The formal regulation of financial counselling

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