The EU is a step closer to regulating financial benchmarks

Yesterday (28 April 2016) the EU Parliament approved by large majority the adoption of the proposed Regulation on financial benchmarks. The decision follows the political agreement reached by the Parliament and the Council in November 2015.

A benchmark is an index or indicator, calculated from a representative set of underlying data that is used as a reference price for financial instruments, financial contracts or to measure the performance of an investment fund. Well known examples of benchmarks are the LIBOR (London Interbank Offered Rate) and the EURIBOR (Euro Interbank Offered Rate). The EU Commission proposed the regulation of financial benchmarks in 2013, in the wake of the LIBOR-fixing scandal that shred light on shortcoming in the benchmark setting process and in the use of benchmarks.

The proposal has a significant consumer protection dimension, given that for example LIBOR is used for determining the price of mortgages and other consumer loans. The proposal aims to close the door for manipulation by subjecting benchmark administrators to prior authorization and on-going supervision; improving the governance of benchmark administrators (e.g. conflict of interest); requiring transparency in the benchmark setting process; and by ensuring supervision of critical benchmarks such as the EURIBOR and LIBOR.

The proposal now needs to be approved by the EU Council.

Taking ex officio a couple of steps further: CJEU in Radlinger v Finway (C‑377/14)

Yesterday, the ECJ issued its decision in Radlinger v Finway. This decision contributes in several meaningful- albeit not revolutionary- ways to the development of EU consumer law. It also by and large follows the approach suggested by AG Sharpston, whose opinion we had reported on here.

The case concerned a consumer credit secured by a mortgage. The contract foresaw a high interest rate- with all likelihood miscalculated, so that in reality it would be even higher-, several penalties for delay or default and an acceleration clause.

At some point the debtors could no longer pay and filed for personal bankrupcy. When this was declared, they sought to challenge certain terms in the contract as contrary to public morality, which was not allowed under the court's rule of procedure. 

The insolvency court posed a series of interesting questions to the Court. Not all of them received an (interesting) answer, but some did. 

First, the referring court asked whether its rules of procedure, barring ex officio assessment and restricting the grounds on which the parties could invoke review of the amounts contested, were in line with directive 93/13. The ECJ, extending one more bit its precedents on procedures and unfair terms, established that the rules did not comply with the Directive.

Second, the referring court asked whether ex officio assessment should also extend to whether the obligation to inform provided for by the consumer credit directive has been complied with. The ECJ said ex officio assessment should also cover the respect of this obligation, as well as drawing all the necessary consequences from a finding that the obligation has not been fulfilled. The penalties should be "dissuasive, effective and proportional". 

Third, concerning the mandate content of the information to be disclosed, the APR cannot be kept low by incorporating costs to be incurred by the consumer in order to obtain the credit in the "total amount of credit". That these costs exist if the reason why this notion (or the similar notion of "drawdown") is distinguished from the concept of "total cost of credit" in the first place. 

Finally, when considering whether certain penalties are unfair under the directive, it is necessary to look at all the potentially applicable fines, irrespective of whether the creditor relies on them. If they are found, as a combination, unfair, all the terms found unfair should be excluded from the contract. 

None of these answers come as particularly surprising, as they are all more or less in line with the Court's precedents- of which they sometimes represent a confirmation, in other cases a minor expansion. Even the expansion of ex officio beyond the Unfair Terms directive had already been undertaken (see the ECJ's references to its own precedents at para 62)

Maybe the most interesting thing to be observed is that the referring court had also asked whether something should be said concerning the direct effect of the secondary EU law provisions involved in the controversy, since the final effects of ex officio review would affect a relationship between private parties. The ECJ stressed that ex officio imposes obligations on the courts and not on individuals, thus there is no need to discuss direct effect. That the discovery of ex officio has helped the ECJ bypass the issue of direct effect of Directives between private parties, however, seems hard to deny. 

Dutch Supreme Court on effective remedies for consumers

A recent development in the area of European consumer law we have not yet reported on this blog is a recent judgment of the Supreme Court of the Netherlands (available here in Dutch; Lindorff/X or telefoonabonnement-arrest II) in a case about a contract for a mobile phone subscription including a 'free' phone. The Supreme Court held that the national court must examine of its own motion if the price of the phone has been stipulated separately and if not, annul the contract. This may have far-reaching consequences for providers of mobile services offering subscriptions and phones for an 'all-in' price, to be paid (monthly) by the consumer.

According to the Supreme Court, the national court has to apply of its own motion national provisions implementing the Consumer Credit Directive (87/102/EEC). At issue was a contract between a consumer and a large Dutch telecommunications company for a mobile phone subscription and a 'free' phone, for a monthly 'all-in' price. In the Supreme Court's view, this is a purchase-in-instalments ("koop op afbetaling") and a credit contract in the sense of the Consumer Credit Directive. The Dutch provisions on purchase-in-instalments are not of European origin, but the Supreme Court puts them on an equal footing for the sake of 'manageability'. The national court must take, if necessary of its own motion, adequate measures to ensure the effective legal protection of consumers. Sanctions for the infringement of consumer rights under the Directive must be effective, proportionate and dissuasive. This means, among other things, that if the price of the mobile phone is not stipulated separately, the contract can be annulled. The Supreme Court considers that such a stipulation will generally indicate the essence of the performance, so that it is excluded from the scope of the Unfair Contract Terms Directive (93/13/EEC). 

In this case, the Supreme Court seems to go beyond the consistent interpretation of national law by 'gap-filling': the remedy was not specified in the Dutch Civil Code, but follows from the general principle of effectiveness and the right to effective judicial protection in EU law. Although the Supreme Court does not explicitly refer to Article 38 or Article 47 of the EU Charter of Fundamental Rights, it does mention relevant case law of the CJEU (inter alia, Pohotovost' and Duarte Hueros, reported by us here and here).

The Supreme Court addresses the consequences of an annulment of the contract at length: the consumer may return the phone, without having to pay any costs for using the phone or decrease in value. Damages would only be due if the consumer does not behave as a 'careful debtor' or fails to return the phone. The mobile service provider has to pay back the part of the price (and costs) the consumer has already paid for the phone. The mobile service provider cannot institute a counterclaim on the basis of unjust enrichment, says the Supreme Court, as this would be contrary to the effective protection of consumers. One could wonder whether effective protection really means that no compensation is due, since consumer protection is about eliminating disadvantages between consumers and traders rather than putting consumers in the best position.

The case has not only drawn the attention of legal academics, but also of claims organisations. A class action is being prepared against at least 8 Dutch mobile service providers (see here and here). For our Dutch readers, a more extensive description of the Supreme Court's findings can be found here.

Forbes column

Our readers may be interested to know that prof. Omri Ben-Shahar from the University of Chicago started publishing a consumer law related column in Forbes online magazine. The first three posts concern GMO labeling, privacy issues and food labeling.

Oceano meets Francovich: AG Wahl on state liability and unfair terms

Yesterday, AG Wahl turned in his opinion in case C-168/15 (here, in French), a Slovakian controversy concerning a seemingly exploitative credit relationship against which the court invested with the execution of an arbitration award had failed to grant relief to the consumer. 

In particular, the consumer claimed, the Court had failed to apply ex officio review of a series of possibly unfair terms- including an arbitration clause.While the execution proceedings, whose first instance she had successfully appealed, were still pending, the consumer also demanded compensation for the first court's alleged violation of EU law. 

Now, not all our readers may remember that since the Court's landmark decision in Francovich, Member States can be held liable in civil liability for failure to (correctly) implement EU secondary law. Later, the Court specified that this liability extends to Courts failing to correctly apply said legislation. 

Asked whether a similar liability would also have to arise in this case, the AG articulated an extensive analysis which examines under which conditions this would be the case. 

First, it should be a case in which the affected judicial decision cannot be remedied in higher instance. 

Second, the violation of EU law should concern a sufficiently clearly established obligation. 

Third, the Court's violation should have been sufficiently qualified by fault or negligence, meaning that only if the court had been in a position to know the facts of the case which would give rise to suspicions concerning the terms' validity would its failure to perform ex officio scrutiny entail state liability. 

The opinion highlights a certain tension between the nature and rationale of the obligation to perform control ex officio and the necessary limitations of state liability, which would be very easily engaged if any failure to perform such control would trigger a claim for compensation. We will see where the Court will settle this balancing. 

Individual unfairness claims prevail over collective ones - CJEU in C-381/14, C-385/14 (Sales Sinués)

We've previously discussed the opinion of AG Szpunar on this matter (Collective actions may not replace individual ones...). The CJEU agrees with the views expressed in this opinion that Spanish law is incompatible with Article 7 of the Unfair Contract Terms Directive, where it prevents Spanish courts to proceed with the examination of an individual consumer claim regarding unfair contract terms, when a collective action against such contract terms has been brought up by a consumer organisation and is pending, and when the consumer may not dissociate herself from this collective action.

"37 First, the consumer will necessarily be linked to the outcome of the collective action, even if he has decided not to participate in it, and the obligation of the national court under Article 43 of the Code of Civil Procedure thus prevents that court from conducting its own analysis of the circumstances in the proceedings brought before it. In particular, the question of individual negotiation of the allegedly unfair term will not be decisive, nor even the nature of the goods or services for which the contract in question was concluded.

38      Second, the consumer is dependent, pursuant to Article 43 of the Code of Civil Practice, as interpreted by the referring court, on the period within which a judicial decision relating to the collective action is to be taken, without the national court being able to examine in that regard the relevance of the suspension of the individual action pending delivery of a final judgment in the collective action.

39      Such a national rule therefore appears incomplete and insufficient and does not constitute either an adequate or effective means of bringing to an end the continued use of unfair clauses, contrary to the requirements of Article 7(1) of Directive 93/13."

The consumer may neither be forced to give up the possibility of the judicial analysis of her individual contractual position, or the possibility to waive the non-applicability of an unfair clause in her situation (Par. 40). Both these claims may not be raised in the collective action procedure, which is standardized for all consumers in similar situation and does not allow for individual exceptions. In one of the last arguments, the CJEU values lower the risk of overburdening national courts by having them adjudicate over more individual unfairness cases or of inconsistency of judgments issued by different national courts on the same unfairness issue, than of failing to provide sufficient consumer protection against unfairness (Par 41-42).

Consumer Law and Consumer Behaviour book

Our readers may be interested in the publication of the book "Verbraucherrecht und Verbraucherverhalten" ("Consumer Law and Consumer Behaviour"), edited by B. Heiderhoff and R. Schulze, which contains contributions of two authors of this blog: Franziska Weber (in German) and Joasia Luzak (in English). 

The table of contents, which unfortunately is not given at the website of the publisher (but you may order this book through this link), is as follows:

Teil I. Grundlagen

B. Heiderhoff/R. Schulze - Verbraucherrecht und Verbraucherverhalten - Einführung

P. Mogelvang-Hansen - Consumer law and consumer behaviour. Some illustrations

R. Caterina - Beyond Error: Psychology's (Not-So-Easy) Lesson for Consumer Law

Teil II. Materielles Recht

G. Howells - Consumer Credit and Behavioural Economics

P. Tereszkiewicz - Fremdwährungskredite als Frage des Verbraucherschutzes: eine Zwischenbilanz

E. Grasso/ C. Poncibó - Nutrition Labelling Chaos. How far shall we go in nudging consumers?

Teil III. Rechtsdurchsetzung

F. Gómez/ K. Lyczkowska - Preliminary References on Consumer Law from Spanish Courts: A Law and Economics Perspective

F. Weber - Ökonomische Analyse verschiedener Rechtsdurchsetzungsmechanismen im Verbraucherrecht

Ch. Twigg-Flesner - Does the codification of consumer law improve the ability of consumers to enforce their rights? - A UK-perspective

J. Luzak - Empirical evidence in consumer law cases: what are 'up to' claims up to?

The risks and benefits of automated financial advice

In December 2015 the three European Supervisory Authorities (ESAs) (the European Banking Authority, the European Securities and Markets Authority, and the European Insurance and Occupational Pensions Authority) issued a joint Discussion paper on automation in financial advice.

The ESAs have recognized that with increasing digitization of financial services, more and more financial institutions offer automated financial advice to their customers (also called 'robo-advice').Thus the Discussion paper is aimed at assessing what (if any) regulatory/supervisory action is required to enable consumers and firms to take advantage of the benefits and to mitigate the potential risks, of automated advice. The Discussion paper explains the concept of automated advice, and highlights the possible risks and benefits of this innovation.

Automated advice means that a recommendation to buy or sell financial products is generated by automated tools (typically websites using algorithms or decision trees) without (or with very limited) human intervention.

The ESAs believe that automated financial advice may be beneficial for consumers in terms of providing easy access to a quality service (free from behavioural biases, human error or poor judgment and reliant on a large volume of complex data) at a considerably lesser cost than traditional advice. However, they also recognize that automated advice may carry a great deal of danger. Importantly, consumers may find it more difficult to understand automated advice than traditional advice without a human interaction and being able to ask questions and seek clarifications; consumers may misunderstand the nature of the advice (they may receive general advice but believe that they have received personalized advice); consumers may end up with unsuitable advice because they do not understand how information is used by the automated tool and enter incorrect or incomplete data, or because of a failure in the automated tool itself. Finally, automated financial advice, as with any digital service, raises data protection issues.

The consultation period ended in March 2016. The Discussion paper generated great interest among the stakeholders and the ESAs have received many responses. BEUC welcomed the ESAs interest in automated financial advice, and considered the Discussion paper to be a well balanced discussion of the risks and benefits of automated advice. It has however highlighted that protecting consumers in this area will require new approaches, and that market outcomes may largely depend on the quality of algorithms used for guiding consumers through the advice process.

What do you think? Is automated advice more likely to benefit or to harm consumers?