Giorgio Jackson and insurance co-payment: “It will translate into a rate increase, but the question is how much”

The financial industry is on alert for an indication that the deputy Giorgio Jackson (FA) entered that seeks, among other things, that the insurance premium be paid in equal parts between the creditor and the client. Although the bank has indicated that the indication as it is, would also apply to insurance that are not associated with credits (as means of payment), the parliamentarian clarifies that “it is only for insurance associated with credit”, so that It could be specified in the indication, he says. It also clarifies that “it is only for future contracts, and not for stock.”

The deputy member of the Finance Commission explains that “these are not indications that I have written in particular, but rather they are part of a work that we did for months with parliamentarians at the transversal level. We work them with the deputy (Gonzalo) Fuenzalida from RN. They are not something, as has been said, far from improvised, but rather they have been the fruit of several months of work, with people who work within the industry, and also with transversal support ”.

What is the objective that these indications seek?

-What is sought is that the interest rate of the loans is the one that reflects the cost of the capital loan. Today the problem is that, in addition to the rate, there are many other charges that are attached, and that therefore, are highly non-transparent for the population when taking a loan Those costs associated with insurance, which are often mandatory, somehow they are ways to circumvent the Conventional Maximum Rate (TMC).

The Commission for the Financial Market (CMF) calculated that only 12.6% of the total could be restricted in bank quota operations, since they would exceed the TMC. This, in the last 12 months represents 236 thousand operations.

-First, the analysis that banks have made or those who have criticized these indications, do not consider the basic objective that (this proposal) has: which is that they compete by rate, that is, the costs that today are hidden to circumvent the TMC, as they are incorporated into the rate, they should not be completely passed on. Secondly, once the banks and the industry argue that this idea would unseat people, they recognize that it is a way of circumventing the system. They recognize it implicitly, that this is the formula they have reached to generate greater profits, since there is a CCT. The population that is in informal credit has already been growing. According to the 2018 survey by the Microdata Center of the University of Chile with the Association of Banks, 14.3% of credit is informal, which is a worrying figure.

For this reason, it is more worrying that there is a risk of greater unbanking with its proposal

-The basic question that I ask myself as a legislator is if the people who are at that limit, and who are currently banked, is credit a form of opportunity or is it rather a form of survival and financial slavery? Could it be that the basic problem of people who are incurring high-risk loans is that they do not have enough money to make ends meet? For me, the structural problem is that we have almost 80% of the population, according to the Central Bank survey, that does not make ends meet with the money it has, that is, they have higher expenses than income. We do not share the vision of an industry sector, a sector interested in this case, which is banking, regarding these indications.

But the CMF has also pointed out in the same sense, that it is an autonomous body, it is the regulator, which does not depend on the government. You have said that your indication is not recommended because it unbanks and raises rates. It must be considered that the TMC today is at 34% for credits of up to 50 UF, versus informal credit that can exceed 120% per year.

-That is an interesting argument, but we can take it to the limit. Today 14.3% is informal credit. Then what do we do? Does it mean to eliminate TMC? There are some of these criticisms that slip between the lines the need to deregulate to protect, supposedly, the poorest people. If one follows this line of argument, one could say that the CCT should be eliminated, that it would be necessary to return to the pre-2008 scenario, when the subprime crisis broke out precisely for loans to people who benefited from bankarization, but ended up in an escalation of financial speculation bubble. And therefore the issue we are talking about is where the limits are set. I believe that the TMC should be a transparent tool, which is not avoided with alternative costs.

Do you have an agenda that you would like to push to reduce informal credit?

-In the short term it is very difficult to create a policy to get people out of this informal debt trap, but the focus should be on structural change and not cover it with more debt. If the structural problem of the sectors that today do not have access to formal credit is that they do not make ends meet to eat, the solution cannot be that they have more credit. The solution is that we give good salaries, good subsidies, that they have access to housing, that when they have a disease they have good access to health. They are more long-term issues, and I recognize that in the short term this is going to have some unwanted effects, but I think it is necessary to remove the veil that often calms us, this veil that everything is fine because people can access credit . The credits should be to find opportunities in life (…) and not to enslave poor people to financial torture.

It says that banks are circumventing the TMC with insurance, but the CMF clarified that in the end the banks charge an interest rate for credit risk, and insurance reduces that risk, therefore the rate is lower. The CMF said that with this indication the rate increases more than 10%, only considering the credit life insurance. Do you have any study that says that this indication actually achieves more competitive rates?

-We believe that any additional cost for the bank will effectively translate into a rate increase, but the question is how much. In this case, as there is a limit, which is the TMC, we do not have studies, but it is economic theory: we believe that banks, due to the competition effect, should not pass 100% of that cost.

Who came up with this idea of ​​sharing the premium?

-In our team we were analyzing it with our legislative advisers, but also accompanied by credit sellers.

From banks?

-Of banks, who we approached, and somehow several of the indications were made with them.

With what legislative advisers?

-With my team. After writing the instructions, we also consulted him and in fact, we met with the CMF.

Have they discussed it with Sernac?

-No.

The bank says that in no country does the credit provider pay part of the insurance. Were they based on any experience?

-No, this is an innovation, but it is based on criticisms that have not come out only in Chile, but in the world, regarding the banks not having a share in the insurance costs. If innovation has to be done here and the bank’s lobby, which is in all parts of the world, is defeated, it is something that can be perfectly replicated elsewhere. In some country this has to be revealed. That it has not been done in other parts of the world, rather than telling us that it is a bad measure, is showing how strong the banking lobby is all over the world.

This is only for entities regulated by the CMF, that is, it does not include auto credit, savings banks and part of cooperatives. Why did they define it that way?

-It is not an essential part of the content of the indication. If something of that nature needs to be modified, there should be no problem.

Another indication says that the default rate cannot be higher than the current interest rate. What is it pointing to?

-For us, the costs associated with risk are in the rate. Paying delinquent interest is like paying twice. We simply propose that it be current interest, and that there be no quasi-automatic TMC interest for delinquencies.

But does the indication indicate that less than the original interest is charged?

-No, the default interest today is the TMC.

But the TMC today is calculated based on current interest plus a spread, and the indication says that when someone falls in default, the charge cannot be higher than current interest. That is, when entering default, less than the original credit would be charged.

-I understand the point of criticism, deep down, encourage customers to want to default to pay less interest?

Clear.

– That is not the objective of the indication, that is an interpretation that does not go in the spirit of the norm. The spirit is that, since your rate is higher because you are someone who has a certain risk, the fact that you fall in default should not cause it to rise and there is a default interest higher than the rate you agreed to.