General information and a representative example in (mortgage) loan contracts C-85/24

The CJEU was given the opportunity to interpret Directive 2014/17/EU on Mortgage Credit (MCD) in C-85/24 Verein für Konsumenteninformation v BAWAG P.S.K. Bank für Arbeit und Wirtschaft und Österreichische Postsparkasse AG.  While mortgage loans are a frequent issue infront of the CJEU, the legal interpretation usually turns on Directive 1993/13/EC on Unfair Contract Terms. This is a rare chance, as far as I am aware, there are only two other cases tackling the MCD. While the judgment was delivered last year, it remains relevant, as there is no more recent case on the issue, and the new Directive 2023/2225 on Consumer Credit (CCD2) contains the exact provision in Article 9(2)(e).

The Austrian bank in dispute offers several credit products to consumers. It provides general information on the products, including in an information sheet. The Austrian Consumer Protection Association brought an action against the bank, asking the court to prohibit the bank from including, in the information sheet only an example of a variable rate credit agreement, without also providing an example of a fixed rate credit agreement and an example of a mixed rate credit agreement, since it offers those three types of interest rates for those credit agreements. The bank argues that the information sheet does not seek to provide consumers with detailed pre-contractual information tailored to individual cases and specific customers. In its view, it cannot be required that a separate example be included for every conceivable form of interest rate in that information sheet.

The legal question for the CJEU was whether Article 13(1)(g) of MCD must be interpreted as meaning that a creditor who offers credit agreements, whether or not secured by a mortgage, at a fixed interest rate, at a variable interest rate or with alternating variable interest rate and fixed interest rate periods, must provide a representative example for each of the three types of credit agreements offered?

Article 13 (1) of MCD entitled ‘General information’, provides ‘Member States shall ensure that clear and comprehensible general information about credit agreements is made available by creditors’. Such general information shall include at least the (g)  a representative example of the total amount of credit, the total cost of the credit to the consumer, the total amount payable by the consumer and the annual percentage rate of charge.

The CJEU noted that the MCD establishes a two-level mandatory information system. The first level consists of ‘general information’, referred to in Article 13 MCD. According to Recital 38, that information should enable consumers to make their decisions in full knowledge by ‘educating [them] in relation to the broad range of products and services available and the key features thereof. Consumers should therefore be able at all times to access general information on credit products available’. The second level of information consists of the ‘pre-contractual information’ in Article 14 MCD, which includes ‘the personalised information needed [by consumers] to compare the credits available on the market, assess their implications and make an informed decision on whether to conclude a credit agreement.’ Thus, the purpose of ‘general information’ is not to provide consumers with detailed explanations tailored to each type of credit agreement offered by the creditor and to each individual case; such explanations must be communicated to them under the ‘pre-contractual information’. They are intended only to inform consumers in the preliminary stage of their credit search.

The CJEU also addressed the question of what constitutes a representative example. In that regard, Recital 53 of MCD is helpful. It explains that ‘when determining the representative example, the prevalence of certain types of credit agreements in a specific market should be taken into account. It may be preferable for each creditor to base the representative example on an amount of credit which is representative of that creditor’s own product range and expected customer base, as these may vary considerably among creditors.’ The CJEU then clarified that ‘in assessing the representative nature of the example to be provided, some factors may be taken into consideration, namely, for example, the average duration and total amount of credit granted for the type of credit agreement under consideration and the prevalence of certain types of credit agreements in a specific market.’ Regarding the annual percentage rate of charge on the information sheet, the consumer's preferences and the information provided should, where possible, be taken into account, and the creditor or credit intermediary should make it clear whether the information provided is illustrative or reflects the preferences and information given. In any event, the representative examples should not contravene the requirements of Directive 2005/29/EC on Unfair Commercial Practices.

Using literal, contextual and teleological interpretations, the CJEU concluded that the practice of creditors who provide different types of credit products is compliant with the requirements of Article 13 Article 13(1)(g) of MCD if they provide by way of general information, only one example of the loans on offer, provided that that example is representative.

Are KIDs going to be relevant when they are finally adopted?

The summer holiday season has not yet started for the EU institutions (even if it might have begun for some of the authors of this blog). Last week the European Council reached an agreement on the new rules that would protect consumers when they enter into PRIP contracts - for packaged retail investment products (such as, for example, investment funds, life insurance policies). The EU institutions want to increase the transparency of such contracts, in order to strengthen consumer trust in the financial market. It only took 1 year for the European Council to agree on the rules proposed by the European Commission. (see our earlier post: Investing consumers should be treated...) Since this type of financial contracts is often quite complex in its drafting, consumers are often unable to understand what they are agreeing to when they conclude such a contract. Not only would they then have difficulties in assessing the contractual risks but also they may not be able to effectively compare offers of different companies, when trying to choose the best one for them. New rules would require certain key information (such as the nature and features of the product, costs and risks profile, performance information, whether it is possible to lose capital) to be given to consumers in a specific, uniform format and content. In order not to overburden consumers, only such key information would be contained in these documents (KIDs). Additionally, Member States would need to guarantee an effective right of redress to consumers. The legislative process on these rules will continue in the European Parliament now. (Council sets out its position on transparency rules for investment products)

 

Coincidentally, most of the authors of this blog have just listened to a presentation on the risks of financial services by Sothi Rachagan, president of the International Association of Consumer Law, given as an opening speech of the Association's bi-annual conference, in Sydney. One of the points that was raised in the presentation was that regardless the measures that we would take to inform or educate consumers about the risks of financial products, consumers would still not be able to protect themselves from them. The complicity of financial products and information on them (even if simplified) is just too overwhelming even for the well educated consumers. It was suggested that instead of further regulating mandated disclosure, other regulatory measures should be taken in order to protect consumers (e.g., limits could be set on the amounts that could be invested/ borrowed by consumers depending on their financial situation). The readers may wonder whether by the time KIDs are adopted in Europe, they would be seen as a pre-historic measure of consumer protection.

Investing consumers should be treated like/with (cross out inapplicable word) KIDs

Yesterday the European Commission presented a new legislative package that is supposed to restore consumers' faith in the financial services. It is an ambitious undertaking, no doubt, taking into account the consumer experience of the last few years with one financial crisis following another and big financial companies failing to provide much needed security and reliability. Many consumers found themselves in financial troubles due to wrong information or financial advice they had received, which often led them to invest in unsuitable for them financial products. To prevent this from happening again, an action at a European level was deemed to be necessary.

"In the aftermath of the biggest financial crisis in recent memory, the financial sector must place consumers at its heart. Retail products must be safer, information standards must become clearer, and those selling products must always be subject to the highest standards. That is why we have adopted a package solely dedicated to consumers, so that they can choose financial products based on clear and sound information and professional advice which puts the consumer's interests first." said Internal Market and Services Commissioner Michel Barnier (Commission proposes legislation to improve consumer protection in financial services)

And so, the European Commission presented three new documents: a proposal for a regulation on key information documents for packaged retail investment products (PRIPS), a revision of the Insurance Mediation Directive (IMD), and a proposal to boost protection for those who buy investment funds which is governed by the Directive on Undertakings for Collective Investment in Transferable Securities (UCITS). The first two of these documents are especially relevant for consumer protection so let's take a closer look at them.

PRIPS

Anyone who ever tried to make an investment knows that financial products are, ehm, complex (this really is too mildly put). In order for consumers to understand what they may expect from a given financial product and what risks they are taking on themselves the information provided to them has to be more transparent and comprehensive. This proposal aims at improving quality of such information by introducing a new, innovative standard for product information. It is intended to be short, plain-speaking and consumer-friendly. Every investment product (investment funds, insurance-based investments, retail structured products, private pensions, etc.) will need to have such a document attached to it. I just love the new name for it: KID - Key Information Document. Let's be honest, most of us have a childlike approach to financial matters - lots of faith in things ending up right even if we climb that highest (financial) tree branch without any security. Each KID will convey information on the product's main features, risks and costs associated with the investment in the product. The intention is to make it clear to consumers whether they can lose money on that product and to show them its complexity. Consumers will easily be able to compare KIDs of different investment products since they will follow the same structure, content, presentation. More information on this proposal may be found here.

IMD

Another matter that often leaves consumers flabbergasted is the risks associated with taking an insurance cover. Most often taking an insurance is seen as purchasing more security, without realising that it may also endanger consumers' interests. Anyone who studied law knows that insurance law is not a thing to trifle with, but consumers often remain blissfully unaware of its complexity. The EC aims at revising the IMD which regulates selling practices for all insurance products. Currently, the Directive applies only in cases when insurance was bought through an intermediary, but the revision aims at giving the same level of protection to consumers regardless of the character of the person they had purchased the insurance from. Moreover, sellers of insurance will need to inform consumers of their professional character, links to the insurance company as well as reveal their remuneration for selling an insurance cover. Most importantly, a professional, honest advice will have to be given to consumers interested in purchase of insurance products. Currently, more than 70% of insurance products are sold without appropriate advice. More information on this document may be found here.

How do consumers choose their financial products?

Ill customs and bad advice are seldom forgotten (B. Franklin)

Guardian has an interesting article today by Heather Connon: "Bank customers need more protection against bad investment advice". It so happens I have researched how the warnings are given to consumers in banking sector when they take out bank loans for investments and I fully agree with the message of this article.

The author gives as an example the famous case of Barclay's Bank who was sued against and ordered not only to pay fines but also to compensate its customers who lost their money on risky investments, that they originally did not intend to make it. Many of the victims in these cases where older people, close to retirement age, who came to Barclay's to invest some of their savings in order to increase their chances for better life after their retirement. However, Barclay's employees did not take into account that the investments they were recommending to these clients had a highly risky profile and did not fulfill the clients expectations (of secure and cautious investment). It is often debated what the banks could/should do in such situations. Some say that the banks have to protect their own business and it is in their interest to sell such investments to the consumers that would bring the bank the most return. They suggest that the consumers should hire independent financial advisers to protect themselves from bank's abuse. Others, however, mention the specific, confidential character of the bank-client relationship which can lead to the increase of the bank's duties of care towards the client, including the bank's duty to advise/inform and warn the client that a certain investment does not fit that client's investment profile.

In the article you may find a description of a solution that UK is about to introduce in 2013: on retail distribution review (which would e.g. ban commission to financial advisers directly from investment products). However, the article criticizes this solution and mentions how unlikely it is that things will change. What we need for a real change to happen is not another regulatory instrument that leaves lots of gaps and ways for the banks to go around the duties of care, but a change of approach of the banks themselves. What we need is a basic understanding that a happy customer is a long-time customer and that a short-time gain may lead to long-time reputation/customer loss. After all, as Benjamin Franklin once said: "Ill customs and bad advice are seldom forgotten".

Guidance for creditors on mental capacity

On December 2010, the UK Office of Fair Trading(OFT) launched a consultation on its draft guidance for creditors on mental capacity. On one hand, the draft guidance is designed to explain the steps the OFT expects creditors to take to identify borrowers who might lack the mental capacity to make informed borrowing decisions. On the other hand, it also outlines the appropriate way for creditors to deal with borrowers who do or might lack capacity, and explains the practices and procedures it considers they should put in place.

The OFT described mental capacity as ‘a person's ability to make decisions and depends in part on their cognitive abilities to: learn, remember and understand’. For many people, for reasons of illness or disability, their mental capacity can be affected in ways which may prevent them from making certain decisions that may impact on their lives.

The OFT’s guidance for creditors on mental capacity is a way to advance the principle of responsible credit. In the context of consumer credit, the principle of responsible lending concerns professional diligence in assessing creditworthiness and supporting education of consumers,warnings about the risk related to default on payment and over-indebtedness. In this particular case, the OFT expects creditors to form a view on whether the borrower is able, perhaps with support, to make an informed borrowing decision and whether they can afford to make repayments under the credit agreement in a sustainable manner.

Further, the principle of responsible lending have gained a considerable momentum in the European Consumer Credit Directive(Directive 2008/48/EC). Aimed at tailoring credit products to consumers’ needs and ability to repay. This has implications for evaluating the suitability of the product design as such and the suitability of the product for a particular borrower. The latter includes consumer’s understanding of the product and its risks and lender’s understanding of the creditworthiness.