Communications - Revolving credit granted with credit cards: safeguards and guidelines for operators

General measures by credit authorities
Section II - Bank of Italy
Supervisory Bulletin No. 4, April 2010 II.1
Communication of April 20, 2010. Revolving credit granted with credit cards: safeguards and guidelines for operators.

Within the scope of its supervisory activities, the Bank of Italy has conducted in-depth examinations of the revolving credit sector granted through the issuance of credit cards.

From the controls exercised based on the powers attributed by law regarding the transparency of contractual conditions and the correctness of intermediaries' behavior towards customers, as well as regarding usury, numerous anomalies have emerged. In addition to supervisory interventions already adopted against individual intermediaries and, where appropriate, related sanctioning procedures already initiated, this Institute deems it appropriate to draw the attention of all operators active in the revolving credit card sector to the need for a scrupulous and non-formal application of the regulations and – more generally – for behaviors based on criteria of maximum transparency and correctness in relations with customers.

The anomalies emerging from the overall supervisory action appear to be mainly attributable to the factors described below.

A) Non-compliance with civil law and usury regulations Cases have been identified where default interest was applied in periods prior to the occurrence of the conditions contractually fixed for forfeiture of the benefit of the term and calculated on the entire outstanding debt, rather than only on the unpaid installment.

Where the nominal interest rate is set at levels close to the usury threshold rate, exceedances of this threshold have been found even in good standing relationships, following the settlement of fees, expenses, and ancillary charges of an eventual nature (e.g., commissions for exceeding the credit limit).

It has also been found that customers were charged interest and other charges collectively exceeding the usury threshold and that default interest was applied with compound interest effects, without an automatic block by the intermediary's IT procedures.

The need is recalled for intermediaries to ensure, through the relevant corporate functions, that operational procedures and control systems guarantee full compliance with civil law and usury regulations. In particular, the correct application of default interest for non-performance must be ensured, avoiding the calculation of such interest on the entire outstanding debt, rather than on the due and unpaid installment.

B) Non-compliance with transparency and correctness regulations Information sheets and other publicity tools are not always complete and up to date. The failure to include installment collection fees in the calculation of the APR (Total Annual Percentage Rate) and the failure to specify the methods for calculating default interest have been noted.

Communications sent periodically to customers are not always in compliance with transparency provisions. In some cases, they do not report the applied exchange rates nor the absolute amount of commissions charged for the conversion of expenses into other currencies, applied by the intermediary or by different subjects.

Sometimes economic charges higher than those advertised have been applied.

The following anomalous practices have also emerged.

General measures by credit authorities
Section II - Bank of Italy
Supervisory Bulletin No. 4, April 2010 II.2

B.1) Issuance of option or revolving credit cards without clear indication to customers regarding product characteristics Credit cards can be of three types:
– "charge" (or balance payment), with which the user pays expenses incurred with the card in a single lump sum with monthly debit and without payment of any interest; – "revolving", which allow expenses to be made, within the granted credit limit, repayable in installments with the debit of interest; – "option", which can be used in charge or revolving modes.

Regarding the issuance of cards of the third type, a lack of transparency towards customers regarding the costs associated with using the card in revolving mode has been noted.

With reference to option and revolving cards issued by intermediaries in co-branding with large retail chains, the different conditions applied depending on whether the card is used at the affiliated retail chain or at external points of sale have not been clearly communicated to the customer.

In cases where the intermediary has applied rates lower than those contractually provided, for example following agreements or special offers, the non-payment of an installment has sometimes resulted in the retroactive application of the higher interest rates fixed in the contract.

Intermediaries are reminded to scrupulously and substantially respect the regulations on transparency and correctness of behavior, with particular regard to: i) clear and simple information to be provided to customers regarding the characteristics of the placed product and the conditions applied; ii) the obligation for intermediaries to adopt internal procedures – including adequate safeguards on sales networks – to ensure, inter alia, that such characteristics and conditions are understandable to the customer.

B.2) Sending credit cards not expressly requested by the customer The practice of sending revolving or option credit cards to customers, already acquired under previous consumer credit contracts, has been noted. Sometimes, the aforementioned cards were sent already activated; in other cases, activation by the customer was provided for.

It is recalled that Article 8, paragraph 1, letter b) of Legislative Decree 11/2010 establishes that "the payment service provider who issues a payment instrument has the obligation to (...) refrain from sending payment instruments not specifically requested, unless the payment instrument already delivered to the user must be replaced".

In the absence of an explicit request from the customer, attested by the signature of a specific and separate contract, intermediaries cannot send payment instruments to customers. This prohibition also applies in the case where the payment instrument is forwarded inactive.

B.3) Placement of insurance policies offered within the context of financing contracts.

General measures by credit authorities
Section II - Bank of Italy
Supervisory Bulletin No. 4, April 2010 II.3

Even in the revolving credit sector, corporate policies aimed at increasing revenues through the placement of insurance policies, by retroceding a large part of the insurance premium to the intermediary, have been noted. Often, the placement of such policies occurs without a careful assessment of the customers' actual needs and under particularly onerous conditions. This practice is accompanied by serious violations of transparency regulations in cases where adequate information has not been provided to the customer regarding the non-mandatory nature of the insurance coverage.

Also with reference to the above-mentioned cases, intermediaries are reminded to scrupulously and substantially respect the regulations on transparency and correctness of behavior. In particular, it is recalled that:
a) the documentation required by regulations must report a complete list of the economic conditions applied to customers, even in the case of the offer of ancillary services or jointly marketed products. Specifically regarding insurance policies, their optional or mandatory nature must be specified. In any case, the information must clearly describe the overall cost of the contract and the portion of the premium retroceded by the insurance company to the proposer; b) the internal procedures adopted by intermediaries must, inter alia, ensure that the characteristics of the offered policy – for example in terms of risks covered – are adequate and not disproportionate to the customer's actual needs. Furthermore, the content of the policy – for example in terms of identification of beneficiaries in the event of the insured event – and its nature (optional or mandatory) must be clearly illustrated by sales staff, also verifying that the customer has had the opportunity to adequately evaluate the prepared information documentation before being bound by a contract or a financing proposal.

C) Non-compliance with provisions on the promotion and conclusion of financing contracts The practice of using the network of affiliated commercial establishments, including those belonging to large retail, for the promotion and conclusion of non-purpose financing contracts, including revolving credit cards, has been noted.

It is recalled that financial intermediaries, for the purpose of promoting and concluding financing contracts, must avail themselves of financial activity agents regulated by Legislative Decree 25.9.1999, n. 374 and the related Regulation issued by Decree of the Ministry of Economy and Finance, n. 485 of 13.12.2001. The aforementioned provisions provide a derogation from this obligation only for the promotion and conclusion, by suppliers of goods and services, of financing contracts solely for the purchase of their own goods and services based on specific agreements concluded with financial intermediaries (purpose credit).

The activity of promoting and concluding revolving credit contracts does not fall within the aforementioned derogation, as this type of financing does not constitute purpose credit, and therefore cannot be entrusted to suppliers of goods and services, but only to the aforementioned financial activity agents. Intermediaries are therefore reminded to scrupulously respect the current regulations.

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General measures by credit authorities
Section II - Bank of Italy
Supervisory Bulletin No. 4, April 2010 II.4

The Bank of Italy expects that banking and financial intermediaries operating in the revolving credit sector through the issuance of credit cards ensure – also through the scrupulous observance of what is indicated in this note – behaviors towards customers based on canons of maximum transparency and substantial correctness.

This objective must be achieved not only through the preparation of contracts and transparency documents (information sheets, summary documents, account statements) drafted in a clear manner that allow customers to understand and evaluate the costs of the offered services, but also through adequate organizational safeguards.

In particular, what is provided for in Section XI of the new transparency regulation issued last July 29 is recalled, where – among other things – the adoption of internal procedures is required to: i) ensure the understandability, by customers, of the structure, characteristics, and risks associated with offered products and their conformity with the law; ii) ensure professionalism, transparency, and correctness of staff in the sales network; iii) avoid that the customer is directed towards products evidently unsuitable for their needs.

Corporate bodies, the compliance function (where present), and internal audit, according to their respective competencies, ensure that the intermediary's organizational structure (including distribution networks) and operational procedures are such as to allow and guarantee full compliance with the obligations provided by regulations.

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The strategic supervision body of banking and financial intermediaries operating in the revolving credit sector, granted with credit cards, must reserve a specific meeting – held in the presence of the control body, which is called to express its own autonomous evaluation – aimed at critically examining the adherence to the contents of this communication of organizational procedures, internal control systems, and corporate practices. The internal auditor and the head of the compliance function (where present) must prepare detailed reports on this matter.

Where the need for corrective interventions is found – to be implemented, in any case, promptly – prompt communication must be given to the Bank of Italy, addressing the letter (containing the minutes of the aforementioned meeting, as well as the reports of the internal auditor and the head of the compliance function, where present) to the Service / Branch competent for supervision, as well as to the External Relations and General Affairs Service of the Bank of Italy.

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Supervision will continue the control action – documentary and inspection – against intermediaries active in the mentioned sector, in order to verify compliance by them with current provisions. The Bank reserves the right to take consequent sanctioning and rigorous initiatives if full and substantial adherence to legal obligations and supervisory regulations is not found, or if evasive behaviors are detected in this matter.

The Bank of Italy finally hopes that, following the adoption of more correct practices and fully respectful of legal and supervisory regulations and considering a greater efficiency and incisiveness of controls, the cost of loans to the end user may also be reduced.

General measures by credit authorities
Section II - Bank of Italy
Supervisory Bulletin No. 4, April 2010 II.5