The value of the banker-customer relationship: THE ETHICAL DIMENSION

Comments 0

In 1984, Cork recognised that changes in commercial life and society since passage of the Bankruptcy Act 1883 necessitated a review and refashioning of insolvency law. The 1986 reforms that Cork influenced recognised that there needed to be a balance between two separate views of bankruptcy: as a sanction against deviancy and consumer laxness (deterrence); and as a form of consumer protection.

In a society based on credit, bankruptcy will still exclude individuals from the credit system and act as a punishment. It will also provide a ‘safety valve’, recognising that credit providers share responsibility for over-commitment. The key task in achieving this balance is to distinguish between the dishonest insolvent and the merely unlucky.

The main participants in achieving this balance, apart from individual debtors and creditors themselves, are insolvency practitioners and their public sector counterparts, the Official Receivers. Cork’s recommendation of a licensing system for IPs and the professionalisation of the industry coincided with the government’s wish to reduce public sector involvement in the administration of bankruptcy. After 1986, The Insolvency Service, an executive agency of the DTI, wanted to concentrate on fraud and malpractice investigations. The strategy was to offer bankruptcy cases to the private IPs, but the sheer numbers of bankruptcies that failed even to pay their own costs meant that by 1999, Official Receivers were involved in the administration of up to 50 per cent of all insolvencies. The attendant pressure on Insolvency Service resources has a damaging effect on the perception of the efficient administration of estates. Although all bankrupts are subject to an investigation this may be paper based only, with much reliance placed on the debtor to provide information. This may be a factor that adds to the attraction of bankruptcy for the dishonest debtor.

Although no specific UK research has been undertaken into attitudes to bankruptcy, there exist a number of other factors that help to shed light on the conflicting attitudes to bankruptcy of creditors and debtors. Factors exist that support the deterrence view of bankruptcy law, typically held by creditors, and the rehabilitation view, presumably favoured by debtors.

There is said to be a ‘stigma’ associated with bankruptcy that supports the deterrence viewpoint. Bankruptcy, IVAs and County Court judgments, so-called ‘black’ information, are routinely recorded and included in commercially available credit reference databases. A credit reference search can highlight a previous bankruptcy or IVA for up to six years beyond the discharge of a bankruptcy order or completion of an IVA. Institutional creditors often base their credit-scoring and screening on such databases. The existence of this negative information assumes an importance in decision making despite the fact that such information fails to distinguish between the dishonest and the ‘unlucky’ debtor, or the recalcitrant bankrupt and the debtor who works hard to ensure that the IVA succeeds.

Banks also find themselves in a privileged position in bankruptcy through their taking of direct and indirect security and guarantees — a privilege maintained by the priority given to types of creditor in the Insolvency Act 1986. An unpopular view put forward in 1992 was the outlawing of collateral that would:

‘. . . force banks into relationship banking, rather than simply paying lip service to it in hard times’.

This view ignores the increased cost of credit that unsecured lending would bring, but does address the fundamental relationship between banker and customer.

Creditors’ maintenance of a bankruptcy ‘stigma’ is under pressure from government and society in general. A society based on credit generally has a greater acceptance of debt and a more permissive attitude to default. The sheer numbers of individuals seeking the protection of bankruptcy also serve to diminish its threat of censure. Together, the perceived inefficiency in official bankruptcy administration and the automatic discharge from bankruptcy after three years appear favourable alternatives when compared with the five years for the average IVA.

A more accessible feature of the equation for UK creditors, is the institutional credit— trust relationship between lender and borrower. Initial lending relationships between banks and new customers are likely to be deterrence based but will develop into knowledge-based relationships where personal contact and repeated interaction are prevalent. Personal lending by UK banks is rarely relationship based, however and most ‘arms-length’ consumer credit transactions will remain deterrence based, but when the value of the deterrence diminishes as society’s view changes and as bankruptcy law favours rehabilitation, the deterrent effect breaks down. In addition the deterrence-based relationship is unlikely to engender any emotional or moral input by the borrower.

Representative APR 391%

Let's say you want to borrow $100 for two week. Lender can charge you $15 for borrowing $100 for two weeks. You will need to return $115 to the lender at the end of 2 weeks. The cost of the $100 loan is a $15 finance charge and an annual percentage rate of 391 percent. If you decide to roll over the loan for another two weeks, lender can charge you another $15. If you roll-over the loan three times, the finance charge would climb to $60 to borrow the $100.

Implications of Non-payment: Some lenders in our network may automatically roll over your existing loan for another two weeks if you don't pay back the loan on time. Fees for renewing the loan range from lender to lender. Most of the time these fees equal the fees you paid to get the initial payday loan. We ask lenders in our network to follow legal and ethical collection practices set by industry associations and government agencies. Non-payment of a payday loan might negatively effect your credit history.

Calculate APR

Happily Served Customers

Get pre-approved for a large personal loan today!