Sweden´s new consumer credit proposals – will red tape get consumers back into the black?

Introduction

“Money makes the world go round”, or so the expression goes. This is particularly true in the case of credit. The ability to borrow money, rather than saving and waiting, is one of the foundations of the modern world. It goes without saying, that with the emergence of FinTech, credit has become more accessible than ever before. This is especially true for small loans and short-term loans.

Small, unsecured loans are primarily provided by Consumer Credit Institutions. There are approximately 70 Consumer Credit Institutions in Sweden, about 20 of which exist only to intermediate consumer loans. They are now, together with the consumer credit market as a whole, facing an even stricter regulatory environment, as the Swedish government proposes to strengthen consumer protections and tackle consumer over-indebtedness.

The proposed new measures include limited tax deductibility for consumer credit interest and stricter rules for the marketing of consumer credits, as well as new regulatory requirements.

In May 2024, the Swedish government put forward a memorandum with proposals to strengthen consumer protections on the consumer credit market and decrease private over-indebtedness. In short, the memorandum proposes to repeal the Certain Consumer Credit-related Operations Act (2014:275) (Sw. Lag om viss verksamhet med konsumentkrediter).[1] With the new rules – which are proposed to come into force on July 1, 2025 – Consumer Credit Institutions would need to be authorised as credit institutions in accordance with the Banking and Financing Business Act (2004:297).[2]

Consumer Credit Institutions can today be licensed to provide and or mediate credit to consumers. The proposal would increase the regulatory requirements for consumer credit providers seeking authorisation as well as increasing the costs and compliance requirements for anyone that wishes to provide consumer credit.

Background to the proposal

As access to consumer credit has increased, so too have the cases where borrowers have been unable to repay their loans. Generally speaking, loans provided by Consumer Credit Institutions are not only smaller and shorter-term than those provided by banks; they also have higher interest rates. Loans without collateral account for more than five per cent of total borrowing in Sweden, and represent more than 20 per cent of total interest payments.[3] Consumer Credit Institutions’ median interest rates for unsecured loans are 39 per cent, compared to 4.9 per cent for bank loans.[4]

According to the Swedish Financial Supervisory Authority (Sw. Finansinspektionen) (SFSA), borrowers with Consumer Credit Institutions generally have lower incomes and are less likely to be able to repay their debts. Around 30 per cent of borrowers from Consumer Credit Institutions receive payment reminders, compared to just 5 per cent of borrowers from major banks.

The SFSA has also studied the differences in credit assessments between Consumer Credit Institutions and banks, and found that banks are generally more prone to conduct credit and risk assessments.[5] For consumer loans of less than SEK 5000, where Consumer Credit Institutions are the most common type of lender, a discretionary income calculation is conducted in less than 10 per cent of cases.[6]

Current state of play

The Certain Consumer Credit-related Operations Act was enacted in 2014, before which Consumer Credit Institutions did not need authorisation by the SFSA. The Act meant that Consumer Credit Institutions became subject to similar rules as other financial institutions, regarding compliance, and shareholder and management suitability.[7]

Under the current rules, an undertaking that wishes to become an authorised Consumer Credit Institution must have founding documents compliant with regulations, as well as fit and proper shareholders, board members and management.

Like banks, Consumer Credit Institutions must have sound business practices.[8] An institution has a responsibility to maintain public trust in the credit market[9], and must also take their customers, and especially consumers, into due consideration.[10]

The soundness requirement is clarified in the SFSA’s regulations. A Consumer Credit Institution must have written internal rules on lending that clearly specify when decisions can be taken, and which include credit limits, procedures for conducting credit assessments in accordance with the Consumer Credit Act (2010:1846), how loans are to be monitored and how the credit provider intends to manage defaulted credits.

The Consumer Credit Act also contains an interest ceiling for high-cost credit products, which the government has also proposed to decrease from 40 percentage points above the reference rate to 20 per cent.[11] The Act also requires moderation in the marketing of credit products.[12]

Future regulatory burden

As previously mentioned, the government’s memorandum proposes the repeal of the Certain Consumer Credit-related Operations Act and requires Consumer Credit Institutions to seek authorisation as banks or credit market companies. This would mean much stricter regulatory requirements, for instance, capital and organisational requirements becoming applicable to the credit provider’s operations.

The added authorisation and supervision requirements would drive up the costs for consumer credit providers, and would force them to not only provide consumer credits, but to also receive funds from the public. Consumer Credit Institutions, which are today only mediating loans, would be particularly harshly affected by the proposals, as they currently neither receive funds nor provide consumer credit themselves.

The increased regulatory requirements and costs could potentially increase the entry thresholds on the consumer credit market, and lead to lower levels of competition, higher compliance costs and higher costs for the consumer. The proposed regulatory changes could also limit access to small and short-term credit.

Various stakeholders have expressed concern about the proposed regulatory changes, especially in relation to entities only intermediating consumer loans. For instance, the SFSA has criticised the lack of an impact assessment regarding consumer credit intermediaries.[13]

It should also be noted that many of the supposed issues with consumer credits, such as risk assessments and high interest rates, are regulated in the Consumer Credit Act (2010:1846) rather than in the Certain Consumer Credit-related Operations Act. The Consumer Credit Act (also) requires sound lending practices, and moderation when marketing credit products. The Swedish Bar Association notes in its response to the government’s proposal that the Consumer Credit Act does not make any difference between credit institutions and Consumer Credit Institutions.[14] The government’s impact assessment does not specify how revoking the Certain Consumer Credit-related Operations Act would decrease over-indebtedness.

Conclusions

The proposed increased regulatory requirements risk creating an environment where the increased costs and barriers of entry to the consumer credit market limit competition, leading to credit becoming less accessible to consumers. The requirement for any Consumer Credit Institution to become a bank or credit market company would make many current providers untenable, and therefore decrease the numbers of FinTech startups in the consumer credit market.

It is also uncertain whether the repeal of the Certain Consumer Credit-related Operations Act would be an efficient and proportionate response to the issue of over-indebtedness. Consumer Credit Institutions are already required to observe sound lending practices, and there are multiple regulations related to consumer loans. Many of the government’s proposals to strengthen consumer protections take aim at the loans themselves and the marketing of consumer credit.

Generally, major interventions in Swedish national law (which are not based on EU law common for all member states), also risk weakening Stockholm’s position as one of Europe’s major FinTech hubs.

As the rest of Europe is waking up to competitiveness issues, Sweden is planning to impose new regulatory requirements on many thriving FinTech businesses. Many of the proposals to combat over-indebtedness have been welcomed by the credit providers themselves, but repealing the Certain Consumer Credit-related Operations Act would lead to an entirely new regulatory environment, without addressing the root causes of over-indebtedness. Functioning financial markets require competition and innovation, rather than increased entry barriers for startups and SMEs.

The Swedish government is expected to continue its legislative work, and refer a legislative proposal to the Council on Legislation during the autumn term. However, it yet remains to be seen whether it has listened to the critique of its proposals.

[1] FiDep, dnr 2024/01078, p. 4.

[2] FiDep, dnr 2024/01078, p. 30 f.

[3] SFSA, Swedish Consumer Credit, FI Ref. 22-32666 (2022).

[4] Swedish Consumer Credit, p. 34 (2022).

[5] FiDep, dnr 2024/01078, p. 26.

[6] FiDep, dnr 2024/01078, p. 29.

[7] Section 6 of the Certain Consumer Credit-related Operations Act.

[8] Section 12 of the Certain Consumer Credit-related Operations Act.

[9] Government Bill 2013/14:107 p. 51.

[10] Government Bill 1992/93:89 p. 153 f.

[11] Section 19a of the Consumer Credit Act. For the proposed changes, see Government Bill 2024/25:17 p. 13 ff.

[12] Section 6a of the Consumer Credit Act.

[13] FI dnr. 24–13477, p. 4.

[14] Swedish Bar Association, R-2024/1037, p. 2.