Sunday, 20 September 2015

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?

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