Over-indebtedness on the rise again in France
Inflation, rising interest rates, falling purchasing power… The worsening economic situation continues to weigh on French households.
According to the Banque de France’s April 2024 financial inclusion barometer, more and more French people are unable to repay their debts.
While the number of cases of overindebtedness lodged with the Banque de France has been falling over the last ten years, it rose by 8% between 2022 and 2023. In the first quarter of 2024, 35,690 cases were filed, an increase of 17% over one year.
Against a complex economic backdrop, this rise in household over-indebtedness is also affecting other European countries, such as Belgium and Luxembourg.
Consumer credit, the main cause of overindebtedness
Despite the recent tightening of the conditions governing access to consumer credit, it still accounts for 40.1% of overall debt, up 2% on 2022. 72.3% of cases involve this type of credit, for an average amount of €22,866.
Over-indebtedness particularly affects vulnerable groups
Over-indebtedness mainly affects vulnerable and less-educated groups.
69% of cases involve people with a standard of living below the minimum wage. 58% are living in poverty. 56% are isolated (widowed, separated, divorced, etc.). A slight majority of cases (54%) concern women.
To better protect consumers and combat over-indebtedness, the European Union strengthened its directive on consumer credit at the end of 2023.
Revision of the European directive on credit to better protect consumers
First published in 1987, this directive has become increasingly strict in recent years on issues of transparency, information and conditions of access to consumer credit, with various revisions in 2008, 2011 and 2014.
The latest revision, scheduled for the end of 2023, is the result of many years of negotiation between the Member States and is aimed in particular at combating over-indebtedness, clarifying certain articles of the previous directive and adapting to new market practices (deferred or split payments, digitisation of processes, use of artificial intelligence, participative financing, etc.).
More specifically, this involves
- Stricter requirements for lenders in terms of transparency, fairness and legibility of information, as well as the solvency conditions required to obtain credit. For example, if a consumer is refused credit because of their financial capacity, they must be referred to an advice centre to help them better manage their over-indebtedness. Another example: information on credit conditions must be clear and legible, including on mobile phones, which are increasingly used to take out credit online.
- Extension of the directive to new forms of credit, such as credit agreements for less than €200, certain forms of overdraft and overdraft facilities.
- Requirements for Member States to provide budgetary and financial education for their citizens, in particular by raising awareness of the risks of non-payment and over-indebtedness. The aim is to “improve consumers’ knowledge of responsible borrowing and debt management, in particular as regards consumer credit agreements, and general budget management”. For example, this financial education can take the form of best practice publications on how to better manage savings, or guides on the credit granting process. This education is particularly important for consumers taking out credit for the first time.
The directive, published at the end of 2023, should be applied by Member States by the end of 2025.
The limits of this new directive: the issue of financial education
While the revision of this directive is a step in the right direction in terms of the development of digital consumer credit practices, it is still weak on the key issue of financial education, which is at the root of most cases of over-indebtedness.
First of all, the obligation to educate consumers about their finances falls solely on the Member States, whereas it would be much more appropriate for credit organisations to be required to do so. This is because it is at the point of taking out a loan that the consumer most needs to be educated, a point at which the credit organisation is in a much better position to intervene than the Member State.
Furthermore, the budget education format proposed by the directive is simply the publication of good practice and advice. This mainly takes the form of information websites financed by the Member States, such as La finance pour tous in France or Letzfin in Luxembourg.
While these sites have the merit of existing and offering a wealth of content on the subject, they are mainly accessible to consumers who have the time, who have a certain level of education that enables them to read detailed articles, and above all who themselves take the step of going online for training.
However, as the statistics from the Banque de France show, people in situations of over-indebtedness are still vulnerable people who do not always have a sufficiently high level of education to have access to the information they need.
To overcome this problem, some Member States have begun to explore other approaches. In France, for example, a few hours of budget education have become compulsory at secondary school level. In Italy, financial authorities such as Consob and the Bank of Italy are conducting research into the use of gamification and edutainment to improve people’s financial education.
This research is in line with that conducted more generally in educational science, which promotes active education, through games and exercises, available at the time of decision-making (in this case, when taking out a loan), and in a flexible format (digital and face-to-face).
Ideally, these research findings should be incorporated into a forthcoming directive to promote budgeting education that is fun and accessible to all in order to effectively combat household over-indebtedness in Europe.