The American Chamber of Commerce in Japan stated the viewpoint to the reform of the Installment Sales Law. The comment proposes several points in the coming law revision. However, it is not suitable critical in the view point of the present status of consumer detriment in Japan.
As noted in the viewpoint, Installment credit sales are generally regulated under the Installment Sales Law (ISL). The ISL governs both closed-end sales finance transactions as well as shopping balances on credit cards. In February 2007, METI organized the Industry Structure Council, Installment Sales Committee, Basic Issue Sub-committee (Sub-committee) to assess the practices in this credit market. The panel suggested any needed reforms of the ISL on the final report on 10th December 2007.
1. ceiling on credit
The ACCJ recommends that the law shoud be avoid imposition of arbitrary restrictions on sales credit.
(ii) that the law promote industry selfregulation as much as possible based on the principle of fair and transparent disclosures, and avoid imposition of arbitrary restrictions on sales credit that could constrict the retail sector,
The rationale of the recommendation is explained as follows:
[...] in the absence of misleading sales practices by merchants and when the customer’s intention is evident, we believe that the deference to customer’s choice is an important principle in developing a healthy credit market, and customer’s choice to buy products or services should prevail even when the purchase volume may not seem to be “ordinary”.
We also observe that an arbitrary ceiling on credit levels based on the consumer’s income may have the effect of constricting credit to the retail sector, and not mitigating the problem of excessive credit. Statistical analysis of consumer credit historical data has demonstrated that income levels are one factor, but not necessarily the primary factor, in a customer’s ability or likelihood to repay a sales finance loan. Arbitrary income-based lending restrictions are not the solution for excessive lending. The new law and it’s implementing rules and regulations should therefore promote and rely on careful underwriting based on a checking of credit bureau information, a clear disclosure of the costs of credit to the borrower, and periodic reviews of solicitation methods.
The ACCJ has consistently advocated that a full-file credit bureau system should become the basis of more scientifically based credit underwriting. While agreeing with the intention of the Report’s recommendations in this area, the ACCJ is concerned that some of the proposed factors to be examined, such as purchasing
history, income and living standards, go beyond what is needed for a sound underwriting, may implicate privacy concerns of customers and quite simply may not be practical to implement in the marketplace.
In relation to the documents requirement, the information to be filled in by the customer in the transaction document should be limited to that reasonably needed for sound underwriting.
Information beyond that necessary for a meaningful credit review should not be collected, in deference to consumer privacy concerns and to avoid overburdening the process as well as the record keeping obligations of credit providers and merchants.
In consideration of the above, additional costs to the credit sector and consumer privacy issues should be considered when establishing any guidelines or specific standards, and such standards should allow flexibility in implementation.
The retail sector, of course, has a freedom of sales promotion and the law should not impose unreasonable burden to the retail business sector. On the other hand, the business sector also has not the right to exploit the consumer. In general, it said that the consumer shall be a entity who can make a reasonable economic decision.
First of all, the consumer cannot usually have enough and efficient information both in quality and in quantity to make his informed economic decision. Therefore, it is not efficient for preventing a consumer detriment that a sufficient information is available to the consumer. Consumers should be provided with information, choice and flexibility. Under the lack of the circumstance, the sales promotion of credit sector also should be restricted.
Secondary, the consumer do not have ability to analiz well such information even if the information is available well to the consumer. Therefore, the consumer tend to be influenced by heuristics techniques of business sector. The use of heuristics techniques may not be illegal; but the bad influence to the ordinary consumer is appalent in the UK door-step selling report compiled by the OFT. Same incication can be found in recent OECD report.
The consumer protection policy should be established by the fruitful outcome that was developed by the behavior economics. It can be fond in OECD report in 2006 and 2007.
The ever increasing complexity of markets and commercial practices is shedding new light on the capacity and willingness of consumers to make optimal choices. Behavioural economics well explain the boundaries to rational consumer behaviour. The consumer policymaker should take into account the way consumers actually behave, whilst the economics textbooks say they should behave in reasonable way.
Behavioural economics will deliver insights that policymakers can use. These insights have obvious potential for consumer policy, whether in relation to regulation or information.
To cap the credit limitation shall be effective measure to cope with consumer unreasonable behavior influenced by heuristics.
Recent development of behaviour ecomonics in consumer protection is found in the report, “Consumer and Competition Policies –Both for Welfare and Growth”; for insurance and private pention, another OECD report is useful.
2. the liability of creditor
The ACCJ recommends the liability of the creditor should be restricted.
(iv) that rights of customers to receive refunds of amounts paid ensure fair redress from merchants that have breached sales agreements or committed fraud, while avoiding the creation of excessive liability for sales finance companies that have acted in good faith to finance purchases.
The basis of the opinion is as follows:
One of the most significant proposals in the Report is the adoption of the obligation to refund all paid amounts, without any fault on the side of credit providers, when a sales finance transaction is rescinded where fraudulent solicitation was made.
Since credit companies will be subject to much broader requirements than before, including the new requirement regarding confirmation of appropriate credit levels based on member merchant checks, refund of paid amounts by the credit company should only be required when there is some form of fault on the part of the credit company. In addition, even if such liability were to be introduced, it must be made clear that such liability is not joint and several between among the merchant and sales finance company. The primary obligation to refund paid amounts should rest with the merchant for all cases; and, a customer should be entitled to seek refund from the credit providers only when the customer was not successful in the recovery of paid-amount from the merchants.
We understand that a consumer’s right to cancel a sales contract is under discussion in connection with the Act on Specified Commercial Transactions. However, the major causes cited by the Report focus on fraudulent or inappropriate sales promotion by merchants. In this context, credit companies should only be
made liable for refunds when it is clear that the credit company failed to manage the member merchant properly, or it knew, or should have known, of the merchants’ inappropriate conduct in a specific case.
If the ACCJ insists that the liability cause to shrink the sale activity, it is not persuasive. The Consumer Credit Act of UK imposes the connected lender liability with the distributor to the creditor. However, this strict restriction seems not to shrink the credit business in UK; on the contrary, the liability gives a significant credibility of UK credit sector and it seems that the liability supports the growth of UK credit industry. In Finland, the credit sector is burdened the similar lender liability; but I do not know the strict liability clause is excessive and gives a bad influence to the credit and retail sector in Finland.
3. cooling off regime
The viewpoint says:
(iii) that cooling off periods take into account existing rights of consumers to cancel contracts, and contain safeguards against fraudulent use of cancellations,
The explanation of the opinion is as follows;
The Report proposes that cooling-off of the sales contract would automatically result in the cooling-off of the credit contract. Under current practices, when a purchase agreement is cancelled during a cooling-off period, the credit agreement is properly processed for cancellation to avoid any finance charges being assessed on consumers in connection with the cancelled sale.
Therefore, there is not much point in introducing a cooling-off provision in the credit agreement in light of these risks of fraud and abuse. In the event that a cooling-off provision will be introduced, clear rules would be essential to prevent any fraud.
As far as the present law, even if the consumer cancels the contract with the distributor, it does not mean that the consumer cant get refund of the paid installment from a creditor who financed a payment of the consumer. In the case, the consumer has to ask the refund of payment from the distributor. But, if the consumer cannot get refund the payment from the distributor such as his bankruptcy, the consumer has no way to get reimbursement.
The ACCJ may insist the establishment of the connected lender liability rule in coming law. But it is insufficient to the purchaser protection. By the proposal of law reform, a creditor owes connected lender liability in the case where a distributor makes misrepresentation or omission of important fact related to the transaction. When the distributor cannnot perform his duty by virtue of his bankrupcy, the creditor has no duty of refund to the purchaser. Therefore, the cooling off of credit contract is necessary for the consumer protection.
