Originally published in the Norton Rose Insurance Updater, February 2010.
In summer 2009, the Bank of Italy (the Italian central bank) published a set of instructions to be used by banks and other financial institutions in calculating their Percentage Rate of Charge ("Tasso Effettivo Globale") which they are required to communicate to the Bank of Italy on a quarterly basis. The Percentage Rate of Charge ("PRC") is the actual rate applied by these institutions to their customers (ie in bank accounts, mortgages, loans, etc) and should be distinguished from the Annual Percentage Rate of Charge ("Tasso Annuo Effettivo Globale") which provides a benchmark rate for consumers entering into loans and is regulated by the Consumer Credit Directive (2008/48/EC)(to be implemented by May 2010).
As the original instructions to financial institutions were not clear, the Bank of Italy has recently published some questions and answers which provide an explanation of the method to be applied in order to calculate the PRC. In particular, the Bank of Italy has provided guidance on when certain insurance coverage should be included in the calculation. The Bank of Italy has made it clear that the cost of insurance policies intended to provide cover for the lending financial institutions in relation to borrower default (such as a Collateral Protection Insurance) should be included. The guidance also sets out categories of other insurance coverage which should be included in the calculation. Certain mandatory insurance policies, taken out in order to obtain loans, must be included; whereas policies entered into alongside loans need only be included in the calculation if their purpose is to provide surety for the loan repayments (ie when the amount of the indemnity is equal to the outstanding amount due from the borrower).
The new rules introduced under the instructions are likely to have a significant impact on insurers offering products linked to loans etc. Lending financial institutions will only be willing to promote and distribute CPI products to the extent that the relevant cost is not included in the calculation of the PRC. Where the PRC is included, the financial product is likely to be less appealing to consumers.
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