Corporate responsibility and social banking

Corporate social responsibility (CSR) is a good example of a ‘soft law’ mechanism which can complement the 2008 directive on credit agreements for consumers. Mentioned as part of the European 2020 strategy for sustainable and inclusive growth, CSR is defined by the European Commission as a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis.

Such a concept was introduced in 2001, when the European Commission adopted the Green Paper ‘Promoting a European Framework for Corporate Social Responsibility’.[1] This paper encourages companies to go beyond compliance with existing regulatory standards, highlighting the economic advantage of such an approach for the companies themselves. Indeed, CSR can be considered as an investment in order to improve the corporate reputation and attract the interest of consumers and investors.[2] Paragraph 51 of the Green Paper explicitly mentions consumers, and states that companies should aim at making services usable by as many people as possible, including disabled consumers.[3] This is particularly relevant in consumer credit, given that financial institutions usually do not lend to low-income consumers.[4] Thus, facilitating access to financial services at an affordable rate could be considered as an important example of corporate social responsibility.[5]

A concept related to social responsibility, but specifically centred on finance is ‘social (or ethical) banking’. While there is no universally accepted definition, it can be said that ‘Social Banking describes the provision of banking and financial services that consequently pursue ( . . . ) a positive contribution to the potential of all human beings to develop ( . . . )’.[6] Social banking usually functions as a best practice approach and as a social assessment tool for mainstream banking and is an institution that helps to tackle exclusion. The roots of this idea go back to at least the 1977 US Community Reinvestment Act (CRA), which introduced a social rating system on banks.[7]

This Act aims to encourage deposit institutions to help meet the credit needs ofthe communities in which they operate,including low- and moderate-income neighbourhoods. However, this does not mean that institutions should make high-risks loans, as the operations have to be consistent with safe and sound operations of a bank.[8] The CRA requires that the performance of these financial institutions in helping meet the credit needs of their communities needs to be assessed periodically.[9] This assessment is conducted by federal agencies, which are responsible for supervising depository institutions and whose ratings are made public. The CRA does not provide specific criteria for rating the record of depository institutions; but the assessment should suit the institution’s circumstances.[9] Beside their ‘naming and shaming effect’, these ratings are important because they are taken into account by public authorities in considering an institution’s application for deposit facilities. Certain government institutions are obliged, by statute, to only deal with banks that have achieved a good rating. However, besides this, there is no direct penalty on the financial institution, in case of non-compliance, which weakens the effectiveness and control of the Act.

The CRA has been successful in motivating financial institutions to establish more inclusive and sustainable lending patterns which do not imply unprofitable credit.[11] This scheme has also led to enhanced financial education and understanding.[12] Thus, a similar legal scheme may also be an interesting inspiration in the EU context to stimulate an equitable consumer credit system.

In EU Member States, social banking is often embodied by alternative lending institutions that lend to consumers at preferential rates. Examples of these include collective bank accounts and self-help organizations, such as credit unions in the UK, which aim to facilitate access to low-income consumers.[13] In these financial cooperatives individuals lend money to one another at comparatively low rates.124 While this represents a good solution for certain consumers, credit unions still have to assess risks which may exclude individuals. Moreover, the organization and the consumers must present a saving pattern in order to obtain credit, which poses practical challenges for the credit union. Thus, the role of the government remains important in order to promote social lending and to provide lending to individuals who remain too risky for credit unions.125

  • [1] See: , COM(2001) 366.
  • [2] For an example of corporate social responsibility and the capability approach, see J. Browne,S. Deakin & F. Wilkinson, ‘Capabilities, Social Rights and Market Integration’, in R. Salais & R.Villeneuve, Europe and the Politics of Capabilities (Cambridge: CUP, 2005), pp. 212-13.
  • [3] Low-income consumers are particularly common among the disabled, see e.g. the JosephRowntree Foundation Report, Enduring Economic Exclusion: Disabled People, Income And Work (2000).
  • [4] T. Wilson, ‘ Responsible Lending or Restrictive Lending Practices? Balancing Concernsregarding Over-indebtedness with Addressing Financial Exclusion’, in M. Kelly-Louw, J. Nehf, &P. Rott (eds), The Future of Consumer Credit Regulation, Creative Approaches to Emerging Problems,(Markets and the Law) (Aldershot: Ashgate Publishing, 2008), pp. 91-106.
  • [5] U. Reifner, ‘The Lost Penny, Social Contract Law and Market Economy’, in T. Wilhelmsson& S. Hurri (eds), From Dissonance to Sense: Welfare State Expectations, Privatization and Private Law(Aldershot: Ashgate Publishing, 1999), p. 119.
  • [6] Institute for Social Banking: .
  • [7] U. Reifner, ‘Social Banking, Ansatze und Erfahrungen uber die Integration sozialerZielsetzungen in Privatwirtschaft und Finanzdienstleistungen’, in L. Schuster (ed.), Die gesellschaftlicheVerantwortung von Banken (Berlin: Erich Schmidt Verlag, 1997), p. 205.
  • [8] This Act was enacted by Congress in 1977 (12 U.S.C. 2901) and implemented by Regulation12 CFR 228, substantially revised in May 1995, and updated again in August 2005.
  • [9] See the information at: .
  • [10] See the information at: .
  • [11] M. Barr, ‘Credit Where it Counts: the Community Reinvestment Act’, (2005) 80 New YorkUniversity L. Rev. 513.
  • [12] According to Ramsay, this scheme can also encourage a more democratic approach as community groups have standing to participate in public hearings on a bank’s performance; Ramsay(n 109), p. 31.
  • [13] See W.C.H. Ervine, ‘Regulating Socially Harmful Lending: Reform in the United Kingdom’,in L. Thevenoz & N. Reich (eds), Liber amicorum Bernd Stauder: Droit de laKonsumentenrecht/Consumer Law (Baden-Baden/Zurich: Nomos/Schulthess, 2006), pp. 77-93.
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