There is hardly a financial product that better fits the saying "better a horrible end than endless horror" than residual debt insurance. For years, if not decades, the policy, which is supposed to step in when in doubt in the event of an instalment loan, has been the focus of criticism from consumer advocates and regulators. Probably no financial product has been written about and scrutinised more intensively than residual debt insurance. It is actually more of a small business where banks offer so-called instalment protection in addition to a loan in the event of illness, unemployment, or death.

If it hadn't been for the banks' great appetite. In some cases, more than half of the insurance premiums were collected as commission in the past. Clearly, there was an incentive to link the loan agreement more or less skilfully with such an insurance.

The opportunity was favourable, because in the event of a credit negotiation, the customer naturally wants the loan and, in case of doubt, quickly felt under pressure. Unsurprisingly, they would then sign under the pretence that they could not do without such insurance. However, making this a common practice was one of the unsavoury aspects of the financial sector. Consumer advocates have repeatedly pointed this out. Time and again, Stiftung Warentest has warned that in case of doubt, no payment would be made, but nothing happened for years.

Until the pressure had increased so much that the financial supervisory authority BaFin also took up the matter and carried out an extensive market investigation, which largely confirmed the shortcomings. BaFin also determined that, at times, up to 70% of a residual debt insurance policy was only used for commission.

At a political level, the government coalition agreed on a commission cap of 2.5% in mid-2021. But that did not put the matter to bed. At the end of 2021, the coalition wrote into its coalition agreement that it wanted to decouple the business of insurance and credit over time. Specifically, this means there must be at least seven days between signing the loan agreement and taking out the insurance.

In the meantime, the European Insurance and Occupational Pensions Authority (EIOPA) has published a report that strongly criticised the product and sales practices. Overpriced and not orientated enough towards the interests of customers. The authority announced its intention to take strict action against abuses.

Somewhat surprisingly, the government coalition has now brought the issue back to the table via the Future Financing Act (Zukunftsfinanzierungsgesetz). And put into law what had been written down in the coalition agreement two years ago. The comparatively recent commission cap was no longer sufficient; a temporal decoupling of credit and insurance was needed. This is likely to be the end of the business in many cases. Anyone who does not feel pressured by a loan agreement will think twice about whether they still need residual debt insurance when the advisor calls after a week and asks for another appointment. So, from the industry's point of view, it's probably a horrible end, but nobody really needs to shed any tears over the product. For the worst-case scenario, there is term life insurance, and in the event of incapacity to work, there was often no payment anyway.

The regulation, known as the cooling-off period, is modelled on the procedure in the UK. The model was introduced more than ten years ago to stop the excesses of residual debt policies. And it could have been even worse for the German financial sector. As a result of the British legal system, banks have had to reverse millions in outstanding debt insurance policies and pay billions in refunds in recent years.