POLITICO publishes draft Commission proposal on collective redress for European consumers

POLITICO, a well-known news website on European affairs, reports that it has obtained a draft proposal of the European Commission for a new Directive on representative actions for the protection of the collective interests of consumers, and repealing the Injunctions Directive (2009/22/EC; referred to as "ID"). Last year, the Commission already announced a 'New Deal for Consumers', including an EU-wide class action and collective redress; see our blog post here.

One of the drivers of this development has been the "the inquiry into emission measurements in the automotive sector", i.e. 'Dieselgate'; see our previous blogs here, here and here. Not all Member States provide for collective redress mechanisms tailored for mass harm situations, so not all consumers have access to effective redress opportunities. According to the Commission, the significant disparities among Member States require EU intervention, particularly in light of the cross-border implications; although the proposal applies to domestic infringements of EU law as well.

The draft proposal is a follow-up to the REFIT Fitness Check of EU Consumer and Marketing Law, which also covered the ID, and to Commission Recommendation 2013/396/EU. The Commission states its intention to further strengthen the redress and enforcement aspects of consumer protection (Article 114 TFEU and Article 38 EUCFR), through the establishment of a complementary EU framework supported by procedural rules on the national level. This should also facilitate access to justice (cf. Article 47 EUCFR); possible benefits of collective judicial actions are lower costs and more legal certainty. The proposal is meant as an additional procedural tool: it does not replace existing mechanisms, nor does it affect substantive rights.

The proposed Directive establishes "certain key aspects", but its lack of further detail is also its weakness. For example, it does not specify which divergences between Member States or gaps in the protection of collective consumer interests are most problematic. It does not make a clear distinction either between injunction orders, redress orders and declaratory decisions, nor does it address corresponding procedural complications and modalities.

The Commission does not explain why the ID needs to be improved and which specific elements need an update. It only observes that the key shortcomings of the ID are its limited scope, the limited effects of injunctions on redress for consumers and the costs and length of the procedure. The Commission therefore proposes to enlarge the scope of the future Directive to other horizontal and sector-specific EU instruments, e.g. in the field of financial services, energy, telecommunication, health or the environment. Consumers who have been harmed must be able to rely on a final decision in a representative action (Article 8 draft proposal). The proposal aims to improve the effectiveness of injunctions in terms of deterrence of unlawful practices, as well as fair and adequate compensation for consumers, but how exactly those goals are to be achieved is not elaborated. Moreover, the proposal aims to strike a balance between facilitating access to justice and ensuring adequate safeguards from abusive litigation (frivolous claims), but again modalities are not defined. The proposal works with 'qualified entities' that must satisfy certain criteria (Article 6 draft proposal), and it emphasises the importance of 'due procedural expediency'. However, how this is to be realized is left to the Member States.

In the Netherlands, for instance, a legislative proposal is pending for the introduction of a collective damages action. The ongoing discussion shows how difficult it is to find a balance between access to justice and effective redress on the one hand, and the prevention of abuse on the other; see here and here for more background information. The most controversial issues, such as the designation of a lead plaintiff, opt-in/opt-out possibilities and the calculation of damage, are not addressed in the Commission's draft proposal. 

It is expected that the Commission will announce its proposal (this draft or an amended version) in the next few months. It is far from certain that it will eventually result in a Directive. Whether it will be adopted or not, the proposal is likely to have an impact on the debate on collective redress.

An end to high banking transfer charges in the EU?

On 28^th March, the EU Commission put forward a Proposal for a Regulation that will reduce charges for bank transfers in the European Union outside the euro area. This initiative is aiming at making the banking union ever closer, especially in retail banking where there have been fewer actions compared to prudential regulation.

Thanks to Regulation 924/2009 fees for cross-border payments in euros between euro area members have been equalised. However, the situation in non- euro zone EU countries is very different with consumers often paying expensive fees even for the transfer of small amounts of money. As mentioned in the press release for the Proposal, consumers in some instances were called to pay as much as 24 euro charges for the transfer of 10 euros, making it highly detrimental to consumers.

The proposed Regulation amends Regulation 924/2009 and aims at removing this perceived barrier to the single market by extending its scope to non-euro area Member States. It must be noted that the proposed regulation only covers transactions in euros and not in other currencies. Regulation 924/2009 offered the possibility to extend the regulation to other currencies, yet only Sweden has made used of that rule. Therefore, the Commission decided this was the time to introduce this measure as now euro payments are cheaper than they were in the past.

The effect of the Proposal is two-fold, as it harmonises cross-border banking charges as well as improving transparency. According to the Proposal charges for cross-border payments in euros will be the same as charges for national (non-euro) payments. This means that the transfer fees will be significantly lower if not nonexistent. Consumer will not be the only ones to benefit, as also businesses will be able to be more competitive to businesses operating in the euro area.

As for transparency, at present consumers are not able to compare options, especially when paying with a card where they are offered the option to pay either in the local currency or in their home currency. The Proposal tackles this issue by obliging payment service providers to offer the full cost of both options to consumers prior to the initiation of a payment transaction. Furthermore, recognising the constant technological advances in the field, the European Banking Authority (EBA) will develop regulatory technical standards on how payment service providers are to fulfill their transparency obligations as well as being able to place caps on such conversion charges.

The Proposal has been positively received by consumer organisations, as reported in a euractiv article .Indeed this is a positive development for EU consumers and should it be voted in the Parliament as it will have a tangible effect on their everyday transactions making them easier and cheaper and making the banking union ever closer.

"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. 

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

Introduction

On the 20^th 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.

Questions

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.

Conclusion

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.