Sanctions for breaching national rules on consumer credit: the CJEU in C-303/20

Earlier this month the CJEU delivered another judgment on the interpretation of Directive 2008/48/EC on Consumer Credit Agreements. In C-303/20 Ultimo Portfolio Investment SA v KM the CJEU was asked to interpret Art. 23 of the Directive, according to which, penalties for breach of national rules on consumer credit must be effective, proportionate, and dissuasive.

The facts

The consumer, KM concluded a consumer credit agreement with Aasa Polska, from which agreement the debt was assigned to the claimant, Ultimo Portfolio Investment. Although the monthly installments for this loan were only around 88 EUR (408 PLN), it transpired that at the time when the contract was concluded, the consumer was heavily indebted, having 23 loans, and her husband independently extra 24 active loans! These together totaled approximately 98 840 EUR (457 830 PLN) amounting to a monthly figure of approx. 2 153 EUR (2300 PLN). At the time, KN was employed with a net salary of approx. 500 EUR (2300 PLN) and her husband was out of work, with no disposable income.

Unsurprisingly, the consumer was unable to honour her payment obligations, and following the default, the claimant brought an action in front of the competent Polish court. The defendant consumer however alleged that before the loan was approved, the lender did not ask any questions to enquire about her financial situation: her outstanding debts, her disposable income, or the debts of her household. Since the claimant was unable to provide proof to the contrary, the court tackled the issue of sanctions, questioning whether the Polish rules correctly implemented Art. 23 of the Directive. In particular, the referring court specified that the Polish Code of Minor Offences only imposes a fine for breaching responsible lending obligations, and this fine is time-barred and only affects the natural persons within the credit institutions such as the director of the company or the credit intermediary.  

The legal question

The referring court effectively asked whether Art. 23 of the Directive must be interpreted to mean that in determining the effectiveness, proportionality, and dissuasiveness of the penalties courts could only take into account provision(s) of the national law specially adopted to implement Art. 23 of the Directive?

The ruling

The CJEU ruled that in interpreting Art. 23 of the Directive, national courts must take into account not only the special national provisions that are adopted to transpose the Directive but also the other provisions of the relevant law that should be interpreted in the light of the working and objectives of the Directive.

In its reasoning to CJEU acknowledged that the low amount of the penalty or that facts that it only applies to natural persons may be indicative of its shortcomings. Referring to its earlier case law it reiterated, penalities to be effective and dissuasive they must deprive the economic benefit of the infringement and must have a positive effect on the consumer in question.

However, the CJEU reminded that under Art. 288 TEFU, directives are legal instruments that are result-oriented, while binding on the result to be achieved they leave discretion to the Member States in the form and method of implementation. Consequently, transposition does not necessarily require legislative action. The existence of general principles and general rules may render a legislative action superfluous. It follows, that in order to determine whether a national law adequately implemented the obligations resulting from the given directive, it is important to take into account not only the legislation specifically adopted for the purposes of transposing the directive but also 'all the available and applicable legal rules.' National courts must therefore consider the whole body of rules of national law and interpret them in the light of the wording and purpose of the Directive in order to achieve the outcome that is consistent with the objectives pursued by the Directive.

In the present case, the court highlighted that Polish law benefits from a range of civil penalties in addition to those in the Code of Minor Offences. Importantly, the CJEU also highlighted that the case at hand would benefit from the penalty applicable for using unfair terms. Namely, Directive 1993/13/EC on unfair contract terms was implemented in Polish law to render excessive charges not binding on consumers (see our report on Profi Credit Polska).

Our evaluation

This judgment provided an important contribution to our understanding of European consumer credit law. It suggests a holistic or we could call a 'contextual approach' to interpreting the fairly vague and general provision on penalties in Art. 23 of the Directive, giving it a more concrete content in a national context. The important message is that in determining whether the sanction meets the requirements of the Directive, national courts must take into account all available sanctions under the applicable national rules, and the CJEU seems to suggest that if more than one sanction is applicable, national courts should weigh them up according to the criteria provided in Art. 23. The judgment also gives useful hints on how to interpret what is effective and dissuasive in the case at hand, and it could be read in connection with other judgments that tackled the aspect of proportionality of sanctions (see our report on Home Credit Slovakia).