Regulatory framework to tackle household financial distress Catarina Frade (FEUC & CES) BEHAVE International Conference Households in the Financial Crisis: Consumer credit and policy Lisbon, January 17, 2014

Political and regulatory challenges/responses Financialization Individual contraints in decision making process Contract Law Principles and Legal/Judicial culture Welfare State shrinkage Policy and regulation crossroads

Contract Law Principles /Legal and Judicial culture Relevant contract law principles and duties: The pacta sunt servanda principle ( contracts are to be honored ) as the legal ground of the capitalist economy certitude, stability and confidance Good faith principle in negotiations and contract fulfilment (to act with fairness, honesty and consideration for the other contractual partner interests) Information duties (disclosure) prescribed to lenders/sellers aiming to support borrowers/buyers decisions Conditions favorable to trade and long-time commitments

Consumer law and the recognition of the inequality between financial institutions and individuals (consumers). – General information duties (disclosure) in consumer protection law – Reinforcement of information duties concerning financial products (v.g. consumer credit law; mortgage law, ECB and Bank of Portugal orders, etc.) – Approach to the rebus sic stantibus theory (change of the circumnstances theory) (v.g. art. 6º, V of the Brazilian Consumer Code) Contract Law Principles /Legal and Judicial culture Rebalance of the bargaining power of contractual partners

Legal and judicial culture (civil law countries like Portugal) Positivism and rule of law Adversarial spirit and distrust in ADR mechanisms to solve conflits (negotiation, mediation, arbitration, etc.) Neglect of consumer law rules in favor of general contract law norms and principles Judicial activism regarded with suspicion and criticism Contract Law Principles /Legal and Judicial culture Standardized/ routinized law enforcement

Contract Law Principles /Legal and Judicial culture Current legal framework and judicial practice favor: an uneven distribution of credit risk, adverse to borrowers; unbalanced solutions that many not provide a satisfactory protection of borrowers rights and interests and in the mid-term also of those pertaining to lenders.

What do we see? Retreat of public provision of welfare (housing, education, health, retirement) Increase dependence of market, including financial market, for the provision of households´well-being (financialization of society) Increase vulnerability of households to the dynamics/crisis of labor market and other life events (micro-level) and to economic and financial downturns (macro-level) The perception of reality

What do we see? Higher exposure to risk from financial institutions due to short term interests of shareholders, the globalization of financial products and practices, and the diversification of customer profiles Vulnerability of democratic political institutions in monitoring and regulating autocratic economic institutions (a lender/borrower relationship is also common) The perception of reality

Policy implications and challenges The shift: From individual responsability (contract law and tort law, financial literacy) to more a collective risk sharing approach (independent debt couselling, debt adjustment regimes, bankruptcy, responsible lending) Balancing pacta sunt servanda (freedom of choice, autonomy of will) with retibus sic stantibus (change of circumstancies)? More doctrine and jurisprudence discussion is needed!

Policy implications and challenges The shift: From monolithic solutions (one size fits all) to multi-level and customized solutions regulatory mix combined with co-operation and co-responsiveness of public institutions, market, society and individuals Centralized regulation versus deregulation versus decentralized regulation ? Discussion towards governance and legitimacy issues!

Policy implications and challenges The shift: From cristalized rules and procedures to more adaptative policies, laws and procedures « deterrance and compliance debate « judicial activism? Fundamental economic and social rights in a context of public resources deficit? The reinvention and reaffirmation of fundamental rights towards human dignity and freedom (constitutional law)!