Price rules in consumer credit: should the EU act?
Price rules are enacted to prevent some sub-prime lenders from wrongly exploiting the price-insensitivity of a significant share of sub-prime borrowers. High diversity across countries can be observed in both the type of rules adopted (combining direct and indirect price caps) and their degree of tightness. Rules seem to be tighter in an environment of high financial inclusion, intense public support in social matters, low risk of poverty, high household saving ratios and/or high maturity of consumption credit markets. The few episodes of marked tightening have shown a significant decrease in both costs and volumes of loans, and it remains unclear whether large substitution effects have been triggered as a result. EU harmonisation in price rules could be justified by the need for a better level-playing field; however, given the diversity in price rules, in the degree of tightness of these rules and in the structure of sub-prime markets, it could also trigger significant negative effects. Overall, further research is greatly needed to appreciate better the size and mechanisms of sub-prime markets, and the implication of price rules.
Sylvain Bouyon is Research Fellow and Head of Retail Finance and Fintech. Inna Oliinyk works as a research assistant in the Financial Markets & Insitutions Unit.