Norwegian Debt Settlements: Inclusion or Exclusion?

Check against delivery

It is a serious and important issue you are addressing here today. Financial exclusion is a problem in most countries, also in Norway, although we are among the countries less affected.  Financial exclusion causes, for those who are affected, a reduced participation in society. It often appears in combination with poverty and other social problems. For this government, combating financial exclusion plays an important role in the overall fight to eliminate overindebtedness and poverty, which we have given the highest priority.

 
So what do we understand by financial exclusion?  Mainly, we are speaking about a process whereby some people have no – or at least reduced - access to fundamental services from the credit markets, such as a bank account for savings and financial transactions, credit, and – in some cases – insurance services. Financial exclusion also means the lack of appropriate low cost, fair and safe financial products from mainstream providers. This situation causes a lot of different problems that easily also may lead to overindebtedness, poverty and social exclusion. Financial exclusion is often a consequence of poverty, but can also be a cause for poverty.

In the most serious cases of financial exclusion, people have no bank at all. They are what has been called ”unbanked”. This is a grave situation to be in, because a bank account is also the key to other financial services such as savings, credit and payment transactions. An even worse side to it, is that people without a bank account will have problems receiving regular payment, such as wages and pensions. This can be a barrier to seeking a job. Neither can they deposit money safely, pay their bills nor buy goods and services electronically. This situation is not only annoying and inconvenient; it can also make living very expensive and be a contribution to poverty. The lack of a bank account with payment facilities can make payment of bills more costly because of the fees connected with these services in banks and post offices. Further more, discounted rates are often offered to customers paying their bills electronically.

These kinds of problems also, off course, face those who have a basic deposit bank account, but without payment facilities.

More common than the lack of a bank account and payment facilities is credit exclusion. People without access to mainstream credit services easily fall victims to alternative solutions as sub-prime lenders or various kinds of providers that operate with unreasonable interest rates or other unfair conditions. 

In this connection I also will mention the problem some consumers face with having access to other “credit-like” services, like getting a telephone or an electricity subscription, renting a car or a hotel room et cetera. This can be a major problem to certain groups of overindebted people, especially those who are blacklisted by credit information companies or have a bad credit history in general.   

Consumers may also be excluded from appropriate insurance services. In a modern society, different kinds of insurance are an important basis for normal social participation. Some insurance services can be mandatory, like those for the use of motor vehicles, or essential to everyday life, like housing and furnishings insurance and for many people, also travel insurance.  

 
Financial exclusion is not a comprehensive problem in Norway. We estimate that around 1 % of the adult population faces this problem. However, this means that more or less 20 -30 000 persons are affected. The problem therefore needs to be addressed and debated also in Norway.

 
So what have we done, and what can we do to prevent and counteract financial exclusion in Norway? First of all, I will underline that we need more research, to find out more about this problem. I therefore appreciate this initiative to share information with other countries in this respect.

In Norway we have been addressing the problem of financial exclusion – at least indirectly – for quite some time. In some areas, legislation has been adopted with the aim of preventing or counteracting the problem, in other areas, different practices have been developed, to help people from being excluded. 

 
According to The Financial Contracts Act from 2000, section 14, it is illegal to refuse to accept a deposit or perform a payment assignment on ordinary terms without giving an objective reason. If this happens, the customer can make a complaint to a mediation board. Such disputes are dealt with free of charge for the consumer. Objective reasons can be that the costumer has committed fraud against the bank, or the bank suspects that money laundering or other criminal activities are connected with the deposit. A customer who is not able to identify himself properly can also be refused. Being blacklisted from credit should, however, normally not be an objective reason to refuse the opening of a bank account.
In this respect, I find it important, that the banks offer basic bank accounts to people having financial problems, for instance people involved in a debt settlement program.

According to another section in The Financial Contracts Act (§47), the lender also has an obligation to dissuade a loan to a consumer, if the lender has to assume that the person concerned should consider refraining from taking out the loan.

 
We know that in our country, financial exclusion often appears in connection with overindebtedness. A vital measure to counteract it is therefore The Debt Settlement Act, which was introduced in 1993. This Act gives people with severe debt problems a possibility to get discharged from all debts after a five year period of “low-budget living”. I will not go into details about this Act, as it will be addressed it thoroughly later in this seminar.

One main cause for financial exclusion is blacklisting because of a bad credit history. Consumers with payment problems are normally blacklisted by the credit information companies and thereby excluded from a wide range of financial services, especially credit and “credit-like” services. For the time being, up to 200 000 persons are financially blacklisted in Norway. This constitutes approximately 5 % of the adult population.
To help these people to get back to a normal financial situation as fast as possible, we have recently amended our regulations in this field. People can now be blacklisted for maximum three years. 

 
As I started, access to credit is vital in a modern society. Lack of such access is also recognized as a form of financial exclusion. Consumers particularly need access to fair and affordable mortgages. In Norway, the majority of consumers lending activity is related to housing. As our country has a larger share of self-owned dwellings than most other countries, access to housing credit is very important. Renting is usually an expensive alternative itself. Furthermore, a house or an apartment will increase its value in the long run. A “housing career” can therefore be a contribution to the combating of poverty. For this reasons, the majority of Norwegians own their homes, normally by means of a mortgage loan. To buy a home can be a problem to people with low income, or those who are blacklisted, because they will normally not get a loan from a regular bank or a credit company. In order to reduce this problem, the government offers substantial financial support and social lending systems to help financially disadvantaged to buy a home. This is carried out through various public support schemes, like housing allowance, start-up loans and housing subsidies. Especially the start-up loan is important in this respect. A start-up loan is meant for people having problems getting a loan on the mainstream market. This type of loan is particularly favorable, and is available to people that buy a home, build a home, improve a current home or refinance housing mortgage.

 
Financial exclusion is no longer a comprehensive problem in Norway compared to other countries. But to those affected, it brings about severe problems to everyday life. Even though much has been done, we therefore need to continue to address the problem, and look at what we can do further to prevent and counteract it.

 
Financial exclusion affects some groups of people more than others. Previous research in Europe has shown that it has strong links to low income and poverty. I will therefore underline that the fight against poverty, is also a fight against financial exclusion.

 
Financial exclusion is far more common among people who are not in paid work and in households where there is no wage earner. Consequently, unemployed people, none-working single parents and people with problems on the labour market due to disability are particularly exposed. Combating unemployment is therefore a major contribution to the efforts of counteracting financial exclusion.  

 
There is also a close link between overindebtedness and financial exclusion. Overindebtedness can be a cause as well as a consequence of financial exclusion. Being overindebted or having a bad credit history can prevent people from opening a bank account, getting transaction possibilities and credit services from main stream providers and so on. Debt settlement legislation is consequently also a very important measure to prevent financial exclusion.

 
The lack of financial skills is an obvious obstacle to financial inclusion. Financial counseling can therefore both prevent and repair financial problems. In Norway, we have a free financial advice service in the municipals, which we consider to be very important, especially in financially turbulent times.   

 
I have already mentioned the importance of access to modern electronic systems for money transactions. However, this also requires access to a computer, a connection to the internet and the skills to use such facilities. For some consumers, this is still an insurmountable obstacle, especially for some elderly people. Consequently, there is, at least for the present, a need for reasonably priced alternatives to internet banking.

Finally, I will reiterate the importance of combating poverty in this respect. As I have pointed out earlier, there is a strong link between poverty and financial exclusion. Combating poverty is therefore also combating financial exclusion.

Thank you for listening to me. I wish you good luck with the rest of the seminar!