Tuesday, 10 September 2019

Unfairness assessment of variable interest rates - AG Szpunar in Gómez del Moral Guasch (C-125/18)

Facts of the case

In 2001 M. Gómez del Moral Guasch concluded a mortgage loan contract, with a variable interest rate, with a Spanish bank in order to purchase a residential apartment. In 2017 the consumer contested the fairness of a term in that contract that determines the mechanism of calculating the variable interest rate - based on the Spanish IRPH index. The consumer claimed that it is unfair that the interest rate is not indexed pursuant to EURIBOR index, which would have been more beneficial to him and is more commonly applied to Spanish mortgage contracts (in ca 90% of all contracts - para. 30). 

The IRPH index used in this loan contract was one of six IRPH indexes that have been adopted by the Spanish government. In 2011 it has been replaced - automatically - by a new IRPH index, also determined by the Spanish government. In a judgment of 14 December 2017 the Spanish Supreme Court declared, in a similar to this case, that if the IRH index is adopted as such in loan contracts it should not be subject to the unfairness or the transparency test from the UCTD, as it reflects a mandatory statutory provision (para. 53). The Supreme Court further decided that a contractual term based on IRPH index, which was drafted similarly to the one used in the case referred to the CJEU, was transparent, both formally and materially. Formally it was transparent as it was placed in the contract in a grammatically clear way, it was comprehensible and allowed consumers to understand and accept the fact that the variable interest rate will be calculated on the basis of an index controlled by the Spanish central bank. Materially it was transparent as it allowed average consumers to calculate the costs of concluding the agreement and it could not be required from banks to propose differently indexed loan agreements and explain how various indexes have been set up (para. 54).


Scope of application of UCTD to terms that reflect national mandatory statutory provisions

First, AG Szpunar reasonably differentiates between evaluating the unfairness of an index rate that has been set out in national statutory provisions and a contractual term that foresees the use of such an index rate in calculating the variable interest rate of a loan contract (para. 59). Then he proceeds to consider whether the exception of Art. 1(2) UCTD should be applicable in this case, i.e. whether the contractual term reflects both a mandatory and a statutory provision of national law. His analysis leads to the conclusion that the mandatory character of the provision regulating the IRPH index is missing, which leaves it possible to subject a term reflecting it to the unfairness test of the UCTD. This conclusion is based on the fact that at the moment of the conclusion of the contract Spanish banks could choose whether to apply the IRPH index or another index that would fulfill the same conditions (e.g. EURIBOR index) (para. 78, 83). Therefore, as the exception from the scope of application of the UCTD should be strictly interpreted and applied only to situations where parties' freedom of choice is taken away, it cannot be said that the use of this index had a mandatory character (para. 82). 

Side note: It is irrelevant that subsequently, in 2011 the IRPH index used in the contract has been automatically substituted by a different IRPH index (here the freedom of choice of parties was eliminated, therefore, we could determine its mandatory character), as the unfairness should be assessed considering the facts of the case at the moment of the conclusion of the contract (para. 64).


- of core terms

Whilst implementing the UCTD the Spanish legislator chose not to apply the exception for the application of the Directive to core terms of a contract (Art. 4 UCTD). This leads to an interesting conundrum in this case. Namely, whether Spanish courts could still refuse to assess the unfairness of a transparent core contract term, which is what Art. 4(2) UCTD stipulates, despite this provision not having been implemented in the Spanish legal order.

AG Szpunar rightly observes along the lines that: you cannot have the cake and eat it too. Principles of legal certainty and transparency require full transposition of provisions of directives that will then be applied in national legal systems (para. 93). In the previous CJEU judgment (Caja de Ahorres), it was decided that the Spanish legislator could have made a legislative choice, by not implementing Art. 4 UCTD, to submit also transparent core terms to the unfairness control, as this provides more consumer protection and the UCTD is a minimum harmonisation directive (para. 89). If, however, the Spanish legislator made a transposition mistake and actually intended to subject transparent core terms to the unfairness control, then, following the CJEU's judgment, we would have expected a change of the Spanish legislation. This has not occurred. Instead, the Spanish Supreme Court took upon themselves to clarify Spanish law as indeed not submitting transparent terms to the unfairness control. Such a judicial and not legislative clarification could be, however, perceived as in breach of the above-mentioned principles of legal certainty and transparency of EU law (para. 96). Therefore, Spanish courts may subject transparent core terms to the unfairness control (para. 100).

- what does it entail?

AG Szpunar reminds the previous CJEU case law referring to the principle of transparency as being fulfilled when an average consumer not only receives information that is grammatically correct but also that allows them to determine economic consequences of concluding a particular contract (paras. 106-108). In light of a given contractual term, he considers the term to definitely be grammatically clear and comprehensible in a way that it informs consumers as to what index will be applied to their variable interest rate and how the rounding-up of the interest will occur (para. 112). Does the term, however, sufficiently inform consumers about the economic consequences of the concluded loan agreement? AG Szpunar is inclined to believe that it may have done so, provided that the method of calculating the interest rate and its elements was clearly related to the applicable index rate, which has not only been fully defined, with a reference to appropriate legal rules establishing it, but also mentioned changes in the past values of that index (para. 125).

Side note 1: Here, AG Szpunar differentiates between the previous case law on transparency, which addressed transparency of loan contracts concluded in foreign currencies, and the given case on a loan with a variable interest rate. When a loan is concluded in a foreign currency, the mechanism of calculating the exchange rate may be very complex and there are potentially serious economic consequences following from non-understanding that mechanism and the fact that there is a future, uncertain risk related to its application. These potentially serious economic consequences shape the transparency requirements (paras. 115-118). In the given case, however, such a future, uncertain risk is not present, as the economic consequences of concluding a loan contract with a variable interest rate are more foreseeable (para. 119). This leads AG Szpunar to not see as necessary that bank warns consumers about the possibility of future changes to an index rate. However, by obliging banks to provide consumers with an indication of past changes to the index values, a possibility of future fluctuation should become clear, as well. Consequently, the difference in transparency requirements seems subtle.

Side note 2: AG Szpunar did not consider it necessary that the banks provide consumers with a separate information on the mathematical formula that allows to clearly follow the method of calculation of the index rate, as this information was publicly available (paras. 122-123). If, however, the information would have been difficult to access, we could possibly expect the information obligations of the banks being extended.

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