Friday, 23 March 2018

"Not sure if debt owns me or I own debt": assignment of consumer debts and default interest rates in Spain (Opinion of AG Wahl)

Of all preliminary rulings on the Unfair Contract Terms Directive (93/13/EEC) in the EUR-Lex database, more than one-third concern questions to the EU Court of Justice from Spanish (civil) courts. The first - Océano (C-240/98) - has become a landmark decision in consumer law. Yet the highest civil court in Spain, the Tribunal Supremo, had never referred a case to the CJEU until last year.
In February 2017, the TS made two preliminary references, one on terms allowing for accelerated payment (vencimiento anticipado; C-70/17) and one on clauses containing default interest rates (interés de demora; C-94/17) that are disproportionally high.

Yesterday Advocate General Wahl published his Opinion in the latter case, which has been joined with another Spanish case on the assignment and purchase of consumer debts (C-96/16).

The joined cases both pertain to (unsecured) consumer credit agreements. In C-94/17 (Escobedo Cortés), the consumers involved had started proceedings against Banco de Sabadell and alleged that a default interest of 25% was excessively high compared to the ordinary interest rate of 5,5%, and therefore unfair. In C-96/16, the default interests at issue were 18,50% respectively 23,70% versus ordinary interest rates of 8,50% respectively 11,20%. The bank in question, Banco Santander, had claimed accelerated payment and requested enforcement of the debt. It subsequently assigned the debt to a third party, which then asked to take over the bank's position in the enforcement proceedings. [N.B. It is becoming increasingly difficult to refer to the CJEU cases on the basis of party names; this case could be called Banco Santander II.] The referring court doubted whether the consumer-debtors should not have been given an opportunity to purchase the debt themselves, so that it would be extinguished. It also wondered whether the case law of the Tribunal Supremo on default interest clauses was compatible with EU law. According to this (national) case law, a default interest clause that exceeds the ordinary interest rate by more than 2 points is unfair and thus invalid. While the additional charge is eliminated, ordinary interest continues to accrue until the debt has been paid in full. 

AG Wahl divides his Opinion in three parts, regarding 1) the purchase and assignment of the debt, 2) the judge-made rule on the unfairness of default interest clauses, and 3) the consequences for, in particular, ordinary interest. 

"Not sure if debt owns me or I own debt..." 
As regards the first part, Wahl finds that the Directive is not applicable to an assignment between two professional parties, in this case: Banco Santander and a third party. Pursuant to the Annex (sub p) to the Directive, terms giving the trader the possibility of transferring his rights and obligations under the contract may be considered as unfair where they reduce the guarantees for the consumer, without her consent. In Wahl's view, however, the case did not concern a term in a consumer contract and besides, the assignment did not change the consumers' contractual position. Consumer protection may become an issue in the relation between the new creditor and the consumers involved, but it is not (yet) a problem now. This - again - shows the limits of what the Directive can do.

Still, the referring court's doubts reveal an underlying issue with the 'commodification' of consumer debts. A third party may acquire the debt for a fraction of its value and then make a profit at the expense of the consumer. From that perspective, the question whether the consumer should not be able to acquire the debt (instead of a commercial investor) is not so strange. Moreover, it is questionable whether the assignment does not have any impact on the consumer's position at all. There is no guarantee that the third party who has acquired the debt operates according to the same standards (duty of care) as the bank that provided the loan.  

A judge-made 'black list'? 
As regards the second part, Wahl observes that from the perspective of (full) effectiveness of the Directive, there is nothing wrong with a judge-made rule that certain clauses are automatically unfair, although that might distort the general contractual balance (in abstracto). In this respect, it is relevant that the '2-points rule' has been formulated with a reasonable interest percentage in mind.

Wahl emphasises that courts must still be able to take the specific circumstances of each individual case into account, but he only seems to have the situation in mind that the term is found to be unfair. Whereas clauses that do not exceed the maximum of 2 points can still be deemed unfair, it seems that courts cannot deviate from the rule when they find that a clause with more than 2 points could, in the circumstances of the case, be regarded as fair. This would go even further than a 'black lists' of unfair terms that are presumed to be unfair, compiled by the national legislator. It would come down to a judge-made 'black list' that does not leave much space for an assessment in concreto. 

Consequences of unfairness
Lastly, Wahl recalls that national courts cannot revise the content of unfair terms. Unfair terms may be replaced by national statutory provisions only when the invalidity of the unfair term would require the court to annul the contract in its entirety, thereby exposing the consumer to disadvantageous consequences; see our earlier reports on Unicaja Banco and Caixabank and Kásler. In Unicaja, the CJEU held that a national provision laying down a threshold corresponding to the default interest rate equal to three times the statutory interest rate must be without prejudice to the court's assessment of the unfairness of a term setting default interest. Wahl adds that if such a term is deemed unfair, it is invalid and must be eliminated from the contract. This would neither require the contract to be annulled in its entirety, nor have disadvantageous consequences for the consumer; on the contrary. In that event, the term cannot be replaced by the statutory interest rate that would have applied by default if there had been no agreement. 

However, removing the default interest clause from the contract does not need to affect the ordinary interest rate in a separate clause, insofar as that clause is not unfair. The ordinary interest is meant as a compensation for the creditor who has provided the loan (a 'core term' according to Wahl), whereas the default interest intends to 'punish' the debtor for not fulfilling her payment obligations. Here, Wahl draws a comparison with a penalty clause. 

If AG Wahl's Opinion is followed, it seems that what the courts in first instance and in appeal had done in the case before the Tribunal Supremo (C-94/17) is incompatible with the Directive: they had diminished the default interest clause to three times the statutory interest rate. Instead, the default interest must cease to apply completely. That will probably deter credit institutions from using excessively high default interest rates in consumer contracts, but consumers must still pay ordinary interest. How this relates to the Tribunal Supremo's other preliminary reference on accelerated payment clauses - which is also relevant for the consumers in C-96/16, against whom enforcement proceedings are pending - remains to be seen. 

Thursday, 22 March 2018

AG Opinion in Bankia: UCPD is not applicable in mortgage enforcement proceedings


On the 20th of March, AG Wahl published his opinion on the Bankia case. The case revolves around the application of Directive 2005/29/EC (The Unfair Commercial Practices Directive) to mortgage enforcement proceedings in Spain. The case is added to the growing case law of the application of consumer law to contracts and illuminates the aim and field of application of the UCPD according to the AG.

Facts of the case

The debtors, Juan Carlos Marí Merino, Juan Pérez Gavilán, María de la Concepción Marí Merino took out a loan, secured by a mortgage in 2006 with the following terms: 166.000 € capital, 25 years repayment and the value of the mortgage was set at 195.900€. In 2009, the loan capital was increased and the repayment term extended. Finally, in 2013, as the debtors were falling behind with payments for more than a year and their outstanding debt had reached 102.750 € there was a final modification of the loan terms. The repayment period was extended to 40 years and the mortgage asset was re-evaluated at 56.689 €, a value far lower than the 2006 one, due to the housing market crisis in Spain.
As the debtors continued to default on payments, the bank initiated mortgage enforcement proceedings in 2015. The bank requested an order for payment and if the debtors were unable to pay the mortgaged asset would be auctioned with a starting price of 57.684,90 €. The starting price for the auction was calculated according to the 2013 re-evaluation and the lower price meant it was unlikely the proceeds from the auction would suffice to cover the amount owed.
The debtors objected to the enforcement proceedings on two grounds. Firstly, arguing for the existence of unfair terms in their contract, as the aim of the modification of the loan terms was to get them to agree to a decreased evaluation of their property. Secondly, that according to the Spanish Code of Good Banking Practice they could be discharged of their debt due to their financial situation. Finally, they also asked for the enforcement proceedings to be stayed.


The following questions were referred to the Court:
(      1)    Must Directive 2005/29 be interpreted as meaning that national legislation such as that currently regulating Spanish mortgage enforcement — Article 695 et seq. in conjunction with Article 552(1) of the [Law of Civil Procedure] — which does not provide for the review by the courts, of their own motion or at the request of one of the parties, of unfair commercial practices, is contrary to Article 11 of that directive because that national legislation hinders or prevents review by the courts of contracts or acts which may contain unfair commercial practices?
(     2)    Must Directive 2005/29 be interpreted as meaning that national legislation such as the Spanish law which does not ensure actual compliance with the code of conduct if the party seeking enforcement of a debt decides not to apply that code (Articles 5 and 6 of Royal Decree-Law No 6 of 9 March 2012, read in conjunction with Article 15 thereof) is contrary to Article 11 of that directive?
(     3)    Must Article 11 of Directive 2005/29 be interpreted as precluding Spanish national legislation which does not allow a consumer, during mortgage enforcement proceedings, to request compliance with a code of conduct, in particular as regards the giving of a property in payment and extinguishment of the debt — Point 3 of the Annex to Royal Decree-Law No 6 of 9 March 2012, Code of Good [Banking] Practice?’
The novelty of the case revolves around whether the UCPD can be applied to halt mortgage enforcement proceedings, in a similar way as the Unfair Contract Terms directive has been applied in the past. The the significance of the Opinion is on the enforcement of the UCPD as per art. 11 UCPD and whether it grants remedies to individual consumers.

Answer to question 1

AG Wahl provides a lengthy answer to the first question. He recognises the main tension of EU consumer law between a high level of consumer protection and encouraging cross-border trade as well as the broad scope of the UCPD (para 35, 38) According to art.11 (1) UCPD, Member States must ensure that ‘adequate and effective means’ exist for the enforcement of the Directive. Is effectiveness of enforcement achieved when unfair commercial practices cannot be reviewed in the context of mortgage enforcement proceedings? The Opinion points out that the UCPD does not provide a right to a contractual remedy for consumers against unfair commercial practices, instead focus is on providing penalties for traders. The Spanish law provides for declaratory proceedings to establish the existence of unfair commercial practices. The next step is to establish whether to satisfy the effectiveness test, declaratory procedure is not enough, and there is also the need to allow for mortgage enforcement proceedings to be stayed.
In the well-known Aziz case it was held that precluding the review of an unfair contract term in mortgage enforcement proceedings was contrary to EU law. The referring court and the Commission wish to draw a parallel between Aziz and Bankia arguing that the same reasoning should be followed and precluding consideration of unfair commercial practices in mortgage enforcement proceedings should be found contrary to EU law.(para 30) Yet, the AG is of another opinion, differentiating between Directive 93/13 (The Unfair Contract Terms Directive) and the UCPD. According to the Opinion, Directive 93/13 does offer a remedy to individual consumers, while Directive 2005/29 only provides for penalties for the trader and therefore cannot prevent the enforcement of the mortgage. Therefore, the lack of suspensory effect of the declaratory proceedings does not influence the effectiveness of the enforcement of the UCPD. (para 61) The AG allows for one exception, in the case where the unfairness of a commercial practice may play a role in assessing the unfairness of a contract term. However, as was found in Pereničová and Perenic, the unfair practice is only a factor for assessing the unfairness of a term. (para 64)
Consequently, the answer to the first question was that national legislation which does not provide for the review of unfair commercial practices during mortgage enforcement proceedings is not contrary to the UCPD.

Answer to questions 2 and 3

The second and third questions focus on codes of conduct and whether a code of conduct can be enforced using the UCPD. According to the AG Opinion, codes of conduct offer an additional means of control to that of the UCPD, and non-compliance with a code of conduct does not automatically amount to an unfair practice. (paras 74-75) In any case, same as for question 1, the AG found that any consequences from the breach of the code of conduct would be for the trader as the UCPD does not offer any individual contractual remedy for the consumer (para77).
Therefore, the answer to the second and third question was the national legislation which does not provide consumers with an individual contractual remedy in the case of breach of code of conduct, is not contrary to the UCPD.


The AG opinion may at first fight appear as one that reduces the level of protection for consumers; as consumers who are at risk of losing their homes as a result of mortgage enforcement proceedings cannot rely on the UCPD in the same way they can rely on the Unfair Contract Terms Directive. Yet the AG opinion accurately reflects the current state of the UCPD and as highlighted by the AG the main issue of the debtors was the re-evaluation of the property rather than the existence of an unfair practice (para 59). This does not mean that it would not be appropriate for consumers to have individual remedies against unfair practices, but rather that this is not the case at the moment. This issue has been highlighted in the Consumer and Marketing Law Fitness Check where one of the suggestions has been to amend the UCPD in order to provide contractual remedies for consumers. It remains to be seen whether the ECJ will follow the AG Opinion or whether they will decide that the UCPD should be considered in the context of mortgage enforcement proceedings, or whether a legislative intervention is the only way to resolve this problem.

Wednesday, 14 March 2018

Delay to consumer insurance upgrades

On 9 March 2018 the Council has adopted a directive postponing the application date of new rules on consumer insurance products to 1 October 2018, with the deadline for transposition moved to 1 July 2018 (Council delays application of new rules). The new rules are adopted through the Directive 2016/97 on insurance distribution, which originally was supposed to be applicable as of March this year (see our previous post on this directive).

New Report on the Rapid Alert System

On 12th March, the 2017 Report on the Rapid alert system for dangerous food products was published. The first structure for exchange of information between Member States on dangerous products was set up in 2003, and became fully operational in 2004. Its legislative basis is art.10 of the General Product Directive.

The role of the Rapid alert system is to enhance cooperation between national authorities and assist Member States in fulfilling their obligation to ensure that only safe products are placed in the market.
The latest report illuminates the latest trends in product safety. The most notified type of product has been toys with 29%, closely followed by motor vehicles at 20%. The most notified risks are injuries with 28% and chemical with 22%, while injuries are also the category with the most follow-up actions.

The Member States are required to take follow-up action following the alerts, which is set out in the website. Follow-up in this instance refers to feedback received from the countries as to how they treated the alert, with the most common follow-up action being that of finding the product. There is no formal coordination mechanism in the case where national authorities assess a threat differently. Instead the Commission is meant to act as a mediator. Divergent approaches in product safety, such as a product being identified as dangerous in a Member State but not in another, may be better addressed by a formalised system to resolve such disputes. 

Transparency is a key element to the Rapid alert system as the alerts and the subsequent measures taken by the national authorities are set out in the website. This allows consumers to follow developments and be able to find out whether an unsafe product has been found in their country. The Report points out the different parts of the alert website that are designed to be used also by consumers, such as a layman explanation of the alert system as well as the possibility to subscribe to alerts and even personalise them. Yet, what remains unclear is to what extent consumers are aware of and interested in making use of the Rapid alert website, as the Report does not specify that. It would be interesting to see which groups of consumers are more likely to make use of the website and the services offered. Since toys are the most notified products, perhaps parents of young children are more likely to make use of the alerts.

The Report also notes the most important challenges in the field of product safety for the past year. It notes how the Rapid alert system has allowed the exchange of information on fidget spinners which presented a choking hazard to children, so that dangerous products would be removed from the market or stopped at the borders.

Yet the greatest challenge is that presented by the growing popularity of online shopping. The Member States need to devote a large amount of resources in order to monitor online markets. Yet the actions adopted on an EU level are limited to soft law interventions, such as informational campaigns and cooperation with online retailers for them to take voluntary commitments. As the popularity of online shopping is growing and EU consumers are getting further exposed to products from all over the world which may not adhere to EU standards, it may be time to consider new interventions in the field, as well as further strengthening international cooperation.