A milestone for Polish consumers claiming unfairness of Swiss francs mortgage loans - CJEU in Lubreczlik (C-396/24)

Yesterday, the CJEU issued a new judgment in the Swiss franc mortgage loans and their unfair contract terms saga, following a referral from a Polish court, in the case known as Lubreczlik (C-396/24). The referral was based on two cases, in which consumers concluded mortgage loans indexed to the Swiss franc rate. In both cases consumers claimed repayment of sums they had paid to the bank on the basis of their mortgage contracts being void due to unfair contract terms they contained. The bank counterclaimed seeking that consumers paid the full loan amount back to the bank. 

Previously, the Polish Supreme Court issued a judgment with a so-called 'two claims' theory (see declaration III CZP 11/20 from 16 February 2021 - in Polish here). This theory acknowledged that after a loan agreement is declared invalid, both parties (consumer and lender) have a right, "distinct and independent of each other, to repayment of monetary payments made in performance of that agreement. Each of the parties could therefore claim full repayment of the sums paid, whether or not it is still a debtor of the other party and regardless of the amount of its own debt" (para 26).

Imagine now situations (very common in practice), in which consumers have already paid the whole amount of their loan to the bank, or even paid to the bank sums exceeding the total loan value, on the basis of high interest rates. While waiting for their claims of unfairness to be adjudicated by Polish courts or the judgments to become final and the bank to return their money to them, they receive a lawsuit from the bank for the repayment of the full amount of the loan. Often, such a (de facto, repeated) repayment would either be financially impossible or significantly detrimental to consumers (even if made in the expectation of the eventual repayment by the bank of the same or higher sum of money) (para 27). Further procedural rules make it also feasible that any repayment by a consumer of the money to the bank will be immediately enforceable, while the bank's obligation to repay the consumer may take a long time to reach that stage (para 32). Consumers could theoretically argue for a set-off of reciprocal claims, but Polish procedural rules make such a declaration complex and not necessarily favouring consumer interests (para 28).

Repayment of the loan amount by a consumer

The CJEU leaves no doubt that Polish (case) law may not allow banks to claim repayment of the full loan amount, regardless of the value of repayments already made by consumers in performance of the loan agreement and "irrespective of the amount remaining due" (para 44). The CJEU recalls the need for the Member States to ensure that the national protection against unfair contract terms is a deterrent for sellers and suppliers against embedding such terms in their contracts (para 38). Further, national law needs to protect consumers against the detriment of having their contract's annulled as a result of them containing unfair contract terms (para 39). These obligations may result in Polish courts being required to "change established case-law", if following such national case law would lead to undermining EU consumer protection's objectives (para 43).

Polish courts should then disregard the Polish Supreme Court's theory of "two claims" in assessing the banks' claims for repayment of the full amount of loan by consumers, if consumers already had paid back at least part of the mortgage loan to the bank. This should mean in practice that banks claims filed against consumers should be scaled down in consideration of the actual repayments that consumers have already made. Strategic litigation by banks against consumers for the repayment of full loan amounts becomes much more risky as a result of this judgment.

Immediate enforceability of consumer repayments

The CJEU also addressed the matter of Polish courts being required to award of their own motion immediate enforceability to repayment claims made by banks against consumers, if consumers accepted such claims (and they may have good reasons to accept them - see para 51 of the judgment for more information). The Court considers also this practice contrary to EU consumer protection objectives, as long as Polish courts are not allowed to consider in their decision-making detriment to the consumer that such an immediate enforceability order would have (para 58). 

This part of the CJEU's judgment protects consumers against the immediate need to repay the money to the bank, which could have dissuaded them from progressing with their unfairness claims.

Overall, this judgment raises financial risks for these banks that were not keen so far to settle consumer cases and which have used various intimidation tactics to dissuade consumers from pursuing their claims. It may also lead to banks proposing more beneficial settlements to consumers and encourage consumers to negotiate settlement terms.

Third party litigation funding and consumer redress

The EU Commission has recenetly published a comprehensive Study on Mapping Third Party Litigation Funding in the European Union incliuding all EU member states. Although the study covers all aspects of third party litigation funding, it is a potentially powerful tool for enforcing consumer rights, especially complex and costly collective redress actions, and can therefore be of interest to practicioners and academics alike interested in better enforcement of consumer rights. See also BEUC's view on third party litigation funding for collective redress.

New action by BEUC: Tamig Temu

We all like a good deal! However, those of us who know (a bit more) about consumer rights and consumer law are aware that cheap goods and services often come at a high price, by infringing our consumer rights.

TEMU, the online marketplace that has gained popularity in the EU, has recently came under the spotlight. This month, BEUC, The European Consumer Organisation, has taken a significant step by initiating an enforcement campaign against TEMU, named 'Taming Temu'. The campaign is a response to TEMU's violation of its consumer protection obligations under the Digital Services Act. The identified breaches include:

•   failing to provide sufficient traceability of the traders that sell on its platform and thereby to ensure that the products sold to EU consumers conform to EU law.
•   using manipulative practices such as dark patterns to get consumers, for example, to spend more than they might originally want to, or to complicate the process of closing down their account.
•   failing to provide transparency about how it recommends products to consumers.

BEUC filed a complaint with the European Commission, while 17 of BEUC’s members filed the same complaint with their competent national authorities. For a more efficient and effective enforcement action, BEUC asks the Digital Services Coordinators of each country (national authorities responsible for enforcing the EU’s Digital Services Act) to transfer the complaints to the Irish authority, TEMU’s country of registration. It would then be up to the Irish authority to take swift action to prevent further consumer harm.

Given the fast growth in the number of TEMU users, it is possible that the platform would pass the threshold of 45 million users per month, which would then classify it as a ‘very large online platform’ and grant the Commission competence to enforce the Digital Services Act.

Given that consumer law enforcement, especially against large platforms, was less effective in the past (see for instance our reports here and here), a concerted EU action is a welcome solution.

Suspending payments of monthly loan instalments for consumers awaiting finding of unfairness - CJEU in Getin Noble Bank (C-287/22)

Photo by Towfiqu barbhuiya on Unsplash

On June 15th, aside the Bank M judgment (see our previous comment here), the CJEU addressed Polish law implementing the Unfair Contract Terms Directive also in the case Getin Noble Bank (C-287/22). Also in this judgment the CJEU chose for a consumer-friendly interpretation of the UCTD, precluding national courts from dismissing a consumer's application for the grant of interim measures (namely, a suspension of the payment of the monthly instalments due under a loan agreement) when a decision on the invalidity of the loan agreement, due to unfairness of its terms, is pending. Such interim measures should be granted by national courts, if this is necessary to ensure 'the full effectiveness' of the invalidity decision. 

Polish consumers in the given case claimed unfairness of terms in a loan agreement converting the loan amount into Swiss francs at the purchase rate fixed by the bank, with monthly instalments repayable in Polish zlotys at the Swiss francs sale rate, also unilaterally fixed by the bank. What interests us, and the courts, however, is that in their claim they asked for the following interim measures being granted: 1) suspension of the obligation to pay monthly instalments until the final judicial decision; 2) prohibiting the bank to issue consumers with a notice of termination; 3) prohibiting the bank to publish any information that the applicants are in default on their loan payments during this time. The first sought measure could help with the improvement of the financial situation of consumers, who are likely to await the first court's decision for min of 2-3 years (para 53). The second measure would prevent the bank from taking punitive measure as a result of consumers' pursuing their claims. The third measure would not allow the bank to tarnish consumers' credit score.

Polish law allows to grant interim measures only when there is a 'legitimate interest' of the applicants in them, which amounts to showing that "the failure to grant interim measures would prevent or seriously impede the enforcement of the forthcoming judgment in the main proceedings or the achievement of the purpose of the proceedings in that case" (para 19). Polish courts have so far not been willing to recognise the existence of such an interest in Swiss francs loan cases, due to either of the following: 1) invalidity of a contract as a result of unfairness not leading to enforcement; 2) the need for interim measures to help avoid consumer harm, which could e.g. occur if the bank was in a poor financial situation; 3) consumers possibly being required to repay the loan capital when unfairness and invalidity is declared, which means that their continued payment of monthly instalments would be beneficial to them, limiting the final repayment amount (para 20).

The CJEU first refers to the past judgment in Aziz case (see our comment on it here), recalling that it already precluded national law from not allowing to grant interim measures to consumers awaiting a declaration of unfairness (and its consequences), when interim measures were necessary to ensure that the final national judgment is effective in protecting consumers (para 41). In Aziz case the interim measures were related to staying enforcement proceedings when consumers defaulted on paying their mortgages, which in Spain led to accelerated proceedings of mortgage enforcement.

Further, it reminds that in the case Fernández Oliva and Others (joined cases C-568/14-570/14 - see here) it considered granting of interim measures as necessary to protect consumers from the risk of paying higher than necessary monthly instalments during lengthy judicial proceedings (para 42).

As, pursuant to Polish law, consumers may only claim repayment of monthly instalments already paid at the moment of bringing an unfairness claim to court, this means that without the interim measures, they would need to bring a second claim to courts after succeeding in the first one (para 22). They would also be obliged to pay legal costs for the second time (para 50). The CJEU highlights that such an application of Polish law would make at least partially the forthcoming final decision ineffective, as it would "not have the effect of restoring the legal and factual situation of that consumer in the absence of that unfair term" (para 48).

Importantly, it is up to national courts to consider how likely the finding of unfairness is in a given case. If there is sufficient evidence of unfair terms, the removal of which could lead to invalidating the contract, plus there is evidence that consumers are likely to overpay banks without courts granting interim measures - the latter should be awarded (para 59).

Enforcement of consumer law in digital age: the EnfTech Project

In order to provide much-needed help to the enforcement of consumer law, our readers may be interested in the recently launched EnfTech Project.

EnfTech is a broad term for the use of technological innovations by enforcement agencies to help deliver enforcement activities. This could include market surveillance, such as scanning for misleading pricing or fake advertising; an investigative activity that uses machine learning to interrogate company documentation; preventative measures such as reviewing consumer contracts for unfair clauses before they reach the market. In the future, it may have the potential to directly execute or enable an enforcement action such as a warning, takedown, or sanction.

EnfTech was launched on the 20th of April via an online event. The recordings of the event, the associated blog, and contact details are available here.

EU Justice Scoreboard 2021

Today, 8^th of July, the EU Commission released the 2021 EU Justice Scoreboard (here). The Scoreboard is a comparative information tool, and it presents an annual overview of indicators measuring the efficiency, quality, and independence of justice systems in the EU.

According to the Scoreboard, ‘[a]n efficient justice system manages its caseload and backlog of cases, and delivers its decisions without undue delay’. The report presents data on the efficiency of consumer law litigation. In particular, the report shows data on the average length of judicial review cases against decisions of consumer protection authorities applying EU law (regarding the enforcement of the Unfair Terms Directive, the Consumer Sales Directive, the Unfair Commercial Practices Directive, and the Consumer Rights Directive). The data allows for a comparison between 2013, 2016, 2018, and 2019. The most recent data (2019) shows that the Member States where consumer litigation takes the longest are Cyprus (around 1800 days, approximately 5 years), Greece (around 1700 days, approximately 4,5 years); and Poland (around 900 days, approximately 2,5 years). On the other hand, the Member States where consumer litigation is the fastest are Hungary (around 100 days, or 3,3 months), Lithuania (around 150 days, or 5 months), and Romania (around 160 days, or 5,3 months). Even though these results are not representative of all EU Member States (for example, Germany, Luxembourg, and Austria were not included in the study because consumer authorities do not have the power to decide on consumer law infringements), one of the conclusions to take is the stark difference in the length of enforcement of consumer rights within the EU. Nevertheless, several represented Member States achieved faster procedures than when compared to 2016 (with the exceptions of, for example, Slovenia and Poland).

Additionally, the report presents data on the length of proceedings by consumer authorities, including decisions declaring infringements of substantive rules, interim measures, and cease and desist orders (regarding the same Directives). The data presented also covers 2013, 2016, 2018, and 2019. In 2019, among the Member States where consumer authorities take the longest to decide, there is Poland (around 600 days, or approximately 1,6 years), Greece (around 350 days, or 1 year), and Slovakia (around 200 days, or approximately 6,6 months). It is interesting to note the parallel with the length of court procedures presented above. On the other hand, among the Member States where consumer authorities are fastest to decide, there is Romania (around 20 days), Estonia (around 20 days), and Slovenia (around 20 days).

It is also noteworthy that, when measuring the quality of justice systems, the Scoreboard shows data on legal aid in consumer claims of 6 000 euros. It is worrying that, in 2020, several Member States (including France, Slovakia, and Romania) may not consider people with an income below the poverty threshold as eligible for any type of legal aid (partial or total). The Scoreboard includes many more interesting insights, and it is definitely worth a read.

CMA's paper on algorithms & online platforms: comprehensive report on benefits and perils of AI regulation

The UK Competition and Market’s Authority recently published a report on the consequences of the online platforms’ use of algorithms (‘sequences of instructions to perform a computation or solve a problem’) for consumer protection and for competition (here). This report builds on the CMA’s 2018 paper on pricing algorithms (here). The report starts by highlighting that the increasing sophistication of algorithms usually means decreasing transparency. The CMA’s report acknowledges the benefits of algorithms to consumers, such as the possibility to save consumers’ time by offering them individualized recommendations. Additionally, algorithms benefit consumers by increasing efficiency, effectiveness, innovation and competition. However, the main goal of the report is to list (economic) harms caused to consumers as a result of algorithms.

The report highlights that big data, machine learning, and AI-based algorithms are at the core of major market players such as Google (e.g. their search algorithm) and Facebook (e.g. their news’ feed algorithm). The CMA also acknowledges that many of the harms discussed in this report are not new but were made more relevant by recent technological advances. Finally, the report acknowledges that the dangers brought by algorithmic regulation are even greater where it impacts consumers significantly (such as decisions about jobs, housing or credit).

The harms discussed in the report deal mainly with choice architecture and dark patterns (e.g. misleading scarcity messages on a given product or misleading rankings). Additionally, personalization is depicted as a particularly dangerous harm, since it cannot be easily identified and because it manipulates consumer choice without that being clear to consumers. Personalization is also worrying because it targets vulnerable consumers. In particular, the CMA is worried about possible discrimination as a result of personalization of offers, prices and other aspects.

Personalized pricing implies that firms charge different prices to different consumers according to what the firm (and their algorithms) think that the consumer is willing to pay. While this has some benefits – like lowering search costs for consumers, the CMA warns that consumers might lose trust in the market as a consequence of personalized pricing practices. While some personalized pricing techniques are well-known – such as offering coupons or charging lower prices to new customers, others are more opaque and harder to detect. Non-price related personalization is also described as potentially harmful, such as personalized search results rankings or personalized recommendation systems (e.g. what videos to show next). In particular, the CMA warns that these systems may lead to unhealthy overuse or addiction of certain services by consumers and to a fragmented understanding of reality and public discourse.

Additionally, the use of algorithms harms competition since it can exclude competitors (e.g. through platform preferencing, via ranking, of their own products). Through exclusionary practices, dominant firms can stop competitors from challenging their market position. A prominent example of this is that of Google displaying its own Google Shopping service in the general search results page more favorably than competitors that offer similar services. Finally, the CMA report zooms in on algorithmic collusion, or the use of algorithmic systems to sustain higher prices.

The report also highlights the obstacles brought by lack of transparency, particularly when it comes to platform oversight. The CMA warns that this lack of transparency and the misuse of algorithms may lead consumers to stop participating in digital markets (e.g. deleting social media apps). This justifies, in the CMA’s opinion, the regulators’ intervention. In particular, the CMA considers that regulators can provide guidance to businesses as to how to comply with the law or to elaborate standards for good practices. Overall, the report brings attention to the fact that many laws in place do not apply to algorithmic regulation, such as to discrimination in AI systems. Moreover, the CMA highlights that the application of consumer law to protect consumers against algorithmic discrimination is still an unexplored area.

The report ends with a call for further research on the harms caused by algorithmic regulation. The CMA suggests techniques to investigate these harms that do not depend on access to companies’ data and algorithms, such as enlisting consumers to act as ‘mystery shoppers’ or through crawling or scraping data from websites. The CMA also suggests specific investigation techniques when there is access to the code.

Overall, this is an extremely comprehensive report that not only explains the biggest consumer harms brought by AI regulation but also contains several practical examples, as well as concrete methodological suggestions for further research and for better enforcement. Definitely a recommended read for both academics and practionners alike.

Dutch Authority for Consumers and Markets to take action against fake online reviews

At the end of last month, the Dutch Authority for Consumers and Markets (ACM) announced that it would be taking action against fake reviews, fake likes, and fake followers active on the Internet (here). The ACM identified these practices on platforms such as Facebook, Instagram, YouTube, and Google. This puts social media and influencer marketing – and associated practices perceived as harmful for consumers - in the spotlight. According to the ACM, these practices are harmful for consumers since they undermine the consumers’ confidence in the market, and they provide consumers with unreliable information. This is an important step in the regulation and enforcement of legal rules regarding online review mechanisms. It is not the first time that the ACM devotes attention to this problem. In 2017, the ACM published a study regarding online reviews mechanisms and suggested that their transparency should be increased to fight reliability concerns. The decision to take action against fake reviews and other misleading practices follows up on the guidelines on the protection of the online consumer developed by the ACM earlier this year (here). In these guidelines, the ACM explained that, among other aspects, a business cannot post fake reviews or instruct others to do so nor can it highlight only positive reviews or delete negative reviews. The ACM stated that it will reprimand businesses, influencers or other market participants that offer ‘misleading endorsements’ and, in case of refusal to stop their illegal activity, the ACM admits the possible imposition of fines.

Although online review-related commercial practices are covered by existing EU legislation (such as the E-Commerce Directive and the Unfair Commercial Practices Directive), the enforcement of such rules in this context is not frequent, although growing in the last couple of years. However, fake online reviews (or misleading online reviews that, not being necessarily fake, are biased due to, for example, social pressure, leading to a problem of reputation inflation) are a problem that affects many consumers. For example, a 2014 study conducted at the request of the European Commission (here) estimated that around 82% of consumers consult online reviews before purchasing a good. The EU consumer law regulation of online review mechanisms has been recently strengthened by the Omnibus Directive that, for the first time, explicitly imposed duties on traders regarding online reviews (see our blogpost on the Directive here). It will be interesting to see how Member States will transpose these measures and what framework will be applicable to online reviews at national level (e.g. competition law, contract law, advertising law).   

Coronavirus and unfairness: scams and unfair practices

Dear readers,

The news is full of warnings of scams and other unfair practices that consumers are exposed to these days. Using the words of The Guardian, what is for some the 'greatest heath and economic emergency for a century', for others, is a chance to 'scam a fortune from a captive market under effective house arrest.'

The spread of COVID-19 and subsequent government interventions has led to unprecedented situations, completely rearranging our lives, from working from home to social distancing. Fear for the health of our loved ones and our own and social solidarity with those in need of e.g. food is all part of our daily lives now. This is a new situation for everyone, and as such we are all vulnerable and easy prey for those that wish to take advantage of us, as consumers, to obtain financial gain.

This advantage taking can take harsh forms of fraud, that seem very common in these difficult times. BBC News ran a special feature on scams recently, giving the example of a young woman who was misled by a scammer posing as a rental agent into transferring part of her rent in advance to the scammers account, believing that she was helping other vulnerable tenants who could not afford to pay rent (see more examples here). A couple of days ago Finextra reported on a new pop up malware activated by a cyber-attacker to open a webpage titled 'Coronavirus Finder'  which clams there are people nearby infected with the virus. In order to find the infected individuals the victim is asked to pay only 0.75 euros on a payment page set up by the hacker. The attempted payment of this money would then transfer the bank details of the consumer to the fraudster. Fraudsters even pose as the EU Commission sending fake debt collect letters for unpaid taxes. There are also teams of people showing up at consumers' homes dressed in protective gear, to supposedly check whether the consumer's environment is not contaminated with the virus. When some of them are talking to consumers, others are robbing the house. New COVID-19 themed scams appear virtually every day, and they cost, for instance, UK customers 800 000 pound sterling in the past month.

Apart from clear cases of fraud, there are other, perhaps less financially harmful but still unfair practices. While many traders have shown their goodwill by providing free (digital) services and digital content, such as fitness training and free entertainment for kids, and free delivery of goods, there are also those that have taken unfair advantage of the current situation, by raising the price of goods in high demand such as toilet paper and by selling fake goods such as face masks and sanitizers that allegedly cure the illness.

The current situation placed the key actors in consumer protection enforcement on high alert across Europe. Authorities are already taking steps to prevent the illegal content to reach consumers, for instance, the Italian Consumer Protection Authority blocked the website of a trader who claimed that he sells the only drug that cures the illness.  On March 20 the national consumer protection authorities within the CPC network issued their Common Position on COVID-19, and subsequently the EU Commissioner for Justice and Consumers wrote to online platforms and marketplaces to combat these practices.

The new situation will be yet another grand challenge for EU consumer law. It is our job as academics and policy makers to question whether the current legal framework and enforcement tools are fit for purpose. In particular, enforcement of consumer rights at the EU level and the functionality of the CPC network and the role of the EU Commission might be questioned once again (see for instance our reports here  and here). It is also less clear what will the EU Commission and national authorities do about stopping specific scams such as the illegal transfer of money and the theft of personal data. These may even be outside the competence of national consumer protection authorities and will require further cooperation and coordination with the relevant authorities. Finally, we should consider whether the concept of consumer vulnerability needs to be further worked on in the new circumstances, and generally whether these new circumstances require new or redefined measures of protection.

If you are interested in these issues, please listen to the recording of the public webinar of our colleague Dr Christine Riefa (with contributions of Professor Christian Twigg-Flesner) on Consumer Rights, Scams and Coronavirus (accessible here). You can also share your views and information on COVID-19 related scams or unfair practices in comments.

And finally, please stay safe and stay alert at all times 🌈

When CJEU case law travels from Spain to Slovenia: C-407/18 Addiko Bank

What happens when a Slovenian court asks the EU Court of Justice a question to which the answer should already clearly follow from previous case law on Directive 93/13? Then the Advocate General might not give an Opinion, but in Case C-407/18 Kuhar v Addiko Bank the Court provides a concise overview of its case law pertaining to, in particular, Spain and Poland, and explains what this means for Slovenia. Thus, the Court seems to understand what the referring court was looking for: back-up for its interpretation of Slovenian procedural law.

To readers of this blog, the case will look familiar: it reminds us of e.g. Banesto, Aziz, Profi Credit Polska and PKO Bank Polski. The CJEU also refers to Banco Popular Español, ERSTE Bank Hungary and Finanmadrid. What these cases have in common with Addiko Bank, is that they all concern the (limited) role of the court in expedited debt-collection procedures, i.e. mortgage enforcement or order-for-payment proceedings. The court only performs a formalities check and cannot assess the merits of the claim. It is the debtor who must initiate a contentious debate by challenging the claim or opposing the enforcement, and it is the (consumer-)debtor who must apply for a declaration of nullity of allegedly unfair contract terms and/or the loan agreement. The court cannot review unfair terms ex officio, and the enforcement is not automatically suspended. As the CJEU recalls, there is a real risk that consumers are unaware of their rights, especially if they do not receive legal aid and lack the financial means for legal representation. In Slovenia, an additional problem is that (consumer-)debtors must provide security for the payment of the debt when they apply for suspension of the enforcement. For a summary of the restrictive procedural conditions at issue, see para 50 of the judgment.

In paras 53-63, the CJEU elaborates why the constellation of procedural rules runs counter to the effectiveness of the Unfair Contract Terms Directive. The link with the Directive is that the mortgage loan agreement at hand appeared to contain an unfair foreign currency clause. In the enforcement proceedings, however, the emphasis was on the debtors' duty to meet their payment obligations rather than the question whether the enforcement was based on unfair terms. Whilst notaries can have a "preventive" role in respect of unfair terms in mortgage loan agreements and notarial deeds, the right of consumers to effective judicial protection must be observed by giving them the opportunity to exercise their rights under reasonable procedural conditions, in particular in respect to time-limits and costs. The mere existence of a means of recourse is not sufficient, as the Slovenian rules at issue show. If there is no ex officio control of unfair terms in the enforcement proceedings, and unfair terms control only takes place at a later stage, consumers will only be protected ex post. Financial compensation will not prevent the loss of their family home.

The Court does not only provide a synthesis of its case law on effective judicial protection in the context of the UCTD; it also discusses Slovenian procedural law in detail. Apparently, the Spanish and Polish cases (still) do not give enough guidance as to what level of procedural protection is required in light of the Directive. What happens in Spain, stays in Spain, and is not 'translated' to other jurisdictions - certainly not Slovenia, and as Padraic Kenna has pointed out, not in Ireland either. The CJEU has repeatedly urged national courts to apply their national laws in such a way as to ensure the full effect of the Directive (reiterated in paras 65-66 of the judgment), but Addiko Bank demonstrates this may not happen without CJEU back-up. The CJEU's case law must 'travel' from Spain and Poland to Slovenia first. Hopefully, the judgment will signal once again that effective judicial protection requires a genuine opportunity for consumers to exercise their rights, not a mere formality; and that the CJEU's case law on unfair terms control (ex officio) in mortgage enforcement proceedings transcends specific EU Member States.

How much redress is too much? The case of the UK payday loans market

Yesterday the collapse of another payday lender in the UK hit the headlines of BBC News. WageDay Advance, a middle-sized payday lender went into administration earlier this year due to a surge of claims for compensation for mis-sold loans. This follows the collapse of Wonga, the largest payday lender in the UK that went into administration last year for the same reason. So what exactly is going on?

Background

Payday loans are unsecured loans for a small amount of cash (usually between £100-1000)  for a short period of time. Traditionally they were repaid before the next payday (hence their name) although nowadays they may last up to 1 year. This type of financing is very popular in the UK, and has caused a lot of detriment to consumers in the past.

Advertisements targeted children and vulnerable adults, the loans were given to everyone without proper creditworthiness assessments, the application process was simple and easy, the basic price was extremely high (the annual percentage rate of charge of a Wonga loan could be as much as 5853%), and multiple extensions involving additional fees and charges were routine. Consumers who easily found themselves trapped in debt, were subject to unfair treatment and aggressive debt collection often being left without essential funds to live on. 

Needless to say payday loans gained considerable public attention, and hence when the Financial Conduct Authority (FCA) took over the regulation and supervision of consumer credit from the former Office of Fair Trading, the regulation of the payday loans market came top of its list of priorities. The Financial Services and Markets Act 2000 as amended in 2012 equipped the FCA with very significant powers, including to regulate the features of a financial products or to ban them completely (product regulation power) and a power to order consumer redress (so called regulatory redress power). Using these powers the FCA decided to keep payday loans on the market subjecting them to detailed rules and to robust enforcement. 

The initial forecast was that the new regime that made payday loans a much less attractive business than would drive out most of the firms. This has not happened (for more on the new regime for payday loans in the UK see my paper here), with a fair number of firms remaining in the market and operating under the new regime.

Reasons for failure 

While the new rules stopping firms from earning excessive profits did not drive these firms out from the market, their life was ended by the new approach to enforcement.  

Accepting the new regime meant complying with the stringent regulatory regime. It also meant  in the eyes of at least some lenders, that they needed to improve their public image and to establish a cooperative relationship with the FCA. In this effort, Wonga voluntarily agreed to compensate consumers for wrongdoings in lending irresponsibly before before the new regime. Within the redress scheme Wonga agreed to contact affected consumers and explain whether they were entitled to compensation under the redress programme, and also to write off the outstanding debt for 330,000 customers and to enable 45,000 consumers to repay their debt free of interest and charges. Wonga also agreed to compensate customers for unfair and misleading debt-collection practices, for sending debt collection letters from non-existent law firms threatening legal action. This action affected some 45,000 consumers and cost Wonga around £2.6m. In 2015 Dollar Financial UK (known as The Money Shop) followed Wonga's steps and agreed with the FCA to compensate 147,000 consumers for irresponsible lending practices costing  the company £15.4 million. In 2016 CFO Lending become subject to a redress scheme, agreeing to compensate 97,000 consumers for various unfair commercial practices costing the firm £34m. And so the list continues....

CFO Lending could not bear the costs, and collapsed into administration in 2017. Wonga followed suit in 2018. These companies collapsed because they could not bear the costs of the redress scheme.

In addition to the redress schemes, another trend affected the well-being of these companies. Following the FCA's approach to enforcement as 'credible deterrence' providing for exemplary and spectacular punishments with maximum publicity, the media and money advise charities took up the problem (see an example here) advising consumers how to claim compensation for unfair, primarily, irresponsible lending practices. In addition, consumers protecting their own interests, claims management companies took interest in reclaiming mis-sold payday loans, to an extent, that claiming this type of compensation became one of the most common complaints directed to the Financial Ombudsman Service.

While it is unclear what exactly happened with Curo Transatlantic Limited trading as WageDay Advance it seems that payday firms that stayed on the UK market are now paying the price for their past behavior, either within a redress scheme agreed with the FCA and/or by a surge of claims from claims management companies and consumers.

The consequence of failure on consumers 

How does the failure of a company affects its customers? First of all, consumers who have loans need to continue with the repayments. However, consumers who were due compensation might have suffered harm. For instance, CFO Lending's capital was not enough to pay compensation to all consumers, and WageDay Advance's consumers are still unsure how much compensation they are going to get as it depends on the amount of revenues earned from loans being repaid. The prospect of these consumers is not very good. They will become unsecured creditors at the bottom of the scale, and are likely not to be repaid.


Concluding thoughts

The case-study of the UK payday loans firms show the importance and the power of effective enforcement tools, but at the same time, it also shows the  danger of having too robust enforcement that may ultimately harm consumers. It raises two important questions. First, should we care about the well-being of companies, and should the redress schemed be tailored to what is sustainable for the firm in question? 'Sustainable redress' would ultimately also serve the interests of consumers by boosting competition on the market, and arguably providing better services and products. Secondly, should the FCA and other regulators having similar schemes rethink their approach to enforcement and design the redress schemes to protect the collective interests of all affected consumers? Bearing in mind the collective interest of consumers would lead to a reduction of individual sums of compensation, but every affected customer would get their fair share. And finally, one might also think about combining the two approaches. Reducing the amounts of compensation to individual consumers to an extent to compensate every consumer and to provide for sustainable redress. What do you think?

Conference on the New Deal for Consumers

On Thursday 11 and Friday 12 April 2019 the conference 'A New Deal for Civil Justice? The New Deal for Consumers and the Justiciability of EU Consumer Rights' will take place in Amsterdam. Attendance is free of charge; you can register by sending an e-mail to: l.d.kaspar@uva.nl

The final programme is now available:

A New Deal for Civil Justice? The New Deal for Consumers and the Justiciability of EU Consumer Rights

The Centre for the Study of European Contract Law (CSECL) holds its annual conference on Thursday 11 and Friday 12 April 2019 at the University of Amsterdam.

The 2019 CSECL conference revolves around the New Deal for Consumers that was proposed by the European Commission on 11 April 2018. It focuses on issues of civil justice that the New Deal aims to address – and, crucially, the question it appears to raise. A particular focus will be on the interaction and tension between different functions of enforcement mechanisms in consumer law, as well as the public and private interests involved at different levels. What or whom is the New Deal for?

For the provisional programme, click here. 

The conference will bring together researchers and practitioners interested in (the future of) European private law, civil procedure, consumer law and, possibly, others with a more general interest in the enforcement of EU law and EU constitutional law.

Keynote speakers:

• Prof. Colin Scott, University College Dublin
• Dr. Eva Storskrubb, Uppsala University

Italy fines Facebook for data related unfair commercial practices

Yesterday the Italian Competition Commission fined Facebook 10 million EUR for breaching the relevant provisions of the Italian Consumer Code implementing the Unfair Commercial Practices Directive. The Competition Commission found that not-disclosing that consumers' data is provided for commercial purposes amounted to a misleading practice and that the pre-selected consent on data sharing comprised aggressive practices. Interestingly, in addition to the large fine, Facebook was also ordered to issue an apology to its users on its website and on its app (see for more here).

This is an important step in the aftermath of the Cambridge Analytica scandal (see for more here, and our report here), and it will be hopefully followed in other Member States where due to the global nature of social media, it is very likely that similar breaches occurred. This then leads us back to an 'old' problem of national enforcement of EU wide infringements of consumer law, and the question of whether there is a need to overhaul and improve the existing enforcement regime of EU consumer law by empowering the EU Commission to take enforcement actions against EU-wide infringements (which we discussed here). What do you think?

Conference and call for papers on New Deal for Consumers

On 11-12 April 2019, the conference A New Deal for Civil Justice? The New Deal for Consumers and the Justiciability of EU Consumer Rights will take place in Amsterdam. It is organised by the Centre for the Study of European Contract Law (CSECL) and revolves around the New Deal for Consumers that was proposed by the European Commission on 11 April 2018. The conference focuses on issues of civil justice that the New Deal aims to address – as well as, crucially, the questions it appears to raise. It will bring together researchers interested in (the future of) European private law, civil procedure, consumer law and, possibly, others with an interest in the enforcement of EU law and EU constitutional law.

For more information and the call for papers, click here. 

CSECL particularly welcomes papers that expressly address the interaction and tension between different functions of (consumer law) adjudication and enforcement mechanisms, as well as the converging or diverging (public and private) interests involved at the different relevant levels. Who or what is the New Deal for?

Representative actions in the Visegrád 4 countries – real improvement? by Rita Simon

This is a guest post by dr Rita Simon from the Institute of State and Law at the Czech Academy of Sciences that has been based on a report prepared by her for BEUC

Representative actions in the Visegrád 4 countries – real improvement?

Mass harms cause a mass of problems. In mass harm situations, collective claims constitute a better means of access to justice than individual ones, especially regarding bagatelle harms. Although certain collective redress mechanisms exist all over Europe, their effectiveness is questionable. Studies such as “Evaluation of the effectiveness and efficiency of collective redress mechanisms in the European Union” and the “Fitness check of consumer law” showed that the existing redresses are rarely used or they do not produce the desired results, in almost all Member States. We can also observe the ineffectiveness of injunction actions in the V4 countries. The New Deal for Consumers, which has been published in April this year, aims to strengthen the enforcement of consumer rights, which is the Alfa and Omega of consumer protection. The proposed way of improving enforcement by the European Commission follows the German, Austrian and French practice: the launch of representative actions by consumer organisations will be supported more strongly by the Commission. However, the question of whether such actions could be the best solution for enforcing consumer rights and access to justice in the V4 countries should be posed.

Injunctive reliefs

Depending on who has the right to file for an injunction and how effective the action is in practice, some key differences should be observed. In the Czech Republic, only consumer protection organisations can file for injunctive relief; in the other three countries some control authorities, such as the financial surveillance authority or office of consumer protection or consumer ombudsman can also initiate injunction actions. How often these authorities file an action often depends on the consumer policy of the government in power. An interesting fact is that in Hungary – similarly to in Spain - the state advocate also has the right to file an injunctive action if the public interest is affected. Such actio popularis actions have been very effective in eliminating unfair clauses, e.g. in financial service contracts. The yearly total of filed injunctive actions is very low in the Visegrád 4 countries, at not more than 1-2 actions per country. However, it should be pointed out that in Hungary and Poland compensatory collective redress is available in combination with an injunctive action, which significantly increases the impact of such a redress. In contrast with this, in the Czech Republic, the consumer organisation often withdraws the filed action, because of the length of the procedure or due to competency problems between the courts and other supervisory bodies. In Poland, the President of the Competition and Consumer Protection Office (UOKiK) does not have an obligation to initiate an injunction procedure automatically at the request of a consumer organisation or the ombudsman; it is at his discretion. A further criticism is that an injunction decision against a foreign trader is not enforceable, and it is reported in all the Visegrád countries that consumer organisations generally lack sufficient financial and human resources. The impossibility of consumer organisations to demand monetary compensation is problematic in the Czech Republic and Slovakia.

Other existing mechanisms – class action, and actio popularis

Class action mechanisms as a form of group action have been in force since 2010 in Poland, and in Hungary since January 2018. Group actions popped up in Poland like mushrooms and were filed in very different areas, such as construction disasters, mass poisoning and unfair clauses in credit or travel contracts, but also against motorway operators and against a regional authority. The number of suits initiated is over 100, but many claims were rejected due to the limited scope of application of the class action. Class actions can be initiated exclusively regarding tortious conduct and product liability, but claims for personal injury and infringement of human rights (health, body integrity, good reputation image, etc.) are excluded from the scope. In contrast, the Hungarian scope of application does not exclude personal injury, but limits the fields of law in which class action can be used. Therefore, a group action can be filed in Hungary in labour and consumer disputes and over some health claims resulting from environmental damage. Group actions in both countries follow in some respects the US class-action model but, regarding joining the group, just an opt-in possibility is given, and the Polish model in particular contains numerous safeguards to avoid malicious, ruinous claims.

As other interesting collective redress, Hungary improved its “actio popularis” rules in 2012 and differentiated between so-called public interest actions and public interest enforcements, which can be commenced if the infringement has harmed a large, identifiable group of consumers, or has caused a significant disadvantage. The public interest action can end in two ways, first with a declaratory judgment establishing the infringement or second with a cease and desist order on its own or with a case order accompanied by a restitution order. In the first model, which ends with the declaratory judgement, consumers have to file a simplified follow-on damages claim. In this claim, they need to prove the causal link between the infringement and the extent of the damage suffered. A public interest enforcement presumes a prior administrative process that has established the infringement. Despite high expectations, this type of claim has so far not achieved its purpose. Collective actions have been filed much less often after the amendments than before 2013. This can be explained by the continuing decline in consumer financing and the abolition of the Department of Collective Action at the Consumer Protection Agency. In addition, the reluctance of consumers to file follow-on complaints regarding the damage suffered needs to be emphasised, as does the lack of information on the existence of actio popularis decisions.

Unlike in Hungary and Poland, the two other Visegrád countries have not introduced new group action mechanisms yet; the Czech legislator is working on a class-action proposal, but the new government has not given priority to this entering into law. Business associations, especially the banking association, have been trying to have the legislation shelved until the new Directive on representative actions has been announced. 

Are representative actions suitable collective redress models for the V4 countries?

The proposal for the Directive allows "qualified entities", such as consumer organisations (but also ad hoc entities), to launch actions on behalf of all consumers. These entities will have to satisfy minimum reputational criteria (they must be properly established, not for profit and have a legitimate interest in ensuring compliance with the relevant EU law). Compensatory collective redress actions will also be available. A very important feature of these actions is that, in order to protect the interests of consumers, the above-mentioned entities will be entitled to seek redress by repairs, exchanges, reductions and termination of the contract or repayment of the purchase price. A very interesting innovation is that if a prior administrative or court decision has assessed an infringement, it should be taken as irrefutable evidence in any subsequent redress action not just in the same but also in other Member States. This emphasis on the acceptance of court and administrative decisions should avoid legal uncertainty and unnecessary costs for all parties, including the judiciary. Such a new development could certainly bring positive changes; the only question to pose is whether the legitimacy of bringing representative actions should be reserved for consumer associations alone.

In the Visegrád 4 countries, there is considerable concern that - due to the lack of funding of consumer organisations and the impossibility of receiving funding from third parties - these entities will not be able to perform properly. The situation, which has been observed in current injunction practices, will not improve in the future. It should therefore be recommended that other state organisations (e.g. consumer authorities, the ombudsman, financial supervisory authorities and trading standards agencies) should also receive the right to launch these collective actions. The state organisation has better access to evidence and it has a bigger legal department than consumer organisations. To support the participation of consumers in civil law proceedings, it seems useful to introduce parallel “clean” opt-in class action models in all the Visegrád states. It is also recommended to define the form and content of simplified individual follow-on-damage claims, similar to the Hungarian model after public interest/enforcement actions. These changes should be proposed with sufficient precision at the European level, because otherwise is can be assumed that the national legislatures of some countries (including the Visegrád states) would not make their collective redress mechanisms significantly more effective, due to the resistance of business and banking associations. Without simple, clear and feasible collective redress, the enforceability of consumer rights will not improve in Slovakia and the Czech Republic at all and just a new rule on paper will be announced.  

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.