The Making Of OUG 50

by Steven van Groningen on 11 October, 2010

In a previous post I wrote more in depth about one specific aspect of Government Emergency Ordinance 50 (OUG 50) on consumer credit contracts. In this post I’ll point out that the process around OUG 50 was flawed and has led to poor regulation. I’ll not go into details about the content of OUG 50. This is – 4 months after publication and 3 month after it came into force – now being debated in the Chamber of Deputies. My point is that a better process would have led to a better result.

Consumer Protection Is Good

Let me start with saying (again) that I am not against consumer protection and certainly not against implementing EU directives in Romania. I really believe that in many cases consumer protection rules are good and the cost of implementing them are justified. In banking they will be beneficial for stronger players like ourselves.

Unethical Practices Are Bad

Unethical practices are taking place in the banking sector even today. I have written myself about one of these practices in this post. Banks that were not joining in, risked losing business volumes. If those practices are ruled out by better regulations, that is good.

Also, I don’t claim that there are no banks with inappropriate behavior in Romania and in no way do I defend unethical practices. I have very specific opinions on some individual banks in Romania and hope that in the first place more competition and secondly better regulation will lead customers to take better decisions about what they believe is best for them. If that means that some banks will suffer and have to pay the bill for their behavior in the past, so be it.

The Process Was Flawed, Seriously

OUG 50 is the Romanian implementation of EU Directive 2008/48. After a long period of consultations and revisions  (the process started in 2002) this the EU Directive came into force in May 2008, so already more than 2 years ago. EU countries had until 11 June 2010 to transpose the Directive into local legislation. In Romania we needed an Emergency Government Ordinance (OUG 50) and even then we almost missed the deadline. Maybe if OUG 50 would have limited itself to the essence of the EU Directive that would have been the end of it. There is no need to analyze whether to implement an EU Directive or not. But ANPC decided to “improve” the EU Directive with some very significant changes. The impact of these changes were not analyzed and no consultation with stakeholder took place.

The Directive states in article 2 -1(b) “This Directive shall not apply to the following (a) credit agreements which are secured either by a mortgage or by another comparable security commonly used in a Member State…..”). These loans were nevertheless included in OUG 50. On top of this, OUG 50 also applies to the existing stock of credits. Again, these are excluded in the Directive that states in article  30-1 “This Directive shall not apply to credit agreements existing on the date when the national implementing measures enter into force.” No EU country has applied the Directive to existing loans. Although these changes were very significant, no impact analysis and no consultation took place.

What Does The “Nota de Fundamentare” Say ?

The “Nota de Fundamentare” that accompanied OUG 50 doesn’t explain what is imposed by the Directive and what the local “improvements” are. The most important change, applying OUG 50 also to the existing stock of credits, is not even mentioned. BNR and Ministry of Finance had not been consulted, according to senior representatives. Attempts for dialog by the Romanian Banking Association, of which I am a vice president, were in vain. Letters, 3 of  them, were not even replied to and a real meeting only took place after the OUG 50 was already published. In the meantime BNR officials stated that – depending on interpretation – the impact could be in the area of half a billion EUR. Ministry of Finance officials stated they would also be affected.

What Would An Analysis Have Shown ?

If an analysis would have taken place ANPC might have discovered that the home equity and mortgage loans they included – even though they were excluded in the EU Directive – are almost exclusively in EUR and that EUR is not the domestic currency in Romania. The variable cost of funding in Romania is therefor not EURIBOR, but EURIBOR plus CDS (Country Risk Premium). By  ignoring this and allowing only EURIBOR as variable  means that millions of consumers have ended up in the asymmetrical situation they find themselves in today: when EURIBOR (now at historical minimum) goes up, the consumer has to pay more, when CDS goes down the consumers will not pay less. I described this already  in more detail in this post.

What Happened  In Those 2 Years ?

So, no consultation and no impact analysis. These are rather basic principles in lawmaking and that is the reason the EU has given the member states 2 years to implement the Directive. I don’t know what has been done during these 2 years, but let us assume that there were legitimate reasons for the delays. In that case, wouldn’t it have been better to use the instrument of  an OUG for a basic implementation of the minimal requirements? Improvements and additions could be made later. ANPC would be surprised to find out that there are banks that side with them on consumer protection. This would have facilitated a smooth implementation and better communication to 8 million of consumers in Romania

Communication about OUG 50 was also flawed

The second part of the process is the communication about OUG 50 to the general public. Have representatives of ANPC taken any action to inform the 8 million consumers that have loans in Romania about the changes to their contracts and how they are affected? Yes, they issued a ….. press release. The text of OUG 50 is unclear at a number of points (no  wonder after such a process) and this has lead immediately to contradicting opinions. Explanations that were given in writing to the ARB were not given to the press or the public. Statements in press and on TV were not clear and consumers became confused. Where did the idea come from that OUG 50 would make existing loans cheaper? Did ANPC do anything to correct this misinterpretation? No, some people even paid lawyers that are trying to exploit the situation. Consumer protection regulations are so unclear that you need a lawyer?! In the meantime the EU has asked for clarifications about the way EU Directive 48/2008 has  been implemented in Romania. The Government itself has in the letter of intent to the IMF stated they “will review the recent ordinance (Ordinance 50/2010) to ensure transparency on interest rates for consumer credit contracts to ensure full compliance with EU law, particularly as regards non- retroactivity.”  If the EU asks for clarifications and the Government acknowledges that a review is necessary, how can we expect 8 million consumers to understand what OUG 50 means to them?

The only official communication by ANPC, after the initial press release, took place on 13 September and 22 September, 3 months after OUG  50 was published.

Since When Do We Need To Agree To Respect The Law ?

We have seen many clients that didn’t know what to do, signing the addenda to their credit agreements or not. Some clients came with a lawyer to the bank, others wrote letters to the management. Why do customers have to sign an addendum in the first place? Since when do we need to agree to respect the law ?

So, in conclusion we have a flawed process and flawed communication to the general public.

Most Banks Have Not Done A Good Job Communicating Either

I am the first to admit that banks have not done a good job in communicating with their clients either, although also here we see differences from bank to bank. But what to do in a situation in which the very institution that is responsible for the text of OUG 50 doesn’t clarify and communicate?  This whole unclear situation could have been avoided with a proper process of consultation. This doesn’t mean that stakeholders will be happy with the end result and that is totally acceptable in a democracy, unclear legislation is not.

{ 6 comments… read them below or add one }

CG October 19, 2010 at 08:19

Your article seems documented and fair (please read seems as bolded and underlined). But I have only one question: In a normal society where rules apply and the ones that do not respect them support the consequences would the abuses of the banks happen as they do in Romania? (related to the OUG 50 but also to all the laws governing the bank – client relationship). I can also guess the answer: I guess not! So then, you can cirticize the clients’ behaviour and the OUG as much as you want. As long as the abuses go on and the banks do not respect the law (as bad as it may be) your arguments are equal to zero in the clients eyes and not even one of them will want to hear or understand them. May the banks follow the law letter by letter (as bad as you say it is) and I assure you that there will not be even one single client in the country that will pursue a litigation or try to engage in such actions against the banks. It is the banks problem if the law is bad for them and in no circumstances should the clients support the banks’ losses.

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SvG October 19, 2010 at 09:41

CG thank you for your comments. As mentioned I don’t defend the banking system or individual banks and I am against unethical practices. In a normal society laws are clear as result of a sound lawmaking process so that everybody understands what the law is. The problem with OUG 50 is that some people have created the totally unjustified expectation that existing loans will become cheaper. Now that it has become clear that these expectations were misleading, of course clients are disappointed and angry and even think that “banks” are not respecting the law. This is not about respecting or not the law. All banks must respect the law and those that don’t should face the consequences. The regulators should take action and the press should document this and present to the public. Not in the vague general terms based on incidents (one thing happens at one bank and this is generalized for the whole system) but practices at individual banks, based on sound fact finding and checking.

In terms of who supports losses the following. Losses for the past are for the shareholder of the respective banks. If these losses show that the cost associated with lending are increasing, than this will obviously increase the costs of credit for the future. Individual banks will of course not be able to ask for higher rates than the market allows so bad banks should be squeezed out by good banks. If however the increased costs of lending are of systemic nature (legislation, country risk, uncertainty, instability, judiciary) the costs of credit will go up for all.

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Ion October 19, 2010 at 21:41

You are trying to foul us. OUG did not mislead us that the ongoing loans are going to become cheaper. OUG said that all abusive practices should be eliminated and that transparency of the costs should be in place for all the loans. The banks/leasing companies/IFN which in the past did not made abuses do not have any problem and the consumers only took notice of the new law of their rights and of the costs as they were made transparent by the law. On the other hand the banks which in the past abused their customers and did not respect even the old laws for customer protections like law 193/2000 are now in the position to regulate the abuses and to eliminate the costs hidden by abuses.
As you are the VicePresident of ARB can you communicate a statistic or a list of the banks having problems in applying the OUG. I am very sure that the list is very short maximum 5 banks are in this unpleasant situation. Moreover the mentioned banks practiced not fair marketing campaigns towards the other players in the banking sector but ARB did not made a public statement most probably settling the problem internally.

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SvG October 21, 2010 at 21:26

Well, everyone can read OUG 50 and the EU Directive for themselves and come to their own conclusion about what it says or not.
I indeed don’t believe there are a lot of banks facing problems in applying OUG 50 but don’t see why that is relevant. A measure that can be implemented is not necessarily a good one. I pointed out that a poor lawmaking process leads to poor results. Confirmed yesterday, when the Chamber of Deputies passed a law and later, after being confronted with a 1 billion EUR impact on the budget, said they didn’t know what they were voting for. I dedicated a post about this today.

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Luminita October 20, 2010 at 15:25

Revin, n-am terminat cu rautatile! hi,hi,hi! Ce parere aveti despre propunerea bancherilor straini care ii curteaza pe cei nemultumiti de sistemul bancar din RO cu oferte de refinantare a creditelor cu 3% DAE/an ? O comentatoare draguta,deschisa si informata de pe blogul dv, pe numele ei Lavinia, imi explica la un moment dat despre indicatorii economici ai RO care nu permit bancilor sa acorde credite mai ieftine! si totusi, Lavinia draga, s-au schimbat intre timp acesti indicatori? acesti bancheri straini nu-si dau seama la ce risc se supun cand fac aceste oferte?
Vedeti, draga domnule van Groningen, de ce nu pot fi de acord suta la suta cu dumneavoastra si de ce cred ca sunteti un diplomat perfect? ascundeti niste chestii (de exemplu, cum se stabilesc acele comisioane ciudate caracteristice fiecarei banci in parte asa cum ati recunoscut) pe care eu si altii doar le intuim, dar nu le putem proba!

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SvG October 21, 2010 at 22:09

Parerea mea despre credite date din strainatate este simplu. Risk cel mai mic risc este considerat risc suveran. Daca statul Roman se imprumute in EUR cu dobanzi in jur de 4%, atunci banci, firme si persoane fizice platesc mult mai mult. In primul rand fiindca riscul este mai mare, in al doila rand fiindca costuri sint mai mari (administrative si reserva BNR) Nu am auzit niciodata despre oferte din strainatate, adresate populateie, cu dobanzi de 3% si nu cred ca existe asa ceva.

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