Revisions to debt instruments and standard terms of debt

There will be changes in the legislation on housing loans and other consumer credit entering into force on 1 January 2017. As a result of these legislative changes, regulation of interest on consumer credit becomes more explicit and stringent. FIN-FSA wants to give a reminder about these legislative changes and point out some of its views which must be taken into account by credit institutions in their credit contracts.

Regulation on interest rates

Interest terms linked to reference rates, interest rate floors and interest rate hedges

The new Act will specify that the interest rate cannot be changed during the validity of the credit contract for any other reason than changes in the reference rate. Even this is contingent on a corresponding provision in the credit contract.

The legislation will also specify that debt instruments linked to reference rates may not have minimum interest rates, or so-called interest rate floors. If the interest on a loan is linked to a reference rate, the interest rate must change in line with any changes in the reference rates, and its downward movements may not be limited.

Housing loans are an exception to this rule. For them, it is allowed to use a contract term limiting the reference rate from declining below zero. Other kinds of interest rate floors are not allowed for housing loans, either.

To be clear, FIN-FSA states that the customer may choose to buy interest rate hedges, such as an interest rate cap or an interest rate collar. Therefore, it is allowed to limit the rise of the reference rate with an interest rate cap, since it is always to the benefit of the customer. An interest rate collar is also allowed as an interest rate hedging term even though it also limits the downward movement of the reference rate. The use of an interest rate collar requires that both the floor and the cap have been set at unbiased levels by objective assessment.

Impact of negative reference rates on the gross interest rate

Old loan contracts linked to reference rates which do not include a contractual term preventing the decline of the reference rate into negative territory must be applied so that the gross interest rate changes in line with any changes in the reference rate. Hence, a negative reference rate depletes the margin, so to say. FIN-FSA considers, however, that application of this term is only warranted this interpretation until the gross interest rate is zero. It would not be warranted to interpret the interest rate terms in old loan agreements and valid legislation contrary to the law of obligations so that the creditor would become liable to pay interest.

Current terms on raising the interest rate

In their current terms for debt instruments, many banks have reserved themselves the right to raise the interest rate (or collect a charge) if the bank's expenses relating to the customer's debt, increase or its income from the debt decrease due to legislation or a decision by an authority.
Since contract terms authorising the unilateral raise of interest rates will henceforth be more explicitly forbidden, terms similar to those above may not be used in new contracts. The rationale of the Act states that the risk for such changes shall belong to the creditor even though it is not possible, even for the creditor, to be prepared for all changes. This risk may not be transferred to consumers by agreement. Neither is it allowed to incorporate, in new contracts, other terms entitling to raise the interest rate.

Regulation on fees and commissions

In addition, it is possible to charge various fees and conditions on top of the interest, where these are specified in an adequate manner. In concluding a contract, the customer must know which expense relating to the debt may be subject to a fee. The fees and commissions can be changed during the validity of the contract, if the contract terms specify the basis for making such changes. The basis for change must be specific. In addition, the new legislation provides that fees and commissions may be changed unilaterally only corresponding to actual expenses.

These matters should be taken into account in formulating and applying the general contract terms.

Impacts of the entry into force of the Act on contracts, and the submission of contract terms to FIN-FSA

According to the provision on entry into force, the new legislation shall apply to contracts concluded after the entry into force of the Act.

FIN-FSA requests banks to also indicate communicate whether they intend to apply the contract terms improving consumer protection to contracts concluded before the entry into force of the Act. Responses are requested to be submitted to FIN-FSA by 31 January 2017.

In addition, FIN-FSA points out that, under the Act on Credit Institutions, the terms of standard contracts shall be submitted to the competent supervisor. FIN-FSA is not tasked with approving any contract terms submitted to it, but it supervises their lawfulness in accordance with the Act on the Financial Supervisory Authority.

The response and the new contract terms with changes tracked are requested to be sent to: kirjaamo(at)finanssivalvonta.fi. Please indicate the journal number FIVA 15/02.06.03/2016 in the response.

For further information, please contact

• Sanna Atrila, Legal Counsel, sanna.atrila(at)fiva.fi or tel. +358 10 831 5552
• Marjaana Hassinen, Legal Counsel, marjaana.hassinen(at)fiva.fi or tel. +358 10 831 5215.