedly negative impact on the quality of school systems around the world.44 The critique states that the pressure to introduce programmes on financial education in schools has occurred exactly when the financial crisis and the austerity measures implemented to counteract it have already led several countries to cut public spending on fundamental areas including education.45 In fact, the relation between finance and education is a particularly intricate one: even as early as the twelfth century, merchant bankers contributed to the development of urban secondary schools promoting more secularised education, as trade required advanced skills to be performed.46 Today, public education is also subject to the pressure of financialisation,47 and it has been noted that when the consumer credit market expanded in the UK against the background of public policies meant to promote home ownership, the possibility of a rise in inflation was counteracted by means of public spending cuts which immediately targeted public education.48 Since schooling is the most basic and fundamental political institution for forming individuals as citizens, inasmuch as it provides the basic education which is necessary to fully participate in society, the ongoing financialisation of education represents perhaps the ultimate and most decisive step in the process of financialisation of society and the citizen.

42 

COM(2007) 808 final, 9. K Kofod, KS Louis, L Moos and B van Velzen (2012) 32. 44  C El Bouhali (2015). 45  See European Commission/EACEA/Eurydice, 2013. Funding of Education in Europe 2000–2012: The Impact of the Economic Crisis. Eurydice Report. (Luxembourg: Publications Office of the European Union). 46  J Le Goff (2005) 117; H Pirenne (1936) 124. 47  MA Peters and T Besly (2015) 48  D Gibbons (2016) 91. 43 

Critical Aspects of the Policy of Financial Education 177

In light of this, the enthusiasm with which programmes of financial education are advocated and eagerly translated in practice or embraced must thus be considered with care. First, these programmes appear mostly as forms of financial education ‘from above’, which neglect the increasingly relevant dimension of financial education ‘from below’. Especially after the 2008 crisis, public awareness of financial services, and the role of debt in modern economy has dramatically increased in different layers of the population, and has often produced more or less concrete outcomes and proposals, such as in the cases of the Occupy Wall Street movement or what has been called the Icelandic Revolution.49 All these initiatives tend to fall off the radar of financial education policies, which on the contrary seem to assume a proactive role for both schools and financial services providers. Secondly, while promoting knowledge about finance appears in itself as a valuable initiative, this policy risks to be perceived as an alternative to other possibly more protective approaches such as regulating financial products50 or banning of the most dangerous ones.51 Financial education alone cannot be regarded as the only policy response to promote a more responsible financial market. This point has been critically noted by the Expert Group on Financial Education: [S]ome Experts suggested that consumer associations were prioritising product regulation and not financial education (e.g. France). In general, there is a tendency to mix financial education with consumer protection measures, which should be avoided. Consumer education is not a substitute for consumer protection, although it can improve the effectiveness of consumer protection policies. For example, consumer education can encourage consumers to read the ‘disclosure’ information about products more carefully and give them a better chance of understanding what they read.52

Thirdly, having assumed the practical non-existence of the rational consumer—a model which has already been abundantly debated and criticised and to which legal scholars probably gave more normative weight than liberal economists did— financial education policies risk paradoxically to reinvigorate that model of homo oeconomicus who, after having undergone some financial education programme, is now considered to be financially included, perfectly rational and informed in issues of financial markets and, therefore, ready to internalise and bear the risks of detrimental financial transactions. The continuous references to the need to teach the consumer about the financial products he or she will purchase and how to manage money, appear as the behaviourist re-edition of the trust in the informative paradigm, occasionally justified—as in the case of the G20 principles—by the macroeconomic concern of achieving financial stability, rather than protecting the consumer per se. Financial education thus ends up reinforcing the approach based on the information held by the consumer, rather than on the regulation of the products to be purchased by that consumer. If this is true, the risk is that, while

49 

S Daellenbach (2015). E Warren (2007). AM White (2008). 52  Expert Group on Financial Education (April 2009) 3. 50  51 

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behavioural economics beneficially oriented research53 towards the insufficiency of the informative model and the need to move to different regulatory approaches, the introduction of financial literacy programmes comes to the rescue of the liberal information paradigm, on the basis of the justification that the recurring failures of that paradigm were due to the incapacity of ‘bounded-rational’54 consumers to fully comprehend the economic operation that they were taking part in, and which will now be fixed by way of programmes which allow the consumer to become wiser. This again places emphasis on the demand side, in spite of the awareness of the fact that the dynamics of the household credit market cannot be explained only on the basis of the behaviour and preferences of the households and it is also necessary to consider the supply side,55 as well as more generally the whole structure of the financial market in which those subjects operate. In fact, this appears as a consequence of the new enthusiasm with which policy makers and scholars have embraced the insights of behavioural economics, without considering how the new paradigm emphasises ‘the failures of many single individuals, including consumers, investors, bankers, and regulators’ rather than the failures of the overall system.56 All the concerns expressed so far become particularly compelling when programmes of financial education are actively performed by the financial sector itself. A large German bank, for instance, presents its programme of financial education in schools suggesting that the reasons for over-indebtedness are ‘­Unwissen, ­Unsicherheit und fehlende Selbsteinschätzung’57 of the customers. In other words, active over-indebtedness. This representation fully neglects the fact that, as discussed in the previous chapter and now widely recognised in the literature, passive over-indebtedness, or at most a combination of passive and active over-­ indebtedness, is the most frequent cause of the phenomenon. The view which risks being propagated in schools is, hence, one which clearly contradicts most social and economic research since the 1960s and reinforces a moralistic view of debt. Would bank-provided financial education deliberately promote among young citizenship this idea of self-responsibility of consumers?

IV.  Interference with Contract Law Although the diffusion of financial education might pose concerns, especially from a pedagogical perspective concerned with the type of education which is 53 

See G Howells (2005). On bounded rationality, see C Jolls, R Thaler and CR Sunstein (1998). 55  S Cosma (2016) 322. 56  S Frerichs (2011). 57  Deutsche Bank, Wirtschaft und Finanzen live! Initiative Finanzielle Allgemeinbildung. L ­ eistung aus Leidenschaft, flyer available at https://www.db.com/cr/en/docs/DB_Flyer_Finanzielle_ Allgemeinbildung_1210.pdf. 54 

Interference with Contract Law 179

promoted in school which seem to call for at least a better definition of the programmes to be taught, there are also concrete problems in the perspective of contract law. A closer analysis of the way in which legal systems work with regard to the protection of vulnerable parties to financial transaction seems to confirm the much more general political suspicion uttered so far. The huge case-law developed in Europe out of litigations concerning retail financial instruments is instructive. Courts in Europe have shown a particular sensitivity to questions of substantive imbalance between contract parties involved in financial transactions, and the case of the suretyship granted by spouses and children to the benefit of their family members as shown in famous judicial decisions both from Germany58 and the UK59 is just the most evident and celebrated example of that tendency. This sensitivity is deeply rooted in contract law which, even without necessarily having to resort to the category of fundamental rights,60 has possesses doctrines usefully employable to offer protection to the vulnerable party.61 Thus, financial illiteracy is often used by courts as a supporting argument to invalidate detrimental financial contracts while, by the same token, courts are much less responsive to the complaints of financially educated and sophisticated claimants, regardless of the question whether they legally qualify as consumers or not. In fact, when the claimant is a sophisticated investor and an advisory relationship has not been explicitly entered into by the parties, English courts generally exclude the argument that there has been a breach of a duty of care by the bank or that the contract can be rescinded for mistake.62 Conversely, in cases where a customer is more inexperienced, English courts have exceptionally been inclined to find that a financial advisory relationship had been established and thus find a bank liable for negligent advice.63 The same approach is even taken in overseas common law jurisdictions, such as in Australia, where a lender bank was found under a duty to advise a particularly inexperienced borrower customer unable to fully understand the risks involved in the transaction.64 The approach of continental European courts, too, tends to be sensitive to the degree of financial literacy of the claimant and diversify legal responses based on that degree of financial literacy, as seen in a remarkable series of cases concerning the mis-selling of harmful financial products to retail investors. As shown by an extensive comparative analysis on the subject,65 the Spanish Supreme Court 58 

BVerfG 19 October 1993, NJW 1994, 36. Lloyds Bank plc v Bundy [1975] QB 326; Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44. 60  See G Brüggermeier, A Colombi Ciacchi and G Comandé (2010); C Mak (2008). 61  O Cherednychenko (2004). 62  JP Morgan Chase Bank v Springwell Navigation Corp [2010] EWCA Civ 1221. Similarly: Bankers Trust International plc v PT Dharmala Sakti Sejahtera [1996] CLC 518. 63  Verity & Spindler v Lloyds Bank plc [1995] CLC 1557. It has been noted that this case ‘cannot provide any more general guide to banks’ liability, however, as it was clearly decided on its own special and unusual facts’, EP Ellinger, E Lomnicka and CVM Hare (2011) 160. 64  Foti v Banque Nationale de Paris [1990] Aust Torts Reports 181-025. 65  F Della Negra (2017). 59 

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refused to grant the remedy of termination for mistake of an investment contract concluded by an experienced investor who had understood the risk he was assuming, while it allowed for the invalidation of a similar contract between a bank which did not perform suitability and appropriateness tests and a small firm whose director lacked specific financial expertise.66 French courts also undertake similar assessments as to the actual capacity of the investor to understand the risks associated with the contract being signed, concluding that customers who are familiar with financial products because of their own trade or profession might be considered to have a sufficient financial expertise to understand the contract.67 Considering these trends, a second look can be taken at the surprising decision of the Portuguese Supreme Court mentioned earlier, which applied the change of circumstances doctrine to a swap contract. Read in this light, that decision clearly appears as an attempt to offer protection, although based on an unstable doctrinal ground, to a financially illiterate subject. As both the lower and the higher Portuguese courts stated, clarifying the circumstances under which the contract was concluded, the plaintiff merely limited herself to sign the contract and nothing has been read to her or explained to her. The legal representative of the plaintiff is a very simple person, who just has a basic education and never contracted any special or complex financial product with banks, while the plaintiff never realised that the contract she was signing could entail any risk and, consequently, a considerable loss.68

In this sense, while the judgment is remarkable in the way in which it applied the doctrine of change of circumstances to a swap contract, it is by no means exceptional taking the different perspective of achieving the goal of financially weaker party protection. As has been suggested by a commentator, rather than change of circumstances, ‘the existence of intrinsic or legal information duties, the complexity of the financial products and the (non-) sophistication of the client appear to be the main factors on which legal doctrine and the courts have relied to award damages or to terminate swap contracts’.69 Now, against this background, in which the informative asymmetry between the investor and the retail services provider is often used to invalidate contracts detrimental to the financially illiterate consumer, some doubts arise as to possible negative repercussions of financial education in terms of investor protection. It could be wondered whether such a line of reasoning could still be employed even in the future when fully-developed programmes of financial education would indicate that, at least formally, the consumer has the same level of information

66 

Tribunal Supremo, n 41, 12 February 2014; Tribunal Supremo, 879/2012, 20 January 2014. CA Paris, 6 April 2000, Moritz/c SA Wargny; CA Paris, 29 October 1999, SA Wargny c/Moreau. 68  ‘A autora apenas se limitou a assinar, nada lhe tendo sido lido, nem explicado. O legal ­representante da autora é pessoa muito simples, que tem apenas a instrução básica e nunca tinha contratado qualquer operação bancária especial ou complexa, sendo certo que nunca a autora se apercebeu que o contrato que assinava poderia acarretar qualquer risco e, consequentemente, a perda de valores significativos.’ 69  R Momberg (2015) 151. 67 

Interference with Contract Law 181

as the financial services provider. The risk is that financial education policies contribute to strike a balance between private autonomy and regulation which is weighted too much in favour of the former, paradoxically harming rather than improving consumer protection. Obviously, it is justifiable that a customer, who was fully aware and capable of comprehending the financial product which was being offered to him or her, cannot later complain in a court about that contract when this reveals to be not beneficial as initially hoped for. Nevertheless, within a market characterised by extreme complexity and deficient product regulation, assuming that the consumer was financially literate might preclude the ex post application of remedies of either contract or non-contract law nature. With respect to contract law remedies, these include the application of doctrines such as good faith, undue influence or even change of circumstances. With respect to non-contract law remedies, procedural mechanisms of debt relief could become more difficult to employ to the benefit of the debtor, since these might be available inasmuch as the consumer has not encountered over-indebtedness because of reckless economic behaviour. In general terms, the risk is that ‘the criteria that distinguish the literate from the illiterate subject operate to de-politicise finance and de-centre financial responsibility through the internalisation of risk and the framing of unequal redistributions of wealth as individual pathology’.70 At the end of the day, programmes of financial education can work in two different and radically opposite ways. In the view of financial education advocates, empowering the consumer will result in an effective protection and an efficient allocation of risky financial products to investors who are more able to understand and cope with that risk. According to a more pessimistic view, nonetheless, financial literacy will serve only to shift responsibilities from the financial services provider to the consumer, de facto aggravating the situation of the consumer and depriving him or her of legal redress. Crucially, much will depend on the approach taken by the judiciary, which will have to appreciate the actual degree of financial literacy of the consumer. It is important that this is carried out in order to verify whether the consumer had really understood the instruments in practice, over and above consideration of the fact that the consumer had been schooled according to some financial education programme as evidence sufficient to prove the consumer’s ability to understand the product and thus bear the possibly detrimental consequences deriving from it. While it will be mostly for the courts to avoid that the policy of promoting knowledge of financial services leads to a shift of the responsibility from the bank to the customer, the role of legislation and regulation remains to be seen. Despite the remarkable emphasis on financial education at the global policy level, a welldefined and coherent approach to the topic seems lacking. Continuing to emphasise the importance of financial education at the policy level without, however, concretely determining in which way and by whom this has to be provided could lead to unexpected consequences.

70 

S Daellenbach (2015) 250.

Conclusion Since the first half of the twentieth century, the inclusion of citizens in the financial market has become a deliberate policy objective pursued initially in the US and later in the European context. Terminological and rhetorical variations in those contexts aside, making retail financial services more accessible to consumers has been regarded as serving both the economic interest of financial services providers by expanding their reach, and the interest of consumers by maximising their welfare. In the post New-Deal period, that idea also served the purpose of facilitating access to credit and, thus, an expansion of the money supply necessary to boost the post-recession economy, consistent with broadly intended Keynesian policies. When Keynesian policies, with their emphasis on the role of the state, started to decline and to be replaced by monetarist ideas, financialisation was pushed to its limits. The democratisation of finance, as it was narrated in the US, could now straightforwardly replace state spending. Economic and political developments leading towards increased individualism and a reduced involvement of the state in the economy led the model of so-called democratisation of finance to predominate. As it promised to democratise finance and bring the wealth of the financial market to a wider public, the financial innovations of the 1980s led to important consequences, sometimes of a seemingly paradoxical nature. For instance, as a new pension orthodoxy suggested that old-age security had to be granted not only by the state but also, and largely, by the private sector, the model of social security eventually ended up relying on individual risk: Risk is presupposed in finance to the extent that to decide not to engage with it at some level is to be excluded from virtually any financial practice and from sociality more generally. As such, social inclusion becomes predicated on financial participation, in which risk appears as part of the natural foundation of all social relations.1

The same ethos underlined housing policies, now intended to facilitate access to mortgage credit. The very way in which an individual becomes an element of a polity, ie a citizen, has been affected. In a financialised context characterised by an increasingly less generous welfare state which can finance itself on the transnational capital market as de facto a kind of ‘market state’, a citizen left with no access to financial services will necessarily experience adverse social consequences. This book has told a mostly European story, rather than a US one. The story it tells is that the idea of democratisation of finance reached the old continent,

1 

S Daellenbach (2015) 252.

Conclusion 183

where it was unfolded in typically European jargon, infused with stronger social concerns, as well as a more pronounced moralistic background. The term ‘inclusion’ was thus employed in Europe. While in the US democratisation conveyed an image of redistribution of the assets of power from the state to the community, in a context that had already celebrated the ‘sovereignty’ of the consumer, in Europe the term inclusion rather suggested a more benign idea of participation and integration, to be realised possibly through the proactive role of a benevolent state. Rather than being able to do away with the state as democratisation of finance claimed to be able to do, financial inclusion relied on state action. Far from being hindered by its own vagueness, but rather facilitated, inclusion hence became a leitmotiv in European social policy—from France to the UK through the ­European Union—and later in finance. Despite the different v­ocabularies and starting points, both democratisation and inclusion pointed nonetheless to the same fundamental conclusion: increasing social welfare of the citizen through retail financial services, thus social inclusion through financial inclusion. Questions of social inclusion eventually replaced questions of social justice, as the new paradigm became the creation of ‘inclusive societies’ rather than necessarily just ones. Social inclusion became to the post-industrial market-state what social justice was to the industrial welfare state. As the notion became preponderant in the EU agenda, and legal scholars embraced it, other disciplinary areas started manifesting a certain discomfort with the newly emergent discourses associated with inclusion, considered as an expression of neoliberal forms of governance.2 Yet taking a socio-legal approach, such as the one employed by this book, some considerations emerge to disrupt that harmonic image of coincidence of social and financial inclusion. Some of the financial developments described were in fact at odds with the rationality of traditional legal thought as based on a particular anthropological model of an individual, as financial innovation facilitated a paradigm shift in the traditional debtor-creditor relation. To be fair, financial capitalism did not put itself in contrast to the historical legal development but rather, with that impetuosity or even ‘violence’ that its critics reproach,3 it accelerated a transition in the path that the law had painfully started undertaking long ago. From time immemorial,4 in fact, the legal tradition had regarded debt as a form of moral sin and put many limits, or even outright prohibitions, on moneylending. While lending upon interest experienced different treatments in Roman law, which in different phases wavered from limitations to prohibitions and factual recognition in a climate of social unrest determined by excessive indebtedness,5 it was canon law that contributed most to the prohibition of the practice in the ­Middle Ages. The prohibition of moneylending upon interest was in fact outlined

2 

L Dunne (2009) 45. C Marazzi (2011). 4  The regulation of lending upon interest dates back to Sumerian civilisation, while its outright prohibition is relatively more recent, see RP Maloney (1974). 5  R Zimmermann (1996) 166. 3 

184  Conclusion

in religious texts before legal ones, but was also and more fundamentally necessary to sustain a feudal, closed economy.6 This state of affairs was maintained in European private law until relatively recently, when practical reasons of economic convenience in a new social scenario, associated with a certain ineffectiveness of the usury laws at that time,7 led to a gradual recognition of the legitimacy of lending upon interest, in some jurisdictions more than in others. Whether this evolution testifies how the moral conceptions of the Church had to be submitted to the needs of the economy8 or whether the Church itself long before the Protestant Reformation encouraged capitalistic developments9 is a matter of discussion for historians of the economy and the law. At any rate, it is apparent that the recognition of the legitimacy of moneylending within certain limits was of enormous economic, as well as of moral significance, as it involved drastic changes even in the Catholic theological thought.10 However, while the law partially set moneylending free from its moral and religious weight, it fully shifted that moral burden onto the debtor. As has been noted, discussing the credit market in England, ‘[f]rom the eighteenth and nineteenth centuries there is no lack of documentation concerning the dislike expressed by the wealthy and the emerging middle classes for the use of credit, particularly its use by the poor, a dislike usually expressed in moralistic tones’.11 Of course, the insolvent debtor is no longer subjected to the draconian rules of the past, which had already witnessed a more liberal evolution within Roman law but which still until recently included imprisonment. However, and consistent with the general societal attitude which regarded credit as reputation and debt as sin, the system of private law still assumed a certain moral deficit on the side of the insolvent consumer debtor, which transpires from several parts of the law. While the law merchant developed new ways to better accommodate the economic needs of traders, the law applicable to the civil debtor remained mostly loyal to its roots. The civil debtor can hence borrow money, but when it comes to the repayment, the debtor has to ‘have money’, based on the principle derived from Roman law that ‘generaliter causa difficultatis ad incommodum promissoris, non ad impedimentum stipulatoris pertinet’,12 and is liable for the performance of his or her obligations with all present and future property.13 The inflexibility of general private law towards the debtor made it necessary to resort from time to time to exceptional instruments through which debts could be written off, especially when the levels of indebtedness in a community became so high as to pose risks

6 

H Pirenne (1936) 13. Report from the Select Committee on the Usury Laws, Vol 376, 1818, in W Swain (2015) 170. 8  M Weber (2003) 269. 9  HJ Berman (1983) 338. 10  J Le Goff (1990) 65 highlighted the importance of the emergence of the concept of Purgatory as an intermediate state between Heaven and Hell, allowing merchant bankers to lend money without necessarily renouncing salvation in the afterlife. 11  J Ford (1988) 29. 12  D45,1,137,4; D Medicus (1988) 498. 13  Italian Civil Code, art 2740; Spanish Civil Code, art 1911. 7 

Conclusion 185

to public order, and this is an aspect which, in various forms, has accompanied the European legal tradition since ancient times.14 At the same time, as a result of a long and tortuous historical evolution which departed from the strict personality of the debtor-creditor relationship to eventually recognise the possibility of assignment of debts,15 the creditor can generally decide to transfer his or her credit to a third party, with the debtor having usually little to no say in the process and even despite the debtor’s opposition. In present days, even the 2008 Consumer Credit Directive establishes that ‘[t]he consumer shall be informed of the assignment … except where the original creditor, by agreement with the assignee, continues to service the credit vis-à-vis the consumer’.16 This is not the place to repeat all these points, and the moral dimension of debt has already been the object of many an analysis by academics in various disciplines. Here, it is nonetheless crucial to add to the picture, and point out that the harsh attitude reserved by the law towards the debtor needs also to be explained on utilitarian rather than purely and, occasionally disputable, moralistic grounds. In a credit culture which was almost entirely based on interpersonal trust and in which credit deeply depended on reputation, such as the one that existed in Europe for large part of history and started undergoing changes only in the eighteenth century, only severe consequences for the insolvent debtor would have served to uphold the trust necessary to make that socio-economic system work. Insolvent debtors had done something more egregious than simply not keeping their promises: they had broken the trust of the community. The often scorned moral conception of debt is just the other and darker side of the sometimes romanticised17 interpersonal trust culture of the past. Thus, if considered in the long historical perspective, the twentieth century developments of financialisation continued the slow legal evolution which resulted in a less harsh treatment of the debtor, in interpersonal trust being slowly subsumed into systemic trust and the consequent repression of the moral considerations associated to indebtedness. Conversely, those financial developments pushed in the direction of promoting indebtedness for an increasingly large group of individuals, including the middle classes who had historically felt less need of borrowing. However, this took place against the framework of a law which had not yet come to terms or entirely cut loose from its interpersonal and moralistic past. Financial capitalism magnified the social merits of retail financial products and offered them to more individuals, but by doing so it pushed citizens into a legal arena that was not yet ready to welcome them. Inasmuch as the law gave more relevance to the interests of the creditor than of the debtor, it allowed financialisation to offer its ‘products’ to a growing number of individuals, extracting value

14 

AD Manfredini (2013). R Zimmermann (1996) 58 ff. Directive 2008/48/EC, Art 17(2). 17  M Joseph (2013) 660. 15  16 

186  Conclusion

from increasingly indebted borrowers, and turning the securities that guaranteed their loans into tradable commodities. Inasmuch as the law was slow in acknowledging the new economic and social function of private debt, it deprived the citizen from the level of protection necessary to bear the burden of heavier debts, at least in Europe. More importantly, with its ideological emphasis on autonomy and viewing contracts as a bilateral private transactions, it failed to acknowledge the broader social and economic function performed by those contracts. This book has hence told a story about the possible clash of the financial rationality with the law and the slow adaptation of the latter to the former, mediated by different and floating narratives about finance, debt, sin and inclusion. Financialisation in fact ‘has led to a fundamental change in society’s view of both personal debt and personal insolvency’, which needed to be tackled by the law, as authoritatively recognised by the government of the UK when introducing reforms to its insolvency law at the start of the 2000s.18 The centre of the analysis in the discussion of the legal framework of financialisation of the citizen has been the European Union, as a major driver of legal reform for European countries. An overview of the actions taken and policies envisaged at the European level to tackle the issue of financial exclusion has in fact portrayed an object in movement rather than a stable and definite image. Different dynamics appear to be at play here, and different narratives on financial inclusion have animated the response of the Union, whose actions in the field are now aimed at the creation of a ‘modern socially inclusive economy’.19 Embedded in the purposive logics and infrastructure of the European Union, the discourse on financial inclusion became most notably entwined with the internal market rationality. From the end of the 1990s to the end of the 2000s, the EU has promoted access to financial services for customers, increasingly highlighting the importance of access as well as the need to overcome legal barriers among different legal systems to allow customers to reap the benefits of the internal market. Access to financial services was strongly emphasised, while protection was delegated to a mostly informationbased approach. The outbreak of the financial and economic crisis has, however, brought to the fore some of the contradictions of the equation between financial and social inclusion and a series of—still ongoing—reforms of the financial system at the global, European and national levels have aimed at striking a new difficult balance between the promotion of access to financial services, thus indebtedness, and the need to counteract over-indebtedness. The need to ‘protect’ the customer from financial risk emerged more clearly, and a slightly more pronounced regulatory approach developed. To stay with one of the examples which have accompanied us in this book, the renewed and reinvigorated attempts to force lenders into a more cautious approach when granting loans, as well as forcing lenders to have sufficient skills

18  19 

UK, Department of Trade and Industry, Insolvency—A Second Chance (July 2011), 1.45. Directive 2014/92/EU, recital 7.

Conclusion 187

and knowledge, can be regarded of course as the emergence of a more regulatory approach, but in broader terms it appears also as an attempt to reintroduce some ‘interpersonal trust’ element in the debt relation. To do so, nonetheless the law significantly relies on those very technologies which, while allowing for more precise prediction as to the possibility of debt repayment, contribute to the creation of financial and digital identities more detached from the actual citizen. Against this framework, the citizen is not intended as a passive target of regulation, commodified, abstracted, a source of value-extraction and several other types of actions which have been highlighted and labelled in the literature on financialisation. Quite interestingly, the citizen is on the contrary required to become familiar with the financial logics and be equipped to fully and actively participate in the financial market itself, pursuant to a policy of financial education that, despite its lack of clarity, has already risen as a new global objective, to be pursued possibly even in schools, as the most definitive strategy to promote a financialisation not only of the economy but more fundamentally of the citizen. If those are the policies which are taking shape transnationally, the numbers of the litigated cases concerning retail financial services, as well as the worrying increase in the figures of household over-indebtedness, seem to offer a different image of real-life citizens—still far from how financial inclusion policies assume them to be. A large number of narratives of financialisation have crossed and are still crossing the law, as the exact form of the interaction between financial and social inclusion and exclusion still appears uncertain, and dependent on the ebb and flow of the financial market. Several decades after the great promise of democratising finance, the echo of George Bailey’s questions in the film It’s a Wonderful Life on the importance of access to credit for citizens still resonates: ‘Doesn’t it make them better citizens? Doesn’t it make them better customers?’20 With the benefit of hindsight, those were not rhetorical questions.

20 

F Capra and J Stewart (1946).

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212 

INDEX

acceleration clauses, mortgage lending  56, 57 access to bank accounts see bank account, access to to credit see credit, access to access inclusion  59 access justice  69–71 Aristotelian tradition  65–6, 67, 70 asset-backed securities (ABSs)  48 austerity policies  38 Aziz (Mohamed) v Caixa d’Estalvis de Catalunya (2011)  56, 136, 145, 150 bank account, access to  24, 88–114 consumer credit  95, 105 EU involvement  100–2 legal frameworks in Europe  92–6 overdraft problems  96–100, 108 Payment Accounts Directive (Directive 2014/92/EU)  110–14, 115, 116, 122, 174 reasonable costs problem  107–10 Recommendation 2011/442/EU  102–7, 110, 115, 166 bank lending, removal of constraints on  37 Bankruptcy Abuse Prevention and Consumer Protection Act 2005, US  163–4 Barroso Commission  69 Basel Accords  37 Basel Committee on Banking Supervision Board  120 Belgium  93 Bell, Daniel  30 Berman, Harold J  45 bills of exchange  33–4 bills of lading  33–4 bio-capitalism  36 Bobbit, P  32 borrowing, secured and unsecured  37 bounded rationality  140, 178 Brazilian favelas  22 British Bankers’ Association  47, 95 Bulgaria  91 capitalism  38, 50, 52, 72, 91 capitalist societies  5, 31, 91 democratisation of finance  40, 42 finance/financial  33, 42, 46, 60, 183, 195 trust, role of  44, 45, 46 twelfth-century  44

Catholic Church  67 Centre for Responsible Lending  51 Charter of Fundamental Rights  70, 101, 145 cheques  33 Clark, Colin  30 Commission see European Commission Committee on Legal Cooperation (CDCJ)  166 Common European Sales Law  109–10 Community Charter of the Fundamental Social Rights of the Workers (1989)  74 Competition and Markets Authority, UK  96 condition inclusion  59 Consumer Agenda (2012)  172, 175 consumer credit  15, 39, 46, 86, 146, 176 access to credit  116, 117, 118, 120, 124, 127, 131 financialisation  35, 36 instalment payments  48 Consumer Credit Act 1974, UK  72 Consumer Credit Directive (Directive 87/102/CEE)  77, 121, 165 Consumer Credit Directive (Directive 2008/48/EC)  173, 185 access to credit  62, 80, 120, 123–7, 129–31, 133, 137, 139 over-indebtedness  151, 155 Consumer Financial Services Action Plan (2017)  84, 125 Consumer Policy Strategy 2007–2013  172 consumer protection  11, 96 access to credit  124, 127, 128, 132, 136, 139 financial education  173, 174, 177, 181 inclusion  10, 11 financial  83, 85 rise of in EU law  72, 73 over-indebtedness  145, 151 Consumer Rights Act 2015  97 Consumer Rights Directive (Directive 2011/83/EU)  11, 121 consumer society  35, 48 contract law access justice  70 access to bank accounts  102 consumer credit  86 freedom of contract  65 inclusion in European legal order  84–7 interference of financial education with  178–81

214  Index over-indebtedness ex ante instruments  86, 153–7, 164 ex post instruments  157–9, 164 non-contract law instruments  159–64 pacta sunt servanda principle  157 responsible lending (EU)  120–4 sale contracts  28 social justice  65 Council of Europe  80 Council of the European Union  165 Court of Justice of the European Union (CJEU)  56, 98, 109, 121, 123, 145, 167, 168, 169 credit, access to  24, 115–41 affordable credit  116 consumer credit  116, 117, 118, 120, 124, 127, 131 consumer protection  124, 127, 128, 132, 136, 139 cross-border access  130 demand, boosting  38–9 ‘European Progress Microfinance Facility’  117 financial stability and exclusion  136–8 inability to access mortgage credit  19 information  124–7 information asymmetries  119 post-crisis responses  127–33 public–private problem  133–6 responsible lending  117–24 revitalising of economy  39 right to credit  115–17 Standard European Consumer Credit Information model  122 trust  138–41 see also creditworthiness credit agencies, US  125–6 credit checks  95 Crédit Lyonnais (Le) SA v Fesih Kalhan (2012)  135 credit reference agencies  94, 126 credit reporting  47 credit scoring  46, 94 creditworthiness  49, 94, 116, 122, 124, 131 Cruickshank Report (2000), UK  94 culture of credit  46 debtor/creditor relationship  44, 48, 143 default  45, 49 de-industrialisation  22 Delors Commission  22, 74 demand and supply  35, 37, 38 democratisation of finance  1, 4, 38–44, 182 consumer credit  39 and financialisation  42 household indebtedness  51 and privatised Keynesianism  40–1, 52

terminology  41 in United States  58 Denmark  93 Department for Business, Innovation and Skills, UK  85 Deposit Guarantee Scheme Directive (Directive 2014/49/EU)  90 Deposit Guarantee Schemes  90 deregulation  30, 31, 48 digital inclusion  61 digital technologies  24 Directive 87/102/CEE (Consumer Credit Directive)  77, 121, 165 Directive 93/13/EEC (Unfair Contract Terms Directive) see Unfair Contract Terms Directive (Directive 93/13/EEC) Directive 2005/29/EC (Unfair Commercial Practices Directive)  11 Directive 2008/48/EC (Consumer Credit Directive) see Consumer Credit Directive (Directive 2008/48/EC) Directive 2011/83/EU (Consumer Rights Directive)  11, 121 Directive 2014/17/EU (Mortgage Credit Directive) see Mortgage Credit Directive (Directive 2014/17/EU) Directive 2014/49/EU (Deposit Guarantee Scheme Directive)  90 Directive 2014/92/EU (Payment Accounts Directive)  110–14, 115, 116, 122, 174 disabled persons, social inclusion of  22 Draft Joint Report on Social Protection and Social Inclusion of the Council of the European Union (2010)  83 Dunne, L  5 Economic and Social Committee see European Economic and Social Committee (EESC) economic research studies  51 Emergency Economic Stabilization Act 2008, US  54 EU law inclusion, rise of  71–84 over-indebtedness  164–8 and private law  10 see also European legal order, inclusion in; European Union Euro  80 Eurobarometer  92 Europe 2020 strategy  82, 83 European Banking Authority  131 European Central Bank  62, 79, 138 European Commission access to bank accounts  89, 103, 105, 109 access to credit  119, 120, 126–7, 128, 129 Consumer Financial Services Action Plan (2017)  84, 125

Index 215 financial education  173 Green Paper on Mortgage Credit (2005)  129, 131, 134 Green Paper on Retail Financial Services (2004)  171 inclusion  18, 58, 64, 72, 77 market  61, 62 merger of financial and social  23, 25 and poverty  25–6 Joint Report on Social Protection and Social Inclusion (2009)  81–2 over-indebtedness  162, 163, 165, 166 Staff Working Document  81 White Paper on Financial Services Policy 2005–2010  77, 78, 88, 101, 171 European Commissioner for Financial Stability, Financial Services and Capital Markets Union  83 European Consumer Agenda (2012)  89, 130 European Council  81 European Deposit Insurance Scheme (EDIS)  90 European Economic and Social Committee (EESC)  78, 141, 150, 156, 165 European legal order, inclusion in  11, 58–87 consumer credit  62, 77, 79, 80, 84 contract law  84–7 financial exclusion  77–84 financial inclusion  60–1 forms of inclusion, distinguishing  59–64 market inclusion  61–3, 69–71 private law  64–71 rise of inclusion in EU law  71–84 social exclusion  74–7 social inclusion  63–4, 66–9 European Parliament  78, 103, 105 ‘European Progress Microfinance Facility’  117 European Securities and Markets Authority (ESMA)  156 European Union bank account, access to  92–6, 100–2 Charter of Fundamental Rights  70, 101 competences of Member States  58 Consumer Policy Strategy 2007–2013  172 DG Internal Market and Services study  101–2 Directive 2014/92/EU (Payment Accounts Directive) see Payment Accounts Directive (Directive 2014/92/EU) financial inclusion, promoting  4, 7 functional institutional design  63 innovations in legal infrastructure  59 law see EU law legal frameworks, banking  92–6 policy aims  10 Recommendation 2011/442/EU see Recommendation 2011/442/EU see also European legal order, inclusion in

Eurozone  79 evictions  56 ex ante instruments  86, 153–7, 164 ex post instruments  157–9, 164 exchange controls  41 exclusion financial  77–84 financial stability  136–8 over-indebtedness  2 and poverty  23 risk of  7 social  22–4, 59, 73, 74–7 see also ‘unbanked’ individuals ex-council properties, mortgages on  37 Expert Group on Financial Education  177 Fannie Mae, US  37 fiat money  30 Financial Conduct Authority, UK  55, 154, 156–7 see also Financial Services Authority, UK financial education  169–81 consumer credit  176 consumer protection  173, 174, 177, 181 critical aspects of policy  174–8 Expert Group on Financial Education  177 financialisation  170 interference with contract law  178–81 programmes  175 rise of policy  171–4 United States  171 financial exclusion  4, 5, 19, 77–84 contract law  86 United Kingdom  94 urban marginalisation  20 financial inclusion  1 comprehensive variant  18 dimensions  17–20 in European legal order  60–1 and financialisation  38 idea of  17–57 low-income individuals  36 Maya Declaration (2011)  26 medium-income individuals  60 merging with social inclusion  21–7 minimalistic variant  18 neutral and commonly agreed objective  5–6 political-economic principle  1, 2 and private law  8–11 promotion by EU  4, 7 relation to social inclusion  7 safe services, access to  19 terminology  38 ‘win-win’ situation  5, 6, 60, 89 Financial Inquiry Commission, US  49 financial instruments, materialisation  33 financial literacy, promotion of  169, 179

216  Index Financial Services Authority, UK  43, 157 see also Financial Conduct Authority, UK financial stability, and exclusion  136–8 financialisation  33–7 autopoietic features  33 of citizens  36 demand and supply  35, 37, 38 and democratisation of finance  42 expanding  52 financial education  170 financial inclusion, increased  38 and ‘real’ economy  33 repercussions  35–6 securitisation  34, 37 short-termism  35 socialisation  3 in the United States  36 Finland  93 Ford, J  37 Foucault, M  5 France  93, 120, 160 Chambre Regionale du Surendettement Social (Cresus)  163 Freddie Mac, US  37 freedom of contract  65 functionalism  46 G20 High-Level Principles on Financial Consumer Protection (2011)  128, 173 General Agreement on Trade in Services (1995), Annex  3, 30 Genil v Bankinter (2011)  134 Germany  29, 160 access to bank accounts  93, 95 Ginnie Mae, US  37 global financial crisis (2008)  15, 33, 34, 35, 43, 50–1, 158 post-crisis responses  127–33 globalisation  28, 33 gold standard  30 Greece  6, 56, 79, 145, 160 Green Paper on Mortgage Credit (2005), Commission  129, 131, 134 Green Paper on Retail Financial Services (2004)  171 Group of Specialists on Seeking Legal Solutions to Debt Problems (CJ-S-DEBT)  166 Hobsbawm, Eric  28 home ownership, private  41 housing bubbles  36 Iceland  6 inclusion access  59 ambiguity of term  9 condition  59 democratisation of finance  38–44

digital  61 dimensions  17–20 in European legal order  58–87 idea of  17–57 market  61–3, 69–71, 142 merger of financial and social  21–7 price  59 re-regulation issues  54–7 rise in EU law  71–84 risk, transfer of  48–50 transformations of state and law  27–33 trust, role of  44–7 see also exclusion; financial inclusion; social inclusion inclusive society  69 indebtedness  1 and capitalism  38 cause-effect relations between levels of public and private  53 democratisation of finance  51 diffusion of financial services  31 household  51 increase of  143–4 vs. over-indebtedness  142, 143 political-economic principle promoting  1, 2 private ix, 31, 38, 41, 52, 53–4 public  31, 41, 53, 55 see also over-indebtedness individualism  3, 4, 68, 69 industrialism  28 de-industrialisation  22 interventionist state  28–9 post-industrialism  30, 32 pre-industrial economy  29 information, access to  124–7 Insolvency Act 1986, UK  160 instrumentalism  65 internal market rationality  62, 63, 103 International Monetary Fund (IMF)  53, 55 International Organization of Securities Commissions (IOSCO)  120 interventionist state  28–9, 156 Italy  148, 174 It’s a Wonderful Life (Hollywood film, 1946)  39–40, 43, 187 Joint Report on Social Protection and Social Inclusion (2009), European Commission  81–2 justice access  69–71 concept  69 global  68 liberal theory of  68 social see social justice theories  68

Index 217 Kennedy, Duncan  25 Keynesianism  54 privatised  40–1, 52 knowledge-power  5 Korczak, Dieter  59 labour constitution  29 laissez-faire minimal state model  31 Lapavitsas, Costas  45 Lefebvre, H  20 Lending Code (2011), UK  47, 95, 100 Lenoir, René  22 liberal state  29 Luhmann, Niklas  21, 22, 45, 46 Mandeville, Bernard  39 marginalisation  20–2, 24, 27 market inclusion  61–3, 142 and access justice  69–71 Markets in Financial Instruments Directive (MiFID)  109, 134, 136 market-state  32 Maya Declaration on Financial Inclusion (2011)  26 methodology  12–13 Miller, David  68 Minsky, Hyman  41 monetarism  41 monetary obligations  146, 147, 157 monetary policy  51, 79, 138, 153 money supply  60, 138, 142, 182 moneylending upon interest, prohibition  183–4 Monti Report (New Strategy for the Common Market), 2010  61, 101, 103, 104 Mortgage Conduct of Business Sourcebook, UK  57 Mortgage Credit Directive (Directive 2014/17/EU) access to credit  118, 121, 125, 130–1, 136, 137, 139–41 financial education  173–4 over-indebtedness  151, 155 post-crisis responses to credit access  127–33 mortgage lending distressed mortgages  56 liberalisation of  37 low-income individuals  51 Muldrew, Craig  44, 45, 46 National Supervisory Authorities  136 NEETs (not in employment, education or training)  24 negotiable instruments  33 Netherlands, the  93 network society  32 New Economy  30 New Labour, UK  23, 69

New Strategy for the Common Market see Monti Report (New Strategy for the Common Market), 2010 nudges  155 Office of Fair Trading, UK  95, 96–7, 99, 100 Organisation for Economic Co-operation and Development (OECD)  53, 80, 171, 176 overdraft problems  96–100, 108 over-indebtedness  15–16, 80, 142–68 active or passive  151 causes  149–52, 178 consumer credit  146 contract law ex ante instruments  153–7, 164 ex post instruments  157–9, 164 EU law  164–8 exclusion  2 ‘fresh start’  161, 162 Geld muss man haben principle  147 impact  86 increase of  144–5 vs. indebtedness  142, 143 legal responses  146–9 non-contract law instruments  159–64 private law responses, categorisation  152–64 partnerships  32 paternalism access to credit  132, 140, 156 over-indebtedness  154, 155 Payment Accounts Directive (Directive 2014/92/EU)  110–14, 115, 116, 122, 174 pension schemes  31 Pirenne, Henri  44 Portugal  79, 158, 180 Post Office, UK  94 post-Fordism  36 post-industrialism  30, 32 post-regulatory state  32 poverty  23, 24 pre-industrial economy  29 price inclusion  59 private indebtedness fostering/promoting ix, 31, 38, 41, 52 hazard ix levels  53 and recessions  53–4 see also indebtedness; public indebtedness, limiting private law autonomist perspective  65 and EU law  10 inclusion and finance  8–11 individualism  68, 69 instrumental perspective  65

218  Index just or inclusive, whether  64–71 materialisation  70 medieval  44 over-indebtedness, responses to  152–64 rules  16 social justice  65–6 social task  29 state-made  28–9 and transformations of state and law  28 productive credit  43 protest movements  6 protestant ethic  38 Protestant Reformation  184 public indebtedness, limiting  31, 41, 53, 55 public–private problem  133–6 quantitative controls, lifting  41 rationality, economic  29 Rawls, John  68 Real Estate Mortgage Investment Conduits, US  37 recessions  53–4 recapitalisation  137 Recommendation 2011/442/EU, access to bank accounts  102–7, 110, 115, 166 Renaissance  33 repossessions  56, 57 re-regulation issues  54–7 responsible lending Centre for Responsible Lending  51 and European contract law  120–4 originate-to-distribute model  120 post-crisis responses  127–8 principle  138–9 self-interest problem  117–20 retail banking  54, 78, 101, 107, 112 revolving credit cards  52 ‘right to buy’  37 risk, transfer of  48–50 Roman Catholicism  38 Romania  91 running-account credit  142 sale contracts  28 Sánchez Morcillo (Juan Carlos) and María del Carmen Abril García v Banco Bilbao Vizcaya Argentaria (2014)  136 Scandinavian countries  91, 160, 161 see also Denmark; Finland; Sweden Second World War  30, 38 secured borrowing  37 securitisation  34, 37 risk, transfer of  48, 49 self-exclusion  59 self-interest problem, responsible lending  117–20 self-regulation  95

services sector  30 Shiller, Robert  42 short-termism  35 Single Market  61, 64, 103 Slovakia  93 Social Charter (1996)  74 social exclusion  22–4, 59, 73, 74–7 Social Policy Agenda 2006–2010  76 social force majeure doctrine  148 social housing  41 social inclusion  3 access to bank accounts  106 concept  67 dimensions  17–20 disabled persons  22 in European legal order  63–4 idea of  17–57 policies to advance  26 relation to financial inclusion  7 rise of/merging with financial inclusion  21–7 and social justice  66–9 social justice  65–6 concept  67, 68 and social inclusion  66–9 Social Policy Agenda 2006–2010  76 Social Policy Agreement (1991)  74 Social Protection Committee  104 sovereignty of consumer  183 Spain  6, 56, 57, 95, 159 and financial exclusion  79, 80 special purpose vehicles (SPVs)  34, 37, 48, 50 states financialisation, effects  36 interventionist  28–9, 156 laissez-faire minimal state model  31 liberal  29 market-state  32 nineteenth-century nation-state  28 post-regulatory  32 post-welfare state  27 private law, state-made  28–9 regulation of labour by  29 transformations of state and law  27–33 welfare state model  25, 28–30, 31 ‘Strategy for Smart, Sustainable and Inclusive Growth (Europe 2020)  82, 83 supervision of financial markets  7 Sweden  93 Thatcher, Margaret  21 ‘third way’  32, 55 Touraine, Alain  30 Tournier v National Provincial and Union Bank of England (1924)  47 Treaty establishing the European Union  70 Treaty of Lisbon  75 Treaty of Nice  76

Index 219 Treaty on European Union (TEU)  75 Treaty on the Functioning of the European Union (TFEU)  75, 167, 172 Troubled Asset Relief Program (TARP), US  54 trust, role of access to credit  138–41 debtor/creditor relationship  44 Greek and Roman law  45 inclusion  44–7 interpersonal trust  44, 46 medieval private law  44 risk, transfer of  48 ‘unbanked’ individuals  4, 5, 19 see also exclusion under-capitalisation  153 Unfair Commercial Practices Directive (Directive 2005/29/EC)  11 Unfair Contract Terms Directive (Directive 93/13/EEC)  11, 95, 97, 108, 109, 122, 157, 168 fairness test  97, 152, 157, 168 Unfair Terms in Consumer Contracts Regulations 1999, UK  97 United Kingdom British Bankers’ Association  47, 95 Competition and Markets Authority  96 Consumer Credit Act 1974  72 Consumer Rights Act 2015  97 Cruickshank Report (2000)  94 Financial Conduct Authority  55, 154, 156–7 financial exclusion  94 Financial Services Authority  43, 157 Insolvency Act 1986  160 Lending Code (2011)  47, 95, 100 Mortgage Conduct of Business Sourcebook  57 New Labour  23, 69 Office of Fair Trading  95, 96–7, 99, 100 overdraft problems  96–100

Supreme Court  97, 98–9, 104 Unfair Terms in Consumer Contracts Regulations 1999  97 United States Bankruptcy Abuse Prevention and Consumer Protection Act 2005  163–4 ‘consumptive credit’  39 credit agencies  125–6 democratisation of finance in  58 Emergency Economic Stabilization Act 2008  54 financial education  171 Financial Inquiry Commission  49 financialisation  36 government agencies  37 housing bubbles  36 Real Estate Mortgage Investment Conduits  37 subprime scandal  50–1 Tax Reform Act 1986  37 Troubled Asset Relief Program (TARP)  54 Volcker rule  54 unsecured borrowing  37 urban marginalisation  20 Uruguay Round  30 usury, prohibition on  20 Volcker rule, US  54 Voluntary Code of Conduct on Pre-contractual Information for Home Loans  130 Wallis, Diana  71 Weber, Max  29, 38 welfare state model  25, 28–30 dismantling  31 White Paper on Banking Services (1990)  47 White Paper on Financial Services Policy 2005–2010  77, 78, 88, 101, 171 Wieacker, Franz  10 ‘win-win’ situation  5, 6, 60, 89 World Bank  4, 31

220