A different look at foreign currency loans? AG Jääskinen's Opinion in C-312/14 Banif Plus Bank Zrt v Márton Lantos and Mártonné Lantos

Opinion of Advocate General Jääskinen delivered on 17 September 2015

The Hungarian District Court of Ráckeve (Ráckevei Járásbíróság) in C-312/14 Banif Plus Bank Zrt. v Márton Lantos and Mártonné Lantos referred an interesting question to the CJEU: can the foreign currency exchange transaction be legally separated from the underlying foreign currency denominated loan, and if so, what are the implications for the consumer?

During 2008 when the majority of loans issued in Hungary were denominated in foreign currency, most notably in Swiss francs, the parties entered in a like loan contract for financing the purchase of a car. These contracts work in a way that the amount of the loan is agreed in a foreign currency (e.g. Swiss francs) but the loan is advanced and the repayments are due in the national currency (e.g. Hungarian forints). In Hungary this is due to Art. 231 of the Hungarian Civil Code of 1959 (that was in force at the time) that although allowed loans to be contracted in a foreign currency actual payments of any moneys owed had to be made in Hungarian forints, calculated based on the exchange rate applicable at the time and date of the payment. For this reason foreign currency loans concluded at the time contained a foreign currency exchange clause that set out the exchange rate (usually the banks buying or selling rate of exchange applicable at the date of exchange). Foreign currency loans thus shield banks from the currency risk of capital markets by transferring this risk on consumers in return for a favorable interest rate i.e. a (seemingly) cheaper loan. 

The referring national court was of the opinion that the foreign currency exchange can be legally separated from the underlying loan contract and be considered a separate, derivative contract, a forward currency transaction. This is because at the time the loan was granted, the bank calculated the equivalent amount of Swiss francs of the amount that was advanced in Hungarian forints at the exchange rate previously determined in the contract, then it purchased from the client the equivalent amount of Swiss francs at the determined exchange rate for the equivalent amount of forints. Later, at each loan repayment, the bank sold the client Swiss francs for the equivalent amount of Hungarian forints at the determined exchange rate (para 15). This according to the Hungarian court gives to a loan contract a possible capital markets dimension opening the interpretation of the concepts of financial instrument and investment activity under the Directive 2004/39/EC on markets in financial instruments - MiFID (para. 16).

Although AG Jääskinen is of the opinion the reference is inadmissible because essential information is absent, information important for the CJEU and interested persons entitled to submit observations to form clear understanding.of the factual and legal context of the main proceedings (para. 21), the AG does give an analysis if the CJEU would nevertheless proceed on the merits of the case.

AG Jääskinen is of the opinion the transaction at hand is not a derivative contract or a forward currency transaction and therefore does not fall under the rules of MiFID (para. 40). Derivative instruments or contracts (see the explanation of derivatives here) are used by one party for protecting against ('hedging') the risk and for speculative purposes by the other party. They work in a way that the future price, rate or value of the underlying asset is fixed beforehand (para 41). This implies that the actual price of the underlying asset (here probably the currency) is different from the contracted future one. This circumstance creates in the derivative instrument an independent economic value from the underlying loan (para. 42). According to AG Jääskinen this is not the case in the present situation. There is no independent economic value because the actual price and the contracted one does not differ, the exchange rate fixed in the loan contract is later used for the currency conversion without creating any added economic value. It is in essence a liquidation of a foreign currency denominated debt in a national currency at the date of payment (para. 43). 

Therefore, AG Jääskinen is of the opinion that the loan expressed in a foreign currency that is advanced and repayable in a national currency at the actual rate on the day of the payment is neither in itself or does it contain a financial instrument or a financial service within the meaning of MiFID (para. 46).

This in turn means that consumers of foreign currency loans are not considered to be investors and do not enjoy the protection guaranteed by Art. 19 MiFID (para. 48-49).

Although the analysis has many valid points and was particularly difficult due to the scarcity of essential information and the complexity of the issue, I somehow do not find convincing that there was no forward currency transaction, even if the conclusion may be correct. AG Jääskinen is of the opinion that we do not have an added economic value because the actual price and the contracted one are not different due to the fixed exchange rate in the contract. However, the characteristic of this derivative contact is exactly fixing the exchange rate for the purchase or sale of currency at a future date (see here). I might be wrong, but I would have expected to see an explanation of what this 'fixing' or 'lock in' means. Does fixing means giving an exact value i.e. a fixed price or is it enough to determine the benchmark at the time of contract conclusion (e.g. the banks selling rate at the date of execution)? If the latter is the case then why is the transaction not a forward currency contract? Second, AG Jääskinen starts from the fundamental point that MiFID is aimed at protecting investors. However, in his opinion consumers of foreign currency loans are not investors in the sense of MiFID because an investor is 'somebody who invests or intends to invest his own or borrowed capital in a financial instrument with a view of gaining revenue, or at least protecting the value of his capital' (para 37). In the present case the client did not intend to invest any capital but to borrow money. While this is true, the point that I missed here is that consumers are often 'tricked' into buying financial services and products they do not need (recall the UK PPI scandal), so the very fact that they did not intended to invest should not deny their protection guaranteed by MiFID.

Thus in my opinion a more thorough analysis would be necessary to decide on the merits of the case, including unpacking whether elements for a forward currency contract are met and touching upon a question whether debtors can be investors within the meaning of MiFID.

We will eventually see whether the CJEU will proceed to decide on the merits of the case (recall that in AG Jääskinen's opinion the reference in not admissible), but if it decides to do so, do you agree with the AG's reasoning?

Compensation due by most technical defects - CJEU in van der Lans (C-257/14)

17 September 2015: CJEU judgment in case van der Lans (C-257/14)

Generally, airlines tend to perceive technical defects in air planes as extraordinary circumstances, which, pursuant to Regulation No 261/2004, release them from the obligation to pay compensation to air passengers whose flight has been delayed or cancelled as a result of such a defect. This practice continues despite the CJEU's judgment in case Wallentin-Hermann (C-549/07), where while the Court admitted that a technical defect could constitute an extraordinary circumstance that would only be possible if the defect could not have been prevented by regular maintenance, due diligence etc. or, more specifically, where it is: "not inherent in the normal exercise of the activity of the air carrier concerned and is beyond the actual control of that carrier on account of its nature or origin".

In the given case the flight of Ms van der Lans has been delayed for 29 hours due to a combination of two unexpected technical defects in the aircraft for which spare parts had to be flown over. KLM claimed that these defects affected engine parts that did not exceed their average lifetime and about which the manufacturer did not warn that could cause particular problems with certain use (para 39). The problems were thus not caused by either poor maintenance or lack of regular controls, which is how the airlines till now perceive a technical defect for which they would have to pay compensation to passengers. While the Court admits that such a technical defect could occur unexpectedly, it perceives it as a defect intrinsically connected to the airline's operating business (para 41). When could a technical defect then be seen as an extraordinary circumstance? "where it was revealed by the manufacturer of the aircraft comprising the fleet of the air carrier concerned, or by a competent authority, that those aircraft, although already in service, are affected by a hidden manufacturing defect which impinges on flight safety. The same would hold for damage to aircraft caused by acts of sabotage or terrorism" (para 38). It should then either not be limited to one aircraft (defect in a whole series of manufactured goods) or be completely out of the airline's control (terrorism). "Premature malfunction of certain components of an aircraft" (para 41) does not count as such as "air carriers are confronted as a matter of course with unexpected technical problems" (para 42). Repairing of such defects falls within the normal activity of air carriers and remains within their sphere of control. Airlines are also not allowed to refuse payment of compensation, believing that it's the manufacturer to blame. They may, however, redress their claims on the manufacturer.

This judgment significantly limits the options for the airlines to deny compensation to passengers of delayed or cancelled flights since most technical defects should fall under this category. So far, however, airlines managed to creatively interpret previous judgments and continue to ignore passenger rights. What impact this judgment may have will also depend on when the new Regulation will finally be adopted and what rules with regard to technical defects it will provide.

Misleading presentation of lenses as cosmetic products - CJEU in Colena (C-321/14)

3 September 2015: CJEU judgment in Colena (C-321/14)

Directive 1223/2009 on cosmetic products defines as such products that are either substances or mixtures of substances that are intended to come in contact with a part of the human body with a purpose to exclusive or mainly clean it, perfume it, change its appearance, protect it, keep it in good condition or correct body odors (Art. 2 par. 1). A German company promoted lenses that were to change the appearance of their users' eyes, without having any corrective function as to the visual deficiencies. On the outer packaging of these lenses an information was placed "cosmetic eye accessory, subject to the EU Cosmetics Directive". The CJEU decides, however, that presentation of a product as a cosmetic product does not influence its assessment as such. The above-described lenses do not fulfil any of the above-mentioned criteria from the definition of a cosmetic product (e.g. they are placed on the eye's cornea, which is not referred to on the exhaustive list of body parts with which cosmetic products come in contact with) and as such are excluded from having to comply with the rules of the Directive. However, national authorities may consider a practice of marketing a product as a cosmetic product even if it is not such, as a misleading commercial practice and proceed accordingly. (Par. 26)

Status of a person concluding linked contracts may differ per contract - CJEU in Costea (C-110/14)

3 September 2015: CJEU judgment in Costea (C-110/14)

As we have mentioned in our description of the AG Cruz Villalón's opinion to Costea (see To be or not to be...), an interesting issue arose in this case that could allow the Court to elaborate on the application of the notion of consumer in mixed-purpose contracts, where a natural party concludes a contract partly for purposes outside of his profession and partly for purposes relating to his profession. However, in its judgment issued yesterday the Court manages not to address this topic.

The most interesting paragraph of this judgment is par. 21 where the CJEU clarifies that "the concept of 'consumer' (...) is objective in nature and is distinct from the concrete knowledge the person in question may have, or from the information that person actually has". It is for the national court to determine, of course, based on all circumstances of a given case whether Mr Costea was acting for purposes outside of his legal profession. If a lawyer, like Mr Costea, concludes a contract that "does not relate to the activity of his firm, is not linked to the exercise of the lawyer's profession" then he could be seen as a weaker contractual party, i.e. a consumer. (Par. 26) This assessment may not be disputed by the lawyer-consumer displaying a high level of technical knowledge. (Par. 27) What should not be taken into account in this estimation is the fact that the loan contract concluded by Mr Costea was secured by a mortgage taken out by his law firm on the building, in which the law firm is located. (Par. 28) While determining the status of a person in the main agreement (credit contract), it is irrelevant what party concluded the ancillary agreement (mortgage). "In a case such as that at issue in the main proceedings, the categorisation, as a consumer or as a seller or supplier, of the lawyer in the context of his taking out a mortgage cannot, consequently, determine his status under the main credit agreement." (Par. 29) 

The CJEU takes a different approach to this case than the AG Cruz Villalón. The latter considered that even if the lawyer took out a loan for personal purposes, the fact that this loan was secured with a mortgage on his professional property and was concluded in a professional capacity, could have signified a mixed purpose contract. The CJEU distinguishes between the main and the ancillary contract and demands that the status of a person concluding these contracts was assessed separately. Linked contracts could, therefore, be concluded by the same party acting in two different capacities in each of them: personal and professional. This link between the contracts should, therefore, not influence the assessment of a status of a person in each of the contracts.

Survey on cross-border access to online content

The European Commission has published a new Flash Eurobarometer 411 with results of a survey on "Cross-border access to online content". The survey examines with what frequency EU citizens access the Internet (it's least used in Romania, Bulgaria and Portugal) and through what media (portable devices are generally more popular than desktop computers and unsurprisingly, the younger the respondent the more likely he is to use a smartphone to access the Internet) and if they do, then whether they also access digital content online, what types thereof (music and audio-video content is the most popular, while e-books remain quite unpopular - but that may also depend on fact that e-books are mostly mentioned as paid digital content, while music and audio-video content is offered accessed for free). The reasons for not accessing digital content online are also explored (no interest, other access means than digital more attractive, lack of knowledge). With regard to the cross-border options, the study checks the willingness of EU citizens to purchase online digital content in a different than their own language (the majority only accesses it if it's in their country's language), as well as whether they are willing to purchase such content from providers from other Member States and what problems they might have experienced with regard to such purchases (in only half of reported cases EU citizens had no problems accessing digital content generally meant for users of another country).

European consumers are a step closer to resolving their disputes online

In 2013 the Commission adopted the ADR Directive and the ODR Regulation. These acts aimed at creating opportunities for European consumer to resolve their disputes out-of-court in a simple, fast and low cost manner, covering online and offline, domestic and cross-border disputes (see our summaries here). Online out-of-court dispute resolution is made possible by the ODR Regulation that foresees the establishment of the EU-wide online platform. The platform is to help consumers solve their disputes online that arise from online sales or service contracts by directing the dispute to the appropriate national ADR entity (established base on and/or complying with the requirements of the ADR Directive in Member States) and providing additional services such as translation. The ADR entities should already be in place (the latest from the 9 July 2015), and the ODR platform is to become operational on 9 January 2016. In order to ensure uniform conditions for the implementation of the ODR Regulation, the Commission has recently adopted an implementing act. The Commission Implementing Regulation 2015/1015 sets out the modalities for: 1) the electronic complaint form, 2) the exercise of the functions of the ODR platform and 3) the cooperation between the ODR contact points in Member States. With this act European consumers came a step closer to resolving their disputes online.