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Finland’s consumer watchdog mulls class action suit against payday loan firms

The Competition and Consumer Authority wants retroactive relief over costly consumer loans.

Image: Henrietta Hassinen / Yle

The consumer ombudsman plans to put a stop to the prohibitive costs associated with payday loans by gathering names for a possible class action suit against two quick loan firms.

The ombudsman wants more reasonable terms for loans that are not covered by new rules aimed at capping prohibitively high interest rates on consumer credit. If the lawsuit proceeds to court, it will be the first time the authority pursues such action against quick loan firms.

The Competition and Consumer Authority, KKV, is currently preparing legal action against two payday loan companies. The suit calls on the Lahti-based J.W.-Yhtiöt and Euro24 Finance from Turku to void customer agreements or alternatively, to halve the annual interest costs generated by their loans.

Both Euro24 Finance and J.W. Yhtiöt, the firm behind the Suomilimiitti payday loan provider, have been on the market for about three years. The authority is initially seeking an out-of-court settlement. However if the lenders don’t agree to its demands, it will become the first class action suit to be tried in Finland.

The consumer ombudsman can take the matter to court on behalf of customers if enough of them indicate that they are dissatisfied with the terms of their agreements and would like to change them. Class action legislation does not define the number of plaintiffs required for a class action lawsuit.

One month to gather plaintiffs

The authority said that it is taking the matter to court based on the number of people who come forward within one month to say that they are dissatisfied with their current payday loans. The lawsuit could focus on either one of the companies and any collectors to whom bad debts were sold could also find themselves embroiled in the case.

If the payday firms bow to the ombudsman’s first demand, consumers will only have to pay back the capital that they borrowed, without interest or other costs. However if the parties don’t reach an out-of-court settlement, and the ombudsman and other plaintiffs win the lawsuit, consumers will have to pay the equivalent of a maximum 50 percent of the real annual interest rate on their loans.

The case will lower costs that plaintiffs pay on their loans by hundreds of euros. Officials do not know how many people have borrowed money from the firms named in the suit. It is also unclear how much consumers in Finland have borrowed from payday firms overall, a situation confirmed by analysis conducted this autumn by the authority.

A spring review by Finnish banks indicated that consumers had drawn down around 660 million euros in quick loans in 2017. However they accounted for only a small portion of the rapidly-growing consumer debt stock.

Legal reforms aim to protect consumers

The authority pointed out that there have been dozens of operators similar to the two firms it identified offering credit at exorbitant interest rates, although there were variations in their loan terms and conditions.

Finland first introduced the option of class action lawsuits about 10 years ago. Last week the government tabled a proposal to allow consumer protection officials to address extortionate interest rates by imposing substantial financial penalties against offenders. Authorities hope such sanctions would persuade the industry to comply with consumer protection laws in a business that the Bank of Finland has described as very profitable.

Legislative reforms designed to afford consumers greater protection came into force this autumn. The changes mean that new consumer loans – including payday loans – cannot charge more than 20 percent interest and loan administration fees have also been capped. In addition, firms that do not comply with the interest rate ceiling will no longer be allowed to charge interest or any other fees.

Before the reforms took effect, interest rates were only regulated on loans with a value of less than 2,000 euros. As a result, loan firms have been offering credit valued at 2,000 euros and above with real annual interest rates of over 1,000 percent annually.