Thursday, 21 September 2017

Foreign currency loans? Inform consumers of risks! - CJEU in Andriciuc (C-186/16)

The Court issued its judgement yesterday in the Andriciuc case (C-186/16), another case concerning consumer loans taken in foreign currency. As we have previously reported on this blog (Foreign currency and unfair terms...), AG Wahl considered average consumers to be able to foresee foreign currency fluctuations without the need for the banks to provide separate warnings about this possibility.

Before addressing the issues of the knowledge of average consumers and banks' obligations towards them, the Court establishes that contractual terms denominating a consumer loan in a foreign currency and requiring this loan to be paid back in the same currency are core terms of the loan agreement. They are seen as defining the 'main subject matter of the contract' (par. 38). This means that they are not subject to the unfairness test, provided the terms were transparent. Interestingly, the Court's reasoning distinguishes here between consumer loan agreements denominated in foreign currency which have to be paid back in the same currency (like in current case), and such loan agreements which only have been indexed to foreign currencies, which means that the repayment occurs in local currency and its rate is calculated on the basis of the exchange rate of foreign currency (par. 39-40). In the second case, the term describing the repayment mechanism could be classified as an ancillary contractual term, and, therefore, subject to the unfairness test. The same cannot be said of the term setting an obligation to repay the loan in the same (foreign) currency:

"...the fact that a loan must be repaid in a certain currency relates, in principle, not to an ancillary repayment arrangement, but to very nature of the debtor’s obligation, thereby constituting an essential element of a loan agreement." (par. 38)

Consumers in Andriciuc case may not, therefore, enjoy the protection of the UCTD unless they can prove that the contractual term was non-transparent (not written in plain and intelligible language). This required the Court to give more guidance as to the obligations following the application of the principle of transparency. The referring court asked whether the term determining loan repayments in a foreign currency would require, in order to be transparent, the bank to indicate to consumers currency exchange risks and their consequences for the price paid by the consumer, and, more specifically, whether the bank would have a duty to warn consumers about 'the possibility of a rise or fall in the exchange rate of the foreign currency'.

The Court reiterates its previous assessment that the requirement of transparency must be broadly interpreted in practice, to sufficiently protect weaker parties, i.e. consumers (par. 44). This requires the terms of the loan agreements to be drafted in a way enabling consumers 'to evaluate, on the basis of clear, intelligible criteria, the economic consequences for him' (par. 45), as was previously mentioned in cases Kásler and Van Hove. Whilst the Court's conclusion in par. 51 does not seem overly innovative, the reasoning the has led to it is and could potentially lead to creating new information duties for the banks. Namely, the Court emphasises the need for consumers being able to make well-informed decisions (par. 48 and 51). With regards to foreign currency loans this means that 

'...the borrower must be clearly informed of the fact that, in entering into a loan agreement denominated in a foreign currency, he is exposing himself to a certain foreign exchange risk which will, potentially, be difficult to bear in the event of a fall in the value of the currency in which he receives his income. Second, the seller or supplier, in this case the bank, must be required to set out the possible variations in the exchange rate and the risks inherent in taking out a loan in a foreign currency, particularly where the consumer borrower does not receive his income in that currency.' (par. 50).

This reasoning follows also from the Court invoking the European Systematic Risk Board's Recommendation ESRB/2011/1 of 1 September 2011 which specified risks to consumers of lending in foreign currencies (par. 49).

Whilst the Court relates to the case at hand, i.e. loan agreements taken and repaid in foreign currencies, I would be hesitant to conclude that this new information duty would not apply to loan agreements indexed in foreign currencies but repaid in the local one. The distinction between these agreements introduced by the Court seemed to be relevant for purposes of subjecting terms defining the repayment mechanism to the unfairness test. In either case, though, the term would be subject to the requirements of transparency and the Court has not yet specified that these should differ for core and non-core contractual terms.

The last question pertained to the assessment of the good faith and significant imbalance between the parties' rights and obligations. The answer to this question would either be significant in case the contractual term would not be assessed as a core term (indexed foreign currency loans that are repaid in local currencies?) or when it would be a non-transparent core term (bank didn't fulfil its information duty?), and the term would then be subjected to the unfairness test. Under such circumstances, the lack of good faith and significant imbalance between the parties' rights and obligations needs to be ascertained at the moment of the conclusion of the contract. The Court suggests, however, that it is likely that the banks, considering their expertise and knowledge, were aware of 'the possible variations in the rate of exchange and the inherent risks in contracting a loan in a foreign currency' (par. 56). Moreover, it is clear that 'In the event of the devaluation of the national currency against that currency, such a term therefore places all the exchange risk on the consumer.' (par. 55). Therefore, if the terms is subject to the unfairness test, whilst it remains for the national court to assess it, the CJEU seems to suggest that it could be considered unfair: 'the national court must assess for those purposes whether the seller or supplier, dealing fairly and equitably with the consumer, could reasonably assume that the consumer would have agreed to such a term in individual contract negotiations' (par. 57).

This is a very important case for many consumers who have concluded foreign currency loans agreements, with the Court indicating a possibility for national courts to determine that such agreements are not fulfilling the requirements of the UCTD.

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