FIN-FSA’s assessment: some consumer lenders fail to manage default risks adequately, shortcomings also in contract terms

Other companies granting consumer credit were transferred under FIN-FSA supervision on 1 July 2023, when the Act on the Registration of Certain Credit Providers and Credit Intermediaries entered into force. In the same context, a new provision on the management of default risk in consumer lending also took effect.

- To ensure the functioning of the financial sector and uphold consumer rights, it is important that all parties granting consumer credit in Finland are supervised based on the same principles. The objective of our expanded supervision in this area is that all market participants comply with common rules, both with respect to the management of default risk and conduct, states Marko Myller, Head of Department for Banking Supervision.

Not all parties manage default risk adequately

Significant differences were identified among parties granting consumer credit in Finland in terms of the management of default risk. Foreign branches and credit institution operating in Finland on a cross-border basis showed significant shortcomings in their lending practices. Some of the other lenders transferred recently under FIN-FSA supervision had even severe shortcomings. However, some shortcomings were also identified among Finnish banks.

The most significant shortcomings were concerned with lending to consumers with an unreasonably high default risk as well as deficiencies in the risk rating systems used by the lenders to assess and monitor default risks associated with consumer lending in a reliable manner.

Some of the lenders applied discriminatory factors in the assessment of credit risks, such as gender or native language. Some had significantly high shares of credit losses or past due exposures as a proportion of their credit portfolio. Some failed to check for bad credit remarks before making a credit decision, while some did not assess the applicant's income or other financial circumstances adequately when granting credit. In addition, shortcomings were found in the retention period of the lending criteria applied. Some of the lenders’ maximum interest rate also exceeded the allowed limit.

Shortcomings found in contract terms

The review of conduct only covered new FIN-FSA supervised entities that actively grant new consumer credit. Preliminary assessment indicates that not all parties comply with all legislation applying to consumer lending in their contract terms. Some shortcomings were identified in individually agreed contract terms concerning the price of credit. While the general terms covered the existence of the consumer's and the lender’s statutory rights appropriately, the details on the preconditions and consequences of invoking these rights were incomplete. In some cases, key contract terms were spread across several documents, making it difficult to form a total view.

FIN-FSA requires remediation of the shortcomings

The FIN-FSA will be in contact with the lenders to ensure that the identified shortcomings are remediated. The FIN-FSA will also use the observations made in the reviews when focusing supervision on other lenders. The observations will also be used in planning periodic reporting needed in the assessment of default risks and in preparing FIN-FSA regulations and guidelines concerning consumer lending.

Review of consumer lenders will continue

The findings described in this release are based on two reviews conducted by the FIN-FSA, one of which is still ongoing.

In autumn 2023, the FIN-FSA launched a review of its new supervised entities to assess the fulfilment of the preconditions for registration, conduct concerning customer protection and compliance with obligations under the AML Act. As regards the fulfilment of the preconditions of registration and obligations under the AML Act, the results will be completed and published later.

In addition, the FIN-FSA carried out a thematic review of the management of default risk by entities granting consumer credit in Finland. These entities include both banks, which were already covered by FIN-FSA supervision, and the other lenders that entered its scope only recently.

For further information, please contact 

Marko Myller, Head of Department
Requests for interviews are coordinated by FIN-FSA Communications, tel. +358 9 183 5030 (weekdays 9:00–16:00).