Lexitor saga takes (perhaps not so) unexpected twist: CJEU in UniCredit Bank Austria v VKI (C-555/21)

 Dear readers, 

while some of you may think this blogger spends too much time online (true), lately social media have been a great source of information concerning new case-law - take Thursday's CJEU decision in case C-555/21 on non-interest costs in the case of early repayment of mortgage credit as an example. Within an hour of the Court issuing a press release, I could see the judgment *everywhere*. People in my bubble were, in general, not happy (see eg fellow consumer lawyer Catalin Stanescu; however, I should say: people were not happy, except some fellow Italians, see * below). What happened? 

In 2019, the CJEU decided Lexitor, a case in which it was requested to decide whether article 16 in the 2008 Consumer Credit Directive, regulating the unwinding of consumer debt in case of early repayment, required also non-interest costs to be returned pro rata tempore. In that case (see our post here), the CJEU ruled that indeed this would be the case: a different interpretation, in particular, would have made it too tempting for credit providers, who are to a large extent unilaterally able to set up the remuneration structure for consumer credit, to set up a business model largely based on low interest and high fixed costs.

This case sent airwaves throughout Europe, even if more visibly so in some systems: in Italy, for instance, it led to a recent decision by the Constitutional Court that may or may not need to be reconsidered after today. Why?

An important question outstanding after Lexitor was whether the established interpretation should be limited to the Consumer Credit Directive or could also be extended to the 2014 Mortgage Credit Directive - this in particular given that the two directives contain textually similar provisions and hence a consistent cross-directive interpretation may be good for legal certainty. Today's decision seems to suggest that it can be extended, as a matter of national law - but such extension is anyway not required by EU law. In particular, the preliminary reference asked whether the Austrian provisions preventing the recovery of non-interest costs unconnected to the duration of the credit contract was compatible with article 25 of the 2014 Directive. The CJEU concluded that it is. 

In the case of mortgage contract, the referring court [see para 18] had already observed, much of the fees that do not depend on the duration of the credit are actually outside of the credit provider's control: think for instance of notary costs, obtaining an assessment of the value of the house and so on. In such context, the CJEU found, the risk of perverse incentives found in Lexitor does not seem so serious to justify the consequences that a strict interpretation of the right to pro rata restitution would entail [see para 32].  

While somewhat irrationally finding solace in the idea that the standardised information to be provided pursuant to the Mortgage Credit Directive would prevent abuse on the side of credit providers by empowering consumer choices [para 33-34; reader, take it from someone who has recently concluded a mortgage contract - it doesn't], the Court also makes space for appreciation of the circumstances of the case and arguably national variations. This emerges from paras 37-38, according to which it is for national courts, seized with a dispute, to ensure that the Directive's protective aims are not circumvented and that costs that are in fact remuneration for the availability of cash over time are not accounted for under different headers to avoid restitution. This is an interesting and imposing task for national courts (with possible further implications such as: what would be the contractual consequences of a misclassification? would it in any event entail an unfair commercial practice? would the courts have to perform this check ex officio if for any reason they are confronted with the case?).

In Italy, the Judgement has drawn particularly much attention - Lexitor had previously led to a consequential decision of the Italian constitutional court and had drawn quite the criticism in Law & Econ circles (see eg here), which means this weeks decision has been quickly celebrated by parts of Italian academia.  

Recent update on consumer protection in financial services

At the end of March I had a pleasure to present at the Consumer Protection in Financial Services conference organized by the Academy of European Law (ERA). The conference tackled the themes of cross-border payments, consumer and mortgage credit and financial digitization and innovation raising many theoretically interesting and practically relevant questions. Without discussing these, our readers might be interested in the current and upcoming initiatives of the EU Commission.

Cross border payments 

The review of Regulation 942/2009 has ended and the amending regulation is about to be published (see the Proposal here). The basic changes to the current regime will be the extension of the basic principle of having no difference in charges for domestic and international payments to non-euro countries, and there will be enhanced transparency requirements for currency conversion services.

Payment services

The most important development in the progress of applying Directive 2015/2366 (PSD2) is the entry into force of Regulation 2018/389 supplementing PSD2 with Regulatory Technical Standards on Strong Customer Authentication and Common and Secure Communication in September 2019. In addition, since the entry into force of PSD2 several Application Programme Interfaces (APIs) have been developed (such as the Open Banking in the UK) and the working of which is being actively monitored by European Banking Authority and the EU Commission. 

Payment accounts

The review of Directive 2014/92/EU has started with the study being awarded that will cover the update of the list of services part of the payment account with basic features, assessing the need for additional measures for price comparison websites. The review will also cover new aspects not included into the scope of the Directive such as  the feasibility of cross-border account switching, and the EU-wide portability of IBAN numbers.

Mortgage credit

Directive 2014/17/EC is due for review in 2020 and the Commission is currently preparing to award the study for the review. The study will cover the use and consumer understanding of ESIS and the cross-border success of the Directive. It will also cover new areas not currently included into the scope of the Directive such as the need for supervision of credit registers, the impact of digitization on mortgage credit and the need for additional post-contractual rights for consumers.

Consumer credit

Directive 2008/48/EC is currently being evaluated, the EU Commission has just closed the public consultation. After gathering all the information from the evaluation the EU Commission will decide whether or not review the Directive. Some new issues under consideration are similar as with the Directive 2014/17/EC and extend to the need to regulate/supervise credit registers and the impact of digitization on consumer credit.

Unfair contract terms

Directive 1993/13/EC was also discussed especially in the context of mortgage credit, and it has been noted that the Commission is currently working on a guide for applying the Directive in the light of the rich case-law that significantly advanced the level of protection provided by the Directive (and which we have discussed on this blog).

Isn't it ironic: AG Tanchev proposes penalty Spain for failure to transpose Mortgage Credit Directive, just as new Law has been approved

The European Commission has brought infringement proceedings against Spain for failure to transpose the Mortgage Credit Directive (2014/17/EU) in time, and asked the EU Court of Justice to impose a daily penalty payment of EUR 105 991,60. The deadline for transposition was 21 March 2016, which was extended by the Commission until 18 January 2017. The new Law on Credit Agreements for Immovable Property (Ley de contratos de crédito inmobiliario) was only approved by the Spanish Parliament on 21 February 2019. Until it enters into force, consumers in Spain are unable to rely on the rights afforded to them under the Directive.

The Spanish government does not dispute that it missed the deadline. However, it argues that the penalty is disproportionate.

First, there was an unusual situation relating to difficulties in forming a government between December 2015 and October 2016. There was a political deadlock after the inconclusive election results of December 2015, which led to new elections being held in June 2016. The second election results were also inconclusive; attempts to form a government continued until the end of October 2016. After the financial crisis, consumer protection in the mortgage credit market had become a controversial issue in Spain, as we can testify by reference to the many preliminary rulings pertaining to Spain discussed on this blog. The new Law was approved only two months before the upcoming elections in April 2019.

Secondly, the Spanish government disputes that the lack of transposition may have adverse effects for competition in the mortgage credit market, and asserts that certain national measures had already been adopted that regulate aspects covered by the Directive.

In his Opinion in C-569/17, Advocate-General Tanchev rejects these arguments. EU Member States cannot invoke provisions, practices or situations existing in their internal legal system, such as elections or an interim government, in order to justify a failure to comply with their obligations under EU law, including the time limits laid down in a directive (point 36).

Moreover, Tanchev is unconvinced that the national measures that had already been adopted meet the requirements of the Directive (point 82). The effects of the failure to transpose the Directive on public and private interests is significant in the Spanish context, in light of problems in the Spanish mortgage sector (point 86). In this respect, Tanchev refers to the numerous preliminary references to the CJEU from Spanish courts. Thus, he concludes, the impact of non-transposition is serious.

AG Tanchev rejects the Commission's view that the penalty payment should be calculated from 22 March 2016 to the date of the start of the infringement proceedings: 27 April 2017. According to Tanchev, the duration of the infringement is assessed from the expiry of the extended deadline, i.e. 18 January 2017 (point 89). This means the period between December 2015 and October 2016 should not matter in any case (point 90). Still, the duration of the infringement is about 24 months, which may be considered a significant period of time.

The penalty payment must be decided according to the degree of persuasion needed in order for the Member State to alter its conduct and bring the established infringement to an end (point 80). Therefore, Tanchev proposes that the CJEU should order Spain to pay the daily payment as proposed by the Commission, with effect from the date of delivery of the judgment. At the date of the hearing, the new Law had not been approved yet. If the CJEU follows Tanchev's Opinion, Spain will no longer need to be persuaded and thus, not have to pay the penalty as soon as it notifies the Commission. Isn't the timing a bit ironic?

Press digest

Mobile banking

The Financial Times Adviser discusses the ongoing plans to regulate on the European level mobile banking (Getting mobile banking working). Currently, the revision of the Payment Services Directive and of the Regulation on Multilateral Interchange Fees is being negotiated among the European institutions. 

On review of the mobile banking industry in the UK conducted by the Financial Conduct Authority see: Mobile Banking and Payments - FCA Industry Review. Important: no evidence of consumer harm was found in the mobile banking and payments area.

Tobacco Products Directive

Another company - Philip Morris International - was granted a right by the English courts to apply for a preliminary ruling in front of the Court of Justice with regards to the interpretation of the Tobacco Products Directive. This time it is the competence of the EU to regulate in this area that is being questioned: the argument is that the Directive does not aim to improve the internal market (e.g. it prohibits menthol even though it's legal in all Member States); that the Directive infringes consumers fundamental rights to information about the products they are choosing (through forcing companies to adopt plain packaging); as well as whether the delegation of power to the Commission to specify certain issue was validly defined (Philip Morris International Granted Right to Challenge EU's Tobacco Products Directive Before the Court of Justicce of the European Union).

Mortgage Credit Directive

Telegraph reports on the uncertainties related to the implementation of the new Mortgage Credit Directive in the UK - who exactly may be seen as consumer and fall under the Directive's scope? "Accidental landlords" - that is persons who became landlords "as a result of circumstance rather than through their own active business decision" will be seen as consumers. Who is that exactly? And what rules shall apply to buy-to-let mortgages? (Would this buy-to-let couple be caught out by new EU rules?)

Privacy online

If you are interested to see which applications and which online tools have what sort of privacy protection, check this data on the Secure Messaging Scorecard (A project of the Electronic Frontier Foundation).

US consumer news (just for fun)

Verizon fights against the Federal Communications Commission plan to introduce net neutrality, threatening to take them to court: Verizon: We Will Sue FCC Again If "Hybrid" Net Neutrality Happens.

Berkeley, California becomes the first American city to introduce a tax on sugary drinks: California City Votes In The Nation's First Soda Tax

Apple is being sued for an equivalent of wiretapping due to users who switched from an iPhone to an Android phone not receiving their iMessages (More Former iPhone Users Suing Apple, Claiming iMessage "Intercepts" Texts Meant for Android Phones).

Federal Trade Commission sues Gerber Products Co. for falsely advertising that its Good Start Gentle formula prevents or reduces the risk of children developing allergies (FTC Sues Gerber For False Advertising Over Claims Its Formula Can Prevent Allergies).

Mortgage credit directive adopted by the Council

Towards the end of last year, we had announced that the European Parliament had approved the proposed Mortgage Credit Directive, leaving it up to the Council to have its final say. A few days ago, the Concil approved the Directive, which seeks to enhance both consumer information and sustainable lending practices.

Although the Directive has been approved with no discussion, three countries have abstained and other governments have asked to add some critical remarks to the meeting's minutes.

Mortgage Credit Directive, the ball is now in the Council's court

Earlier this year, we had reported that the European Parliament, both through its Economic and Monetary Affairs Committee and in a plenary vote, had manifested its support for the Commission's proposal on a Morgage Credit Directive. On Tuesday, the Directive has been approved in first reading, which means that now the word is to the Council, that might decide to approve the directive or to send it back to the Parliament with amendments.

Some key features of the proposed directive are:

• the introduction of a standardised information sheet, which should make comparing different offers easier and also include "worst case scenario" information;

• the establishment of a series of business conduct rules aimed at preventing malpractice and conflicts of interests;

• esuring that consumers are given the chance to repay the debt earlier than originally agreed;

• a "passport" regime aimed at making it easier for credit providers to do business cross-borders;

• european-wide standards for the credit-worthiness assessment of mortgage applicants.

• rules facilitating the "smooth" handling of arrears and other repayment difficulties.

The impact of the rules would vary greatly from country to country. For instance, the Commission's impact assessment reports that in 2006/2007, a stunning 45% of UK mortgages were granted without the consumer's income being verified, a figure which is unlikely to represent the EU's average. An interesting collection of fact and figures has been put together in a rich Commission memo.

The text of the proposed directive can be dowloaded here (part II).

One step forward towards a mortage credit directive

On Wednesday, the European Parliament gave broad support to the pending proposal for a Mortgage Credit Directive, which, if everything works according to plans, should come into force in the spring of 2014. 

While not all loan-seekers will be enthusiastic with this intervention, the directive is aimed at two quite important objectives:

1) facilitating the creation of a single market for mortgage loans;

2) preventing the recurrence of crises in the housing market such as the ones that hit fiercely Spain and Ireland over the last few years.

How should these objectives be achieved? 

First, and this is the part credit consumers might be worried about, the Directive introduces European standards for creditworthiness assessments: the effect of this on consumers is likely to vary according to the state where they live. At the same time, better information and decision-making are pursued by the introduction of a standard information sheet, which should make comparison easier, and a 7-day reflection period. 

The directive also foresees a general right to early repayment, which the member states might subject to the payment of a fair compensation to the credit provider. 

As concerns brokers and intermediaries, while the directive  imposes a set of rules of conduct (concerning inter alia pay structure and the obligation to provide prospective lenders with "worst-case-scenario" information) meant to prevent conflicts of interests and encourage "fair" lending practices, new chances will be provided by the introduction of a "pass-porting regime"- i.e. the chance of seeing one's trade authorization recognized in the whole Union. 

The directive also introduces "good practices" on the sensitive issue of arrays and foreclosures, encouraging banks to consider their debtor's position carefully before undertaking irreparable actions and asks states to make sure that incorporation of the asset takes place at "best effort" price. 

In addition, national rules of contract law might have to be adapted to provide parties the possibility to stipulate that "returning" the collateral- the house- will suffice to extinguish the debt.