Thursday, 24 May 2018

Non-performing loans: the impact of the proposed rules on consumers

On the 14th of March 2018 the EU Commission published its proposals for tackling the problem of non-performing loans (NPL), i.e. the Proposal on a Directive on credit services, credit purchasers and the recovery of collateral.

NPLs are loans on which borrowers are unable to make the scheduled payments for more than 90 days, or those loans that the financial firms assess as being unlikely to be repaid considering other criteria. The financial crisis made the problem of NPL particularly acute, when masses of borrowers (consumers and businesses) were unable to pay their debts. As a result, a large number of NPL piled up on the books of financial firms, tying up their capital and endangering their solvency; and depending on the size and number of firms affected potentially threatening the stability of the entire financial system. Consequently, the initiative for their regulation came under the umbrella of completing the Banking Union. The Proposal is also part of the broader effort to create a Capital Markets Union. 

The proposed Directive aims to tackle NPLs in two ways. First, it seeks to encourage the development of an EU-wide secondary markets for NPLs by establishing a harmonized legal framework for the sale of these products. Secondly, it seeks to increase the efficiency of debt recovery procedures through the availability of a distinct EU-wide common accelerated extrajudicial collateral enforcement procedure (AECE). Although the proposed Directive is not a special consumer protection instrument (it applies to both consumer and business NPL loans) consumer interest are taken into account under both pillars.

Under the first pillar, the Proposal put in place safeguards to protect consumers whose loans are being classed as NPL and are being sold to third parties. These third party buyers may be banks and non-bank institutions, and they may be based in a different Member State from the originator of the loan. This naturally raises concerns. Non-bank institutions, specialized debt collection firms are known for using unfair and harsh practices in collecting debt from consumers. Depending on the Member State, these firms may fall under a less stringent regulatory regime than banks, including looser conduct standards which they must adhere to. It also raises the danger that consumers would be subjected to a foreign legal regime if they decide to challenge the behaviour of the debt collector or if they are being sued. To prevent any harm stemming from these aspects, the Proposal clarifies that consumer protection rules that were applicable to the initial credit agreement, i.e. the agreement that consumers entered into with their banks, will continue to apply irrespective of who buys the loan and irrespective of the legal regime in force in the Member State where the loan is sold to.

The Proposal clarifies that consumer protection rules specially include the rights granted under the Mortgage Credit Directive, the Consumer Credit Directive and the Unfair Contractual Terms Directive. In the same way, all the consumer protection rules in force in the Member State of the consumer continue to apply, including statutory and other mandatory law. The legal framework seems to be understood more broadly than formal rules, including infromal procedures put in place to protect the most vulnerable, the overindebted consumers. In order to create a coherent legal framework, the new rules will ask for an amendment to the Mortgage Credit Directive. Similar to Article 17 of the Consumer Credit Directive, in the event of assignment of the creditor's rights to a third party, the Mortgage Credit Directive will be amended to state that the consumer shall be entitled to plead against the assignee any defence which was available to him/her against the original creditor.

Regarding the second pillar, consumers are protected by consumer contracts being exempted from this special enforcement regime. Consumer debt will have to be enforced by the existing enforcement procedures in Member States.

We can therefore see that the the new rules as they stand in the Proposal are not likely to have a significant effect on consumer welfare, they will neither provide more protection nor will they harm consumers. The level of consumer protection will remain the same as before the Directive: the effect of the Proposal is status quo on consumers. It is a distinct question to what extent the existing, underlying rules protect consumers, and whether this Proposal should complement or supplement the existing legal framework with more substantive intervention.

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This post is a response at a special request of one of our readers. Please let us know if you would like to hear our view on an EU consumer protection matter of a special interest to you.

Thursday, 17 May 2018

CJEU judgment on ex officio control of unfair terms in Belgium

Today the EU Court of Justice gave judgment in a Belgian case we have reported earlier on this blog: Karel de Grote-Hogeschool v. Suzan Kuijpers (C-147/16). The case concerned a repayment scheme between a student and an educational institution in Belgium regarding tuition. When the student failed to meet her payment obligations, the institution brought a claim against her before the peace court in Antwerp. The student did not appear in the proceedings and did not have legal representation.

The referring court wanted to know if it could examine ex officio whether the contract fell within the scope of the Unfair Terms Directive (and, consequently, whether it contained unfair terms). The CJEU's answer to this question is - unsurprisingly - positive. Moreover, the concept of 'seller' has a wide meaning and includes the educational institution insofar as it provides a service that is complementary and ancillary to its educational activities. The CJEU reiterates that

"(...) it must be borne in mind, as the Court has consistently held, that when national courts apply domestic law, they are bound to interpret it, so far as possible, in the light of the wording and the purpose of Directive 93/13 in order to achieve the result sought by the directive and consequently comply with the third paragraph of Article 288 TFEU. This obligation to interpret national law in conformity with EU law is inherent in the system of the FEU Treaty, since it permits national courts, for the matters within their jurisdiction, to ensure the full effectiveness of EU law when they determine the disputes before them (see, by analogy, judgment of 21 April 2016, Radlinger and Radlingerová, C‑377/14, EU:C:2016:283, paragraph 79 and the case-law cited)."

It is noteworthy that the CJEU has answered the question as to the ex officio examination to be carried out by the national court on the basis of the principle of equivalence (rather than effectiveness or the right to effective judicial protection):

"It follows that, where the national court has the power, under internal procedural rules, to examine of its own motion whether a claim is contrary to national rules of public policy, which, according to the information provided in the order for reference, is the case in the Belgian judicial system for a court giving judgment in default, it must also exercise that power for the purposes of assessing of its own motion, in the light of the criteria laid down in Directive 93/13, whether the disputed term on which the claim is based and the contract containing that term come within the scope of that directive and, if so, whether that term is unfair (see, by analogy, the judgment of 30 May 2013, Asbeek Brusse andde Man Garabito, C‑488/11, EU:C:2013:341, paragraph 45)." 

Wednesday, 9 May 2018

AG Opinion on Profi Credit Polska: barriers to appeal against payment order contravene UCTD

On the 26th April 2018, the AG Kokott's opinion on case C176/17 Profi Credit Polska S.A. w Bielsku Białej v Mariusz Wawrzosek was issued. The AG Kokott is of the opinion that the Polish procedure does contravene the Consumer credit directive as there are significant obstacles in place for the consumer to be able to exercise his rights, leaving him in a disadvantageous position.

It has been well established in the case law that national courts should examine whether terms are unfair ex officio. This case asks whether the same is true when the court examines a bill of exchange arising out of a consumer credit contract.

In Poland it is a widespread practice to issue bills of exchange by the creditor against the consumer, for securing the debt out of a consumer credit agreement. The polish civil procedure code, Kodeks postępowania cywilnego (hereafter: KPC) has a fast track procedure in place for the issue of such bills of exchange where the court is limited to examining solely the formal requirements applicable to the bill of exchange, without examining the relationship underlying it. The question referred was whether this procedure is compatible with the consumer credit directive.

There are two stages in the procedure, in the first stage the consumer credit agreement is not examined by the court, yet it can be examined in the second stage following an objection of the defendant/debtor. The facts of the case were that Mariusz Wawrzosek signed a credit agreement with the bank Profi Credit Polska S.A.. That agreement contained a standard term that the debtor would issue a blank bill of exchange to secure the claim of the bank from the credit agreement. As the debtor failed to repay his debt the bank filled out the bill of exchange with the amount of 3.268,38 PLN and used the bill of exchange as a basis for issuing a payment order against the debtor. 

AG Kokott argues that the relationship should be viewed as a whole, meaning both stages (para 28).The previous directive on consumer credit included a provision on bills of exchange. The current directive does not include such an article, meaning that it is up to the member states to decide whether to regulate bills of exchange in relation to consumer credit agreements. Still the referring court asked whether the polish law contravenes art.22(1) of Directive 2008/48/EC (Consumer Credit Directive, hereafter: CCD)

According to the opinion, as the CCD does not harmonise law on bills of exchange, there is no violation of art.22(1) CCD. Art17(1) is not relevant to the case, as it refers to the instance when the claim has been transferred to a third party; while in this case the relationship remained between the bank and the debtor. Therefore, the CCD does not preclude the provisions of Polish law in question.

Is the same true in the case of Directive 93/13/EC (Unfair Contract Terms Directive, hereafter: UCTD)? AG Kokott differentiated the facts of this case from that of Finanmadrid EFC and Aziz. The bill of exchange forms the basis for the issue of a payment order. Unlike Finanmadrid EFC, the payment order covers only the bill of exchange, meaning that the debtor is able to turn against the creditor at a later stage requesting that a contract term is found unfair (para 66). Also the AG clarified that unlike Aziz, in this case there is not the chance of eviction from the family home, meaning that having only one chance to appeal against the payment order is compliant with the UCTD, especially if the consumer can further raise compensation claims or claims based on unjust enrichment and raise issues of unfairness in such proceedings (para 70-71).

Finally, AG Kokott pointed out the issues that to her opinion render the procedure of the appeal of the consumer against the payment order contrary to the UCTD. The AG argues that the fact that the appeal is possible only at the second stage of the procedure is not problematic as the law does not protect the consumer from complete inertia (para 73). The two week deadline for exercising the appeal is also not problematic in itself. (para 79) What is problematic is that in this appeal the debtor is required to put forward all the reasons for the appeal, submit all the relevant evidence as well as pay all the court expenses. 

The procedure should not be such as to discourage the consumer from appealing to the court (para 77). AG Kokott finds that the requirement for the consumer to prepay  ¾ of the court expenses when filing an appeal, as opposed to ¼ of the expenses for the applicant, is particularly grave and able to discourage the consumer from appealing to justice (para 80).

This is a carefully measured opinion where AG Kokott is conscious of the principle of subsidiarity yet willing to defend the rights of European consumers where that is necessary.

Thursday, 3 May 2018

Kasler repercussions - AG Tanchev in OTP Bank and OTP Faktoring (C-51/17)

Today AG Tanchev issued an opinion in the case OTP Bank and OTP Faktoring (C-51/17) examining compliance of Hungarian law with Unfair Contract Terms Directive. Unsurprisingly (for a Hungarian reference), the facts of the case pertain to another consumer loan contract (concluded in February 2008) where the loan was denominated in Swiss Francs (see previously e.g. our blog post on Kasler case). Similarly to the Kasler case, the creditor converted the loan from Hungarian forints to Swiss francs, using its own buying rate for the conversion, whilst monthly repayment instalments were fixed according to the bank's selling rate. Another contract term gave the creditor the power to unilaterally change the ordinary interest and management costs. Consumers now are seeking for the declaration of invalidity of the contract as it contains unfair contract terms, whilst they would like to keep the loan contract valid but just change the denomination into forints (para 19). 

New Hungarian law
After the Kasler judgment by the CJEU, Hungarian law has changed and declared invalid such clauses in consumer loan contracts, which use the buying rate of a foreign currency to determine the loan payment, but selling rate is used for the purpose of loan repayment. The consequence of such invalidity is the replacement of a given term with a provision providing the official exchange rate for the currency set by the National Bank of Hungary to be used for both loan payments and repayments. Subsequently, another law required banks to return any overpayments made by consumers due to unfair contract terms. Finally, third law adopted in 2014 prohibited accepting loan contracts secured by mortgage denominated in foreign currencies and converted consumer debts into forints.

Simultaneously, the Hungarian Supreme Court's judgments retains validity in stating that generally, contract terms determining that the consumer is to bear exchange rate risks are core contract terms. They can, therefore, only be examined as to their unfairness when they are not transparent to average consumers, taking into account the text of the contract and the information received from the financial institution. Unfairness can be found if consumers have reason to believe that the exchange rate risk is not genuine or that he bears the risk to a limited degree, which may occur if consumers receive inadequate or untimely information from creditors (para 27).

Questions
The questions of Hungarian court aim to establish how the changes in Hungarian law, which were introduced years after conclusion of the contract, could have affected contractual obligations and what is their compliance with EU law. 

Temporal effects
One of the disputes between the parties in the proceedings concerns the retroactive aspects of the Hungarian legislation that was introduced in 2014. Whilst the temporal effects of these laws are for the Hungarian legislator to establish, AG Tanchev reminds that Kasler judgment did not introduce any temporal limitations and generally requires national courts to apply EU law-consistent (Kasler-conform) interpretation of UCTD from the adoption of this directive into national law. This means that pursuant to EU law, the new Hungarian laws could apply to contracts concluded as of the date of entry into force of the UCTD (31 Dec 1994) (para 50), ex tunc therefore rather than ex nunc.

Testing for unfairness
As unfairness test applies pursuant to art. 3(1) UCTD only to non-individually negotiated terms, and excludes terms reflecting mandatory statutory or regulatory provisions pursuant to art. 1(2) UCTD, there is a question whether terms introduced by new Hungarian legislation that would replace contractual terms could be tested for unfairness.

AG Tanchev rightly focuses more on the second requirement, as it is quite self-evident that consumers have not individually negotiated terms that had been imposed by statutory law. One argument raised by AG Tanchev is that due to the strict application of the exception from Art. 1(2) UCTD, the terms reflecting new Hungarian law cannot fall within its scope as they had been adopted years after conclusion of the contract (para 59-60). The idea being that the legislator takes into account the balance of interests' between the parties when forcing them to adopt a certain contractual term, which cannot happen ex post. This seems unconvincing, as the sole purpose of the Hungarian legislation was to restore that balance and if it applies ex tunc then the objection should be withdrawn. The second argument is, however, strong, as AG Tanchev reminds that this legislative change flows from the need to comply with Kasler judgment and EU law-conform interpretation of UCTD. If contractual terms following from the adoption of new law were excluded from unfairness test, then the CJEU could not check again whether the Kasler judgment had been properly followed by the national legislator, through adjudicating on potential follow-up unfairness claims (para 63). As we had seen on the example of Spanish saga, such follow-up cases often show further inconsistencies in national interpretation and application of EU consumer law.

Transparency
What I find personally disappointing is the lack of engagement of AG Tanchev with issues of information transparency. As in the given case the bank has issued quite a detailed information to its consumers on exchange rate risks, see: 

 ‘in relation to the loan risks, the debtor declares that he is aware of and understands the detailed information relating to this matter provided to him by the creditor, and is aware of the risk of taking out a foreign-currency loan, a risk which he alone bears. With regard to the exchange rate risk, he is aware, in particular, that, if during the term of the contract there were variations in the exchange rate between the forint and the Swiss franc which were unfavourable (that is to say, in the event of depreciation of the exchange rate of the forint as opposed to the exchange rate at the time of disbursement), it might even happen that the exchange value of the repayment instalments, which are fixed in foreign currency and payable in forint, would increase significantly. By signing this contract, the debtor confirms that he is aware that the economic repercussions of this risk lie entirely with him. He also declares that he has carefully assessed the possible effects of the exchange rate risk and that he accepts them, having weighed up the risk in the light of his solvency and economic situation, and that he will not be able to make any claim on the bank as a consequence of the exchange rate risk

When I look at the judgment of the Hungarian Supreme Court it seems to me that the provision of such information could lead to Hungarian courts establishing that there was sufficient information provided to consumers on this risk, and, therefore, transparency, which could lead to the exclusion of the core term from unfairness testing. From that perspective, it is relevant to consider whether this information was transparent enough or more would be required from the bank? AG Tanchev leaves this question to be answered by national courts. The hint he gives that this might not have been enough is by referring to Andriciuc case, which required creditors to 'set out the possible variations in the exchange rate and the risks inherent in taking out the loan (...)' (para 71). Such specifics are not included in the above notice.

Another interesting question raised by the applicants but left unanswered is whether the fact that the Hungarian legislator imposed the official exchange rate of the Hungarian National Bank could be perceived as invalid, due to lack of transparency of such an exchange rate to consumers or the lack of foreseeability of such a rate determining consumers' obligations - at the moment of the conclusion of the contract. It is interesting to consider whether the Hungarian legislator should not have at least offered consumers a choice - to have their contractually agreed on exchange rate changed into the official exchange rate of the Hungarian National Bank or to remain with the contractual one. Whilst the official exchange rate might be more transparent, it won't necessarily be more beneficial to consumers.

Thursday, 26 April 2018

Beyond B2C: proposed regulation on fairness and transparency in platform-to-business relations

Earlier today the Commission took further steps to advance its hotly debated initiative on platform-to-business relationships and proposed a regulation on promoting fairness and transparency for business users of online intermediation services. The declared aim of the new rules is to "create a fair, transparent and predictable business environment for smaller businesses and traders when using online platforms". This includes, in particular, businesses such as hotel owners, sellers of goods or developers of mobile applications who rely on online intermediation services to reach consumers. By proposing rules targeting this specific type of B2B relationships, the Commission - already second  time this month (cf. the proposed directive on unfair trading practices in the food chain) - departs from the usual, consumer-oriented approach to the regulation of fairness in commercial transactions and steps upon a legal minefield. 

Two approaches

Aside from the business-to-business dimension addressed, the rules proposed for the platform economy and for the food sector do not seem to have much in common. For a start, the rules tabled today would not be contained in a directive requiring implementation, but in a directly applicable regulation with elements of a co-regulatory approach. The substantive provisions of both initiatives are also fundamentally different. Rather than providing for a black or grey list of unfair trading practices, the proposed regulation on platform-to-business (un)fairness lays down obligations for providers of online intermediation services and, in certain respects, online search engines to provide business users and corporate website users, respectively, with appropriate transparency and to offer them certain redress possibilities. 

Content of the proposal

Particular attention in the instrument presented today is devoted to standard terms and conditions used by providers of online intermediation services. In this respect the proposal does not provide for a general fairness test, such as the one found in the Directive 93/13/EEC on unfair terms in consumer contracts, but rather focuses on the way T&Cs are drafted (in clear and unambiguous language - Article 3(1)(a)) and made available (easily and at all stages of the commercial relationship, including the pre-contractual stage - Article 3(1)(b)). Further provisions referring the specific terms and conditions to be determined by providers of online intermediation services are also found throughout the instrument. Only one of them, however, is mentioned as a direct follow-up to the rules on transparency and availability - one related to the suspension or termination of online intermediation services.

Indeed, pursuant to Article 3(1)(c) providers of online intermediation services shall ensure that their terms and conditions set out the "objective grounds" for decisions to suspend or terminate, in whole or in part, the provision of their online intermediation services to business users. The placement within the proposal is not insignificant considering that, pursuant to Article 3(2), "terms and conditions, or specific provisions thereof, which do not comply with the requirements of paragraph 1 shall not be binding on the business user concerned where such non-compliance is established by a competent court". Additionally, Article 4 of the proposal provides that the business users affected by suspension or termination should be provided with a "statement of reasons".

Consequences of non-compliance with other provisions related to the specifics of T&Cs such as the parameters of ranking (Article 5 - applicable also to search engines; for a consumer protection perspective see our ealier post: New Deal for Consumers: proposals on online transparency; note the differences between the addressees of the rules), conditions of differentiated treatment (Article 6) and of access to personal and other data (Article 7) as well as restrictions to offer different conditions through other means (Article 8) are not directly apparent. In this respect business users could either rely on the abovementioned rules on transparency and availability or try to address their concerns by means of internal complaint-handling systems (Article 9) or mediation (Articles 10-11). Both solutions do not seem unviable.

Furthemore, the proposal establishes a notification requirement of providers of online intermediation services regarding modification of their T&C. On the face of it, the requirement seems to be similar to the one known from regulated network markets. The proposed regulation, however, does not aim to allow business users to terminate the contract upon notice of changes in contractual conditions (cf. Article 20(4) of Directive 2002/22/EC and Article 98(3) of the proposed European Electronic Communications Code). Rather the failure to comply with requirements of proposed Article 3(3) would render the relevant modifications null and void

Last but not least, the proposal also opens avenues for injunctive relief (Article 12), which deserve an analysis of their own, particularly in the light of new initiatives devoted to consumer law enforcement.

Concluding thought

The basic premise regarding the role on online platforms - with regard both to professional users and the non-professional ones - seems to hold. Admittedly, one may argue that this is only true for some of the major players. Whether the extent of the issue calls for a response of the kind proposed today, and not, for example, within competition law, is only a part of controversy, however. The proposal on platform-to-business (un)fairness touches upon other highly divisive issues such as the distinction between B2B and B2C and the broader questions of Intenet governance. Even though, as for now, the future of the proposal remains uncertain, advancing the discussion on (some of) these matters would already bring value of its own.