CJEU on Buy Now Pay Later (C-409/23): not consumer credit unless it is

Not that fresh, still hot: last month, the CJEU issued a remarkable decision in Case C-409/23 (Arvato), a preliminary ruling request from the Dutch Supreme Court concerning so called "buy-now-pay-later" (henceforth: BNPL) schemes and their qualification in the context of European consumer credit rules. 

While payment in instalments, with our without intermediaries, has been around for a pretty long time, not all European consumer markets are equally permeated BNPL schemes, which are very popular and common - for instance - in the Netherlands. In these schemes, consumers can conclude online transactions in a webshop and only pay at a later stage, when they receive an invoice by a third party that takes up the invoicing and provides payment security to the seller. If this reminds you of a credit card, that's not odd at all: these services essentially aim to provide services akin to those of a credit card, without the long-term credit contracts (and eligibility controls) associated to traditional models. Some, in fact, even go as far as to provide an own app-environment through which consumers can reach web shops. 

In return for these services, BNPL companies sometimes charge sellers/service providers a fee; they usually also charge consumers a small - even nominal - fee. According to consumer advocates, however, a significant portion of their revenue comes from consumer non-performance, in the form of late payment interests and debt collection fees. Civil law courts are then confronted with claims aiming to force consumers to pay their growing debts; in the Netherlands, many (but not all!) local courts have started to treat these contracts as credit contracts, even though officially in most cases the BPNL company has formally just been assigned the original credit by the seller. Why?

The advantage of considering BNPL as credit contracts is technical but also quite substantial: in many cases, Dutch courts are then able to invalidate the credit contract based on breach of core information requirements, leaving the consumer with, in essence, only the principal to pay. This is a particularly favourable outcome when, as is not rarely the case, the original purchase is only worth a small amount but the collection fees and default interest have been cumulating for a while. 

Whether BNPL should, under current rules, be considered a credit contract depends in no small part on how one interprets the "old" Consumer Credit Directive, which excludes certain transactions from its scope. In particular, Article 2(2)(f) of that Directive excludes contracts "where the credit is granted ‘free of interest and without any other charges’ or [...] under the terms of which ‘only insignificant charges are payable’". Dutch courts, however, have been considering the collection fees and late-payment interest as part of the cost of credit, making the contract (maybe free of interest but) not "without any other charges" or including only "insignificant charges". The Dutch Supreme Court was unsure whether this approach was in line with the Directive and asked the CJEU to solve the question for them - do default interest and out-of-court collection fees count as "cost of credit" in the context of assessing whether a credit contract has been entered?

The Court of Justice answers the question over a succinct few paragraphs: first (para 44), it notes that the letter of the law points to "interest" and "other charges" to only be relevant when "provided for at the time of conclusion of the credit agreement". This suggests excluding default interest and collection fees because "the non-performance by a consumer of his or her payment obligation and the duration of any such non-performance are, in principle, unforeseeable at that time". Second (para 46), considering such interests and charges as part of the cost of credit would largely hollow out the exception established at article 2(2)f since only contracts providing absolutely no consequence for non-performance by the debtor would be covered. Hence, in principle where credit is provided for free or against a negligible fee the fact that fees and interests will have to be paid in case of non-performance does not turn the relationship into a credit contract under the Directive. 

However, the Court observes (para 49-50), both the Dutch government and the referring Court suggest that default interest and collection fees are to be considered integral part of the provider's business model; the Directive, at the same time, requires Member States to make sure that its provisions cannot be circumvented "as a result of the way in which agreements are formulated". In light of the above, national courts have to make sure they guarantee the effectiveness of the Directive, and in particular

ascertain whether, in reality, the creditor is seeking to circumvent its obligations under Directive 2008/48 by anticipating, from the time the credit agreement is concluded, the non-performance by the consumer of the payment obligation in order to seek an economic advantage from the latter’s liability for interest and default charges. To that end, it will be for that court to examine all the circumstances present at the time when the agreement in question was concluded and other relevant information, such as, inter alia, the statutory or contractual origin of the interest and default charges, the periods within which that interest and those charges become payable and the amount of that interest and those charges.

This is a difficult task for national courts. Pending a decision by the Dutch Supreme Court, our sources suggest that local courts are reacting in different ways: some are just assuming that they can go ahead with treating the contracts as consumer credit; other courts are asking BNPL providers additional information about their business model in order to ascertain whether they do, indeed, plausibly expect a significant percentage of "their" customers to incur late payment fees; some are de-prioritising affected cases while awaiting a result, and some others, finally, are assuming that the CJEU's decision means BPNL is not credit after all. 

The uncertainly is naturally limited in time - the article 2(2)h in the Consumer Credit Directive 2023 explicitly limits the exemption to cases in which deferred payment is offered by the provider of the underlying good or service, with the exclusion of commercial third parties; however, it is also rather consequential for all actors involved - providers, debtors and courts.  

Who is the average consumer? CJEU in Compass Banca (C-646/22)

On the 14th of November, the CJEU published its long-awaited decision on Compass Banca (Case C-646/22; we have previously discussed it here). In this case, the CJEU, for the first time, elaborated on who the ‘average consumer’ is, especially in light of the persistent critiques from behaviouralists, and further clarified the assessment of and the consequences for unfair commercial practices under the UCPD (Directive 2005/29/EC).

The case involves a commercial practice by the Italian company Compass Banca which the Court termed ‘framing’ – a term typically associated with a specific type of cognitive bias rather than a concrete commercial practice. Namely, Compass Banca presented an offer for a personal loan alongside an unrelated insurance product, leaving consumers with the impression that it was not possible to obtain the loan without taking out the insurance. In particular, there was no cooling-off period between the signing of the two contracts. Even though Compass Banca claimed that it was made clear to consumers that the loan was not contingent on the insurance, the Italian consumer authority requested a seven-day cooling-off period to be granted and, upon Compass Banca’s failure to comply, found the practice of framing an ‘aggressive’ and thus ‘unfair’ commercial practice under the UCPD. Compass Banca challenged this decision in court, which invited questions reaching the CJEU.

The CJEU’s ruling

The first question concerns the extent to which behavioural insights about individuals’ cognitive biases should inform the concept of the ‘average consumer’, a notion that lies at the heart of the UCPD as a benchmark for assessing the effects of a particular commercial practice on consumers’ decision-making processes. Such an explicit reference makes this (abstract and somewhat academic) question not merely ‘hypothetical’ and justifies its admissibility (paras 37-39). Probably unsurprisingly, however, the Court avoided adopting academic terms like ‘homo economicus’ and ‘bounded rationality’ which were used by the referring court. This, of course, does not really make a difference to the substantive reasoning.

With reference to recital 18 of the UCPD (which came from the Court in the first place), the Court restated that the ‘average consumer’ is an individual ‘who is reasonably well-informed and reasonably observant and circumspect, taking into account social, cultural and linguistic factors’. The CJEU highlighted the nature of the ‘average consumer’ as an objective criterion which is independent of any specific consumer’s knowledge, but ‘not statistical’, which nonetheless allows national courts to take into account ‘more realistic’ considerations when exercising their own faculty of judgment to determine the ‘typical reaction of the average consumer’ (paras 48-51, recital 18 UCPD). With this understanding, the Court continued to clarify the two prongs of the average consumer benchmark: ‘reasonably well-informed’ and ‘reasonably observant and circumspect’. (I read it as the former relates to obtaining information/its availability, while the latter to processing information/its effectiveness.) As to the former, in view of the trader’s mandatory information obligations, it should be understood as ‘referring to the information which can reasonably be presumed to be known to any consumer, taking into account the relevant social, cultural and linguistic factors, and not to the information which is specific to the transaction in question’ (para 52). The lack of information is thus not excluded from the assessment of the effects of a commercial practice. Here, I think the Court was indicating that being ‘reasonably well-informed’ does not require consumers to actively seek out material information that the trader is legally obliged to provide.

Similarly, the nature of being ‘reasonably observant and circumspect’ does not exclude considering the influence of cognitive biases, should such biases be likely to affect a reasonable average consumer to materially distort their behaviour (para 53). The Court then recalled its several cases which acknowledge that an average consumer may be deceived, may have varied levels of attention regarding different goods and services, may be subject to an erroneous perception of a piece of information and may be simply unable to understand the technical details in certain transactions (paras 54-56). While these cases were usually discussed as ‘deviations’ from the average consumer standard, the Court used them as ‘evidence’ to confirm that a ‘reasonably observant and circumspect’ consumer is not a perfectly or particularly observant and circumspect one (adverbs used by AG Emiliou in para 42). Nonetheless, the Court cautioned that the existence of constraints like cognitive biases does not automatically make them legally relevant and decisive in finding an unfair commercial practice: ‘it is still necessary for it be duly established that, in the particular circumstances of a specific situation, such a practice is of such a kind as to affect the consent of a person who is reasonably well-informed and reasonably observant and circumspect, to such an extent as to materially distort his or her behaviour’ (para 57). There seems to be a high bar for courts to apply behavioural insights. In all, the Court concluded by sticking to the classic definition of a rational consumer while accepting the possibility of constraints that can impair consumers’ decision-making capacity, such as cognitive biases.

The second question concerns whether the practice of ‘framing’ in this case is in all circumstances aggressive or at least unfair. First, the Court found that framing is not categorically blacklisted in all circumstances, since it does not correspond to any practice listed in the ‘complete and exhaustive list’ of Annex I (para 68). Second, the Court indicated that neither can framing be found aggressive, in most cases, when applying the general test under Art. 8 UCPD: there is no ‘harassment’ and ‘coercion’ in their usual meaning in daily language (para 72), and there is no ‘undue influence’ as framing ‘does not, as such, imply the existence of acts of pressure, even if that practice is likely to create a bias of framing’ (para 75). Third, it is still possible that a non-aggressive practice can be a misleading one in the sense of Arts. 6-7 UCPD. In this case, the Court noted that framing leaves consumers with the (misleading) impression that it was impossible to get a loan without taking out the insurance (para 80) – though Compass Banco has claimed otherwise (para 82). Ultimately, it is for national courts to assess the unfair nature of a commercial practice (para 83).

The third and fourth questions ask: Should framing be found unfair, do the UCPD and Art. 24(3) of Directive 2016/97 on insurance distribution preclude the national authority from requiring a cooling-off period to be granted in order to put an end to the unfair practice? Regarding Directive 2016/97 the question was answered negatively, as Art. 24(3) only requires the possibility of buying a good or service separately without the ancillary insurance (as a package). As to the UCPD, the Court held that while it precludes ‘a general or preventive obligation to comply with a certain cooling-off period’ in an ex-ante manner (para 91), it does not preclude national authorities’ ex-post ‘power to issue directions to that trader’ once there has been an established unfair commercial practice (para 92). However, the measure taken cannot restrict the freedom to provide services (per Art. 4 UCPD) and must respect the rights codified in the Charter of Fundamental Rights, in particular the freedom to conduct a business under its Art. 16 (paras 94-95). In this light, the principle of proportionality mandates that a measure is only acceptable when ‘there are no other equally effective means of putting an end to that practice which are less prejudicial to the freedom to provide services and the freedom of the trader concerned to conduct his or her business’ (para 96). In short, requiring a cooling-off period is fine, unless there are less intrusive alternatives. Here, the Court took a rather constitutionally informed approach to the enforcement of consumer protection, though one might wonder why consumer protection itself (Art. 38 of the Charter) was not brought to the balancing exercise.

Comments

This case adds an interesting (but definitely not conclusive) annotation to the controversial notion of the ‘average consumer’. The Court wants to keep the baby and the bathwater: the average consumer is indeed ‘observant and circumspect’ (which receives heavy criticism) but only ‘reasonably’ so (which allows considerable leeway and flexibility). While the Court stressed that its analysis was specifically made ‘within the meaning of [the UCPD]’, its reasoning would most likely have broader implications as the average consumer benchmark is creeping into other consumer instruments. 

To some, the Court has said nothing new in this case – nowhere in EU law has it ever committed to interpreting the average consumer as ‘homo economicus’. To others, this decision may be celebrated as a victory for behavioural law and economics. However, the wording of the decision suggests (‘an individual’s decision-making capacity may be impaired by constraints, such as cognitive biases’) that cognitive biases are not the decisive nor the only factors that can ‘impair’ a consumer’s decision-making capacity. (Here, I would prefer ‘influence’ over ‘impair’ as we don’t want to reinforce ‘observant and circumspect’ and marginalise ‘reasonably’.) Indeed, while behaviouralists have commendably challenged the predominant information paradigm for better consumer protection, it has been pointed out that their critique lacks a social dimension – how choices are shaped not only by our individual cognitive capacities but also by our interpersonal interactions, social practices, cultural preferences and institutional set-ups. In this regard, the Court made reference ‘to the fact that a loan applicant is normally in need, to the complexity of the contracts presented for signature by the consumer, to the concurrent nature of the combined offer and to the short period granted to take up the offer concerned’ (para 80) – which appears to be a list of factual and contextual factors that should be considered when ascertaining how ‘reasonably observant and circumspect’ the average consumer should be in this case. And this list clearly goes beyond cognitive biases (so does the list by AG Emiliou in para 40).

In any case, determining the average consumer’s typical reaction should not be reduced to an empirical exercise solely aiming for a realistic approximation of real-life consumer behaviour, even with the help of behavioural science and even AI. This is clear in recital 18 of the UCPD (‘in line with the principle of proportionality’, ‘taking into account social, cultural and linguistic factors’, ‘not a statistical test’) and from the Court. Instead, delegating national judges ‘to exercise their own faculty of judgement’ ultimately asks them the normative question of how much protection should be afforded to the consumers in our political economy. So if we take this normative dimension seriously, we can explore other ways to flesh out the benchmark beyond what was discussed in this case. But then, to what extent should realistic considerations inform this normative assessment? And what assumptions, insights, frameworks, theories or imaginaries should serve as the normative guideline for judges to fill in the definition? 

Like it or not, the average consumer is here to stay, and the debate is certain to persist. How ‘reasonable’ the average consumer should be expected to be, what and who should inform this definition, and therefore what the desirable level of consumer protection should be – these questions will continue to puzzle academic debates, judicial reasonings and even political processes. 

Price reductions to be determined on the basis of the ‘prior price’ (C-330/23 Aldi Süd)

 Guest post by Laura Bakola (PhD candidate at Leiden University)

In September the CJEU issued a judgment on price indications and the obligation of the trader to announce a price reduction on the basis of the ‘prior price’ of the product. The case comes after the amendment introduced by Directive 2019/2161, as regards the better enforcement and modernisation of consumer protection rules (hereafter Omnibus Directive), to Directive 98/6 on consumer protection in the indication of the prices of products offered to consumers (Price Indication Directive, hereafter PID). According to the amendment, any announcement of a price reduction shall indicate the prior price applied by the trader for a determined period of time prior to the application of the price reduction (Article 6a(1) PID); the prior price means the lowest price applied by the trader during a period of time not shorter than 30 days prior to the application of the price reduction (Article 6a(2) PID).

The case involved a supermarket chain which had issued an advertising brochure containing product offers. One of the brochures contained price indications that were presented in the following manner:

Concerning the first price indication, a percentage was used, but the reduction was not determined on the basis of the lowest price charged in the trader’s stores in the 30 days prior to the offer, the latter being the same as the selling price. Concerning the second price indication, the statement ‘price highlight’ was used, while indicating a higher price than the lowest price charged in the 30 days prior to the offer. Against this background, the questions asked by the referring court pertained to the interpretation of Article 6a(1) and (2) PID; namely, whether these provisions require that a price reduction announced by a trader in the form of a percentage, or in the form of a promotional statement intended to highlight the advantageous nature of the announced price, must be determined on the basis of the ‘prior price’, within the meaning of Article 6a(2) PID.

According to the Court, although Article 6a(1) PID does not make it possible to determine whether the price reduction must be calculated on the basis of the prior price, as defined in paragraph 2 of that Article, account should be taken of the Directive’s objectives, as well as the specific objectives pursued by the provisions in question (paras 20-21). As regards the objectives pursued by the Directive, these are the improvement of consumer information and facilitating comparison of the selling price of products, in order to enable consumers to make informed choices (Article 1 and Recital 6 PID); the selling price of products must be unequivocal, easily identifiable and clearly legible, so that that information is precise, transparent and unambiguous (Article 4(1) and Recital 2 PID). Furthermore, both the Omnibus Directive and the PID were intended to achieve a high level of consumer protection (Recital 1 Omnibus Directive and Recital 2 PID). Interpretation of Article 6a PID as meaning that it suffices to mention the ‘prior price’, without using it as the basis for calculating the price reduction, would undermine the aforementioned objectives, in particular that of improving consumer information (para 24). As regards the specific objectives pursued by Article 6a PID, these were intended to prevent traders from deceiving the consumer, by increasing the price charged before announcing a price reduction and thus displaying false price reductions (para 25). Mentioning the ‘prior price’ for mere information purposes, without using it as the basis for calculating the price reduction, would undermine that specific objective, by allowing traders to mislead consumers through price reduction announcements which are not real (para 26).

It follows that the selling price of a product in a price reduction announcement cannot be the same as the ‘prior price’, within the meaning of Article 6a(2) PID, or be higher than it (para 27). The Court also clarified (para 28) that assessment of a commercial practice consisting of displaying a price reduction, which is not determined on the basis of the ‘prior price’, will be made with regard to the relevant PID provision and not the provisions of Directive 2005/29 on unfair commercial practices (UCPD). Article 6a PID specifically regulates aspects linked to price reduction announcements, thus constituting lex specialis in relation to the UCPD.

In light of the above, the Court ruled that Article 6a(1) and (2) of the PID must be interpreted as requiring that a price reduction of a product announced by a trader in the form of a percentage, or in the form of a promotional statement intended to highlight the advantageous nature of the announced price, must be determined on the basis of the ‘prior price’, within the meaning of 6a(2) PID.

The judgment in case C-330/23 Aldi Süd is a welcome ruling, clearing up the interpretation of Article 6a(1) and (2) PID. However, as business practices evolve in response to regulatory changes, problematic price promotion techniques are not expected to cease. The onus is then on enforcement authorities to ensure application of the rules, thus achieving transparency of price indications in consumer markets.