In recent days, the National Administration for the Protection of Consumer Rights (ANPC) made a controversial decision to apply sanctions to 11 banks in the system on the basis of the existence of “deceptive commercial practices committed by them regarding the method of calculating rates, by the fact that the repayment schedule of the rate consisted of in the first years with 25% of the principal balance to be repaid and 75% of interest.”

I must admit, when I read the statement, I was both shocked and concerned by what I read, as a professor of finance and banking with many years of experience, but especially as a consumer of financial products and services. The decision taken by this institution is flawed from at least three points of view: essentially, as the way it is communicated, as well as the way it approaches those being controlled. Next, I will explain them one by one.

Why is the solution fundamentally wrong? There are at least seven reasons:

• 1. First of all, because the method of financial calculation of rates was not invented by banks, but it can be found in any specialized manual in the country and abroad, taught in all specialized universities of the world, and not only yesterday. In addition, it is governed by current Romanian (OG 50/2010 and GEO 52/2016) and European legislation.

• 2. From the moment the loan is concluded, debtors are informed about two options for calculating rates – fixed (equal) or reduced rates, the cost of the loan and other details of the contract through the FEIS form (European Standardized Information Sheet) and through the deadline attached to it. Thus, he chooses to be informed. The vast majority of borrowers choose flat rates because in the event of a rate cut, where rates are much higher in the first part of the contract than in the case of flat rates, they will no longer be able to access mortgages and customers will have to make large down payments to be able to get a loan .

• 3. Equal repayment rates consisting of equal weights between principal and interest cannot be calculated in a way that makes economic and financial sense. The only solution is to switch to reduced rates, which will indeed lead to faster repayment, only the rates in the first part of the repayment period will be significantly higher than those determined by the current calculation methodology. This situation will result in some customers (both new and old) no longer falling under the debt ceiling.

• 4. Another weak point is that the debtor is imposed only one method of repayment of the loan, he can no longer choose from two alternatives.

• 5. Installments for customers who are in the repayment period of the loan and for whom the main part of the fixed (equal) rate has a greater weight than 50%, will be harmful, since the repayment of a smaller principal amount (50% of the one he had at the time of forced rescheduling) means a higher interest-bearing balance. Thus, the total cost of the loan will increase compared to the situation in which it was.

• 6. Both the fines themselves and the situation of uncertainty (especially moral hazard) caused by the absurd measure will indirectly make loans in the banking system more expensive, and, in the end, all debtors will be debtors. lose.

• 7. As this will affect the demand for new loans, financial intermediation, which is still small, will slow down.

Why the method of delivering the decision and the approach to the controlled were inappropriate

The way in which this decision was communicated was not inspired, as it could seriously damage the image of the banks, the Romanian banking system as a whole, without any real reason. We can also see this as a factor that could destabilize banking in Romania, given the high proportion of banks found to be “guilty”. “Loan flight” is as dangerous as “deposit flight”. Comparison with moneylenders in the official release is not worthy of a state institution entrusted with such duties.

Before making any decision and communicating it, the ANPC had to enter into a dialogue for clarification with the institutions concerned, as well as ask the perspective of the regulator, in this case the National Bank of Romania. In some countries, supervision of the “conduct of business” (which also includes consumer protection) of financial institutions is the responsibility of supervisory authorities, precisely because it is a separate industry and requires a higher level of expertise. Thus, cooperation between authorities is welcome and in this case the step should have been taken by the ANPC.

It would also state that ANPC has come up with a new way of calculating rates in a specific and detailed manner and not in an evasive manner.

Vote banks would certainly win lawsuits against ANPC, which would damage the image and reduce the credibility of ANPC as a government institution. They will be added to those already made, because I am deeply convinced that many debtor clients of banks have realized that this measure is wrong. But until then, the only losers are new and old borrowers, who will bear higher lending costs and will no longer have access to credit on the same terms as before, but it will be harder to get.

Thus, this episode shows us once again that there is a need for a high and strong level of financial education among customers. A financially educated client will make much better financial decisions and will be less sensitive to the erroneous actions of some government institutions, the latter are less prone to such behavior.

Note. The opinions expressed are the personal opinions of the author and do not concern the institutions with which he is associated.