18 July 2016

Consumer Credit, quo vadis?

Already the Dispatch on the Swiss Consumer Credit Act (CCA) of the year 1978 states that consumer needs "show a natural tendency to always be a few steps ahead of the respective economic capacity". Developments in recent decades have shown that consumer credit has transformed from a business for emergencies to a business for prosperity. Apart from the undisputed economic benefits of consumer credit there have always been a certain number of inherent social and economic risks. In the course of time, the Swiss legislator has assessed and weighted these risks differently. The following article will provide an overview of the changes that came into force this year.

From the Prohibition of Aggressive Advertising…
As of January 1, 2016 it is prohibited in Switzerland to advertise consumer credit in an ag-gressive manner. The industry will self-determine what qualifies as "aggressive advertising" in corresponding convention. The responsible sector associations have already signed two conventions which the Federal Council (available only in German, French and Italian) presently regards as sufficiently distinct.

… to the Expansion of the Right of Revocation…
The revocation period for consumer credit contracts has been extended from 7 days to 14 days. The extended right of revocation entered into force on January 1, 2016.

During the legislation process it was feared that the extension of the revocation period would increase the risk for a misuse of purchased and leased objects. The question of payment of remuneration in case of misuse was subject to great dispute in the Swiss parliament, to such an extent that it almost caused the whole draft legislation to fail. As a compromise, the law now states that in the case of misuse an adequate remuneration is owed with the amount dependent on the object's loss in value.

…to the Reduction of the Maximum Interest Rate
As of July 1, 2016 the maximum interest rate has been reduced to 10% per annum for cash credit and 12% per annum for overdraft facilities; they had previously been fixed at 15% since the year 2003. In addition, the calculation method for the interest rate has been structured flexibly. Going forward, the Swiss Federal Department of Justice and Police FDJP will evaluate the interest rate on a yearly basis and may adjust it as required. Decisive for the evaluation is the Swiss National Bank's 3 month LIBOR and a supplemental allowance of 10% per annum for cash credit and 12% per annum for overdraft facilities. Consequently, a scope of 10%-15%, respectively 12%-15%, per annum is fixed for future adjustments to the maximum interest rate.

For contracts that were concluded prior to a change of the maximum interest rate, the previous maximum interest rate remains in force. For framework contracts or credit and customer cards linked to a credit option, the extent this provision is applicable will be determined on a case by case basis.

Effects on the Market for Consumer Credit
It remains to be seen whether the reduction of the maximum interest rate will result in the borrowers with the poorest creditworthiness being, in effect, excluded from the commercial market for consumer credit. If this is the case and these borrowers have to turn to lenders which are less or entirely unsupervised, the revision would have a counterproductive effect. Meanwhile, in contrast, all other borrowers presently benefit from the lower interest rates.

For further questions, please contact our Banking Team.

Authors: Dominic A. Wyss, Dr. Jana Essebier

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