Foreign currency exchange transactions connected to foreign currency denominated loans are not investments

Judgment of the CJEU in C-312/14 Banif Plus Bank Zrt. v Márton Lantos and Mártonné Lantos delivered on 3 December 2015 

The Hungarian District Court of Ráckeve (Ráckevei Járásbíróság) in  referred an interesting question to the CJEU: can the foreign currency exchange transaction be legally separated from the underlying foreign currency denominated loan, and if so, what are the implications for the consumer?

As we have reported earlier, AG Jääskinen first of all considered that the reference for preliminary ruling is inadmissible. However, should the CJEU decide to proceed on the merits of the case, AG Jääskinen was of the opinion that the CJEU should answer the question negatively. The AG disagreed with the referring national court that the foreign currency exchange can be legally separated from the underlying loan contract and be considered a separate, derivative contract, a forward currency transaction. 

The CJEU did consider the request for preliminary ruling admissible (see paras. 35-42), and following AG Jääskinen's opinion, ruled that foreign currency exchange transactions connected to foreign currency denominated loans are not 'investment services or activities' within the meaning of Art. 4(1)(2) of MiFID (para. 76). Consequently, consumers of foreign currency loans are not considered to be investors and do not enjoy the protection guaranteed by Art. 19 MiFID (para. 75).

First, the CJEU rejected that the transaction in question is an investment service or activity listed in section A Annex I of MiFID, because it is incidental to the granting and repayment of the loan (para. 55), and serves no other purpose than to perform the credit contract.

Second, the CJEU rejected the argument that the transaction falls within the scope of 'dealing on own account' under Section A(3) of Annex I MIFID, because this means trading proprietary capital that results in contracts for one or more financial instruments (paras. 58-59). In the present case however the transaction did not result in concluding a contract for a financial instrument. Instead, it served to secure the granting and the repayment of the loan (para. 60-61). 

Third, according to the CJEU, the transaction cannot be considered to fall under Section B of Annex I MIFID, under which a grant of  loan or credit may constitute an ancillary service, because this includes only loans granted for the purpose of concluding one or more contracts for financial instruments, and this was not the case here (para. 63-68).

Finally, the CJEU rejected the argument that the foreign currency exchange transaction falls under any financial instrument listed in Section C of Annex I MIFID, particularly futures. Futures, such as forward currency transactions, are a type of derivative where two parties undertake to buy or to sell, on a subsequent date, an underlying asset at a price fixed at the time of contract conclusion (para. 69). The transaction in question however does not serves the purpose of a sale of a financial asset at a price which is fixed at the time of contract conclusion. In fact, according to the CJEU, there is no distinction between the loan agreement and the future currency sales transaction, since the latter serves the performance of the loan contract, that is, the payment of the capital and the scheduled repayments (paras. 70-71). In addition, the value of the currency (that is to be taken into account for the calculation of repayments) is not fixed in advance.It is rather determined on the basis of the sales price of the currency on the date of each monthly installment (para. 74).

Consequently, 'clauses of such a loan agreement relating to currency conversion accordingly do not constitute a financial instrument distinct from the operation which is the object of the agreement, but merely a term of the agreement which is an inseparable part of the performance.' (para. 72). This also means that in foreign currency denominated credit contracts consumers may be protected by Directive 1993/13 on unfair contract terms and by on Directive 2008/48 on consumer credit (paras. 48-49), but not by MiFID.

As we can see, the CJEU did conduct a more thorough analysis than AG Jääskinen (perhaps it also had more information to rely on), but it arrived to the same conclusion. The CJEU thoroughly analyzed whether the foreign currency transaction meets the requirements of MiFID and did some unpacking whether elements for a forward currency contract are met. It is now clear that foreign currency exchange transactions are not separate contracts for financial instruments, and consumers do not enjoy the protection MiFID guarantees for investors. The question is whether this is detrimental for consumers given that they do enjoy protection under Directive 1993/13 (allows for challenge of fairness of foreign currency exchange clauses) and Directive 2008/48 (provides for information requirements). 

German Parliament passes Act on consumer ADR

The German Parliament has passed its respective Act – Verbraucherstreitbeilegungsgesetz (VSBG) – implementing the requirements of the ADR-Directive with a slight implementation delay on 3 December 2015. Please access the relevant documents here.

In the next step the Act still needs to be approved by the Federal Council (Bundesrat). It is expected to enter into force by April.

Importantly, Germany is stricter than the Directive when it comes to forbidding ADR bodies that are close to traders or trade associations (§ 1(2) VSBG). It is in line with the Directive when it comes to such requirements as low/now costs for consumers (§ 23 VSGB stipulates the few instances in which consumers may be charged a fee). Consumers do not have to contract a lawyer to represent them before an ADR body. Where no special board exists, there will be a general board to collect the remaining cases (§ 29 VSBG). With the view to financing emphasis is put on the trader side. It is acknowledged that the outcome of an ADR procedure may differ from that of a court judgment ( § 16(1) III. VSBG). 

German small claims procedures in the civil courts are generally said to be working rather well compared with other European countries. The two systems can, therefore, be regarded as competitors. It remains to be seen how successful consumer ADR enforcement will be in Germany. As of now there is only a scattered ADR landscape. With the implementation it will be overarching: For every consumer problem access to an ADR is now guaranteed.

Commission's proposal on the Digital Single Market out

Yesterday, the European Commission published two proposals aimed at harmonising the rules on two aspect of digital economies: sales of goods and provision of so-called digital content. There will be chances to discuss the proposals more in detail in the weeks and months to come (in particular: to what extent can they still be considered as a legacy of the discarded common sales law proposal?). Curious readers, however, will find them on the website of DG justice, accompanied by a number of context documents as well as country factsheets. Exciting times!

Changes allowed, within limits - CJEU judgment in case C-326/14 Verein für Konsumenteninformation v A1 Telekom

Yesterday, the Court of Justice of the EU handed down its judgment in the Austrian case of Verein für Konsumenteninformation v A1 Telekom Austria AG. The case concerns an action brought by the Austrian consumer association (VK) regarding standard terms used by A1 Telekom. VK submitted that these terms were not in line with EU consumer law, insofar as they stipulated that A1 Telekom's customers were not allowed to withdraw from their contracts in case charges were modified in accordance with an annual consumer price index made by the Austrian Institute for Statistics. 

As we reported earlier, Advocate General Cruz Villalón concluded that this type of price adjustment clause did not necessarily imply a modification of contractual conditions under the EU's Universal Service Directive, ‘in so far as the statement of the consideration payable by the subscriber as the ‘index-linked price’ is sufficiently foreseeable, transparent and legally certain to support the conclusion that there has been no change in the subscriber’s contractual position’. According to the Advocate General, the national court would have to assess whether these conditions were met.

The CJEU follows AG Cruz's Opinion and holds that:

'Article 20(2) of Directive 2002/22/EC of the European Parliament and of the Council of 7 March 2002 on universal service and users’ rights relating to electronic communications networks and services (Universal Service Directive), as amended by Directive 2009/136/EC of the European Parliament and of the Council of 25 November 2009, must be interpreted as meaning that a change in charges for the provision of electronic communications networks or services, resulting from the operation of a price adjustment clause contained in the standard terms and conditions applied by an undertaking providing such services, the term providing that such a change applies in accordance with changes in an objective consumer price index compiled by a public institution, does not constitute a ‘modification to the contractual conditions’ within the meaning of that provision, which grants the subscriber the right to withdraw from the contract without penalty.'

The Netherlands helping other Europeans out with its collective action tool

In the context of consumer claims being lined up against VW, the Dutch WCAM - Collective Settlement Act - is attracting the attention of consumer lawyers Europe-wide. With the help of this instrument a consumer representative can negotiate an out-of court settlement with a company regarding widespread damage. Afterwards this settlement can be declared binding by the court.

Group litigation is a scarce phenomenon in Europe. Therefore, not only Austria but also Germany are discussing to litigate with the help of the WCAM in the Netherlands. Such a stretch is legally possible. Already in a previous case the WCAM has served without many Dutch citizens actually being affected by the harmful behaviour: see for details the Converium litigation in Dutch and English.

It remains to be seen if these moves give sufficient incentives to other European governments to reform the national systems for collective redress.

AG Sharpston in Radlinger v Finway: EU law requires ex officio control of respect of information requirements

Today, an interesting opinion has been released enriching the CJEU literature on unfair terms and credit contracts. In this case, the referring court had asked several questions concerning Czech procedural rules on insolvency proceedings as well as some questions concerning the interpretation of Directive 93/13 and Directive 2008/48 on consumer credit agreements.

The "procedural" questions more strictly related to directive 93/13 are answered in a way that corresponds to previous decisions by the ECJ. We will skip discussing them. The questions concerning the assessment of penalty clauses are very techincal, so it seems better to wait for the CJEU to answer them (in other words, it is not clear whether the AG actually answered the questions asked by the referring court). 

An interesting novelty attached to this case, however, concerns information duties. According to the Advocate General, courts must be able to assess ex officio whether the information requirements set out by the Consumer credit directive have been fulfilled. 

The advocate general invokes the well-known reglections which have led to the imposition of ex officio with regard to "certain provisions of EU consumer protection legislation" (para 52), since (as stated in Faber)

"there is a real risk that the consumer, particularly because of a lack of awareness, will not rely on the legal rule that is intended to protect him". 

The finding that the supplier has failed to meet its information duties might have important consequences for the consumer, for instance it might entail the application of a different interest rate- that is, if the national legislation provides for adequate remedies. When these remedies are not provided, however, a similar obligation seems to burden courts without helping consumers much. What do you think? 

Execution proceedings enriched with an unfairness test: AG Szpunar in Finanmadrid (C-49/14)

11 November 2015: AG Szpunar's opinion in case Finanmadrid (C-49/14)

Yesterday, in another Spanish case on unfair contract terms, where a consumer defaulted on his credit payments (this time for a motor vehicle instead of a house), AG Szpunar issued an opinion following the so far set line of judgements. 

In this case the order for payment was issued by secretario judicial (court's secretary), who (at the time) was not obliged pursuant to Spanish law to ex officio test for unfairness of a penalty clause in a credit contract. Since the consumer did not raise the issue of unfairness, only when the order for payment became final, in the execution proceedings, the court raised a question whether they should not be able to test for unfairness of the contractual provision, on which the order for payment is based. Pursuant to Spanish law this was not possible.

AG Szpunar, unsurprisingly, concludes that if Spanish law did not oblige the court's secretary to assess unfairness of his own motion, then such an obligation should bind judges in the execution proceedings (par. 98). Still, he considers that conducting of the unfairness test in the execution proceedings is undesirable, e.g. because these proceedings usually do not include investigation of facts, there is a possibility that the previous decision already became final (par. 54-58). However, if this test has not been conducted at an earlier stage of the judicial process, this may be the only solution left to Spanish courts to comply with the principle of effectiveness in applying consumer protection against unfair contract terms (par. 60). The preferred solution would be, however, to oblige the secretario judicial  (as an employee of the justice system) to conduct ex officio control of unfair contract terms - which is what the recent Spanish law reform aimed at (par. 50-51).

One other interesting point: AG Szpunar refers to the relationship between art. 47 of the Charter and the principle of effectiveness. Currently, there is a lot uncertainty as this relationship and whether art. 47 of the Charter is supposed to complete the requirements following from the principle of effectiveness or whether maybe it will replace them and create a new test for effective judicial protection/remedy (par. 85). While AG Szpunar considers that art. 47 of the Charter requires effective remedies to be granted also through national procedural rules, he concludes that Spanish law in this case could not be seen as infringing art. 47 and that the level of protection granted in the UCTD reaches further than the level of protection of art. 47 (par. 89-90). This is an interesting point of view that the CJEU will most likely not delve into (since the question may be answered without any reference being made to the Charter), so it's good to take a note to AG Szpunar's arguments for anyone interested in the issue of a relationship between the Charter and EU private law.

Teaching Consumer Law 2016

The next Teaching Consumer Law conference takes place in Santa Fe, 20-21 May 2016 and is focused on "Teaching Consumer Law in Our Popular Culture and Social Media". Please see the save the date poster below.

VW scandal spurs development of collective claims in Germany

A number of group actions against VW have been instituted in many countries over the past weeks and months. In Germany, however, according to current law a consumer has to sue individually. Heiko Maas, Federal Minister of Justice and Consumer Protection, has been seeking to change the German legal landscape in this regard. In the context of the VW scandal he re-emphasized that legislative changes in Germany will be put on the table. A draft bill can be expected for the beginning of 2016. Rather than similar to US American collective actions, the German action will be designed in the form of a model case proceeding (Musterfeststellungsklage). This way identical or similar law suits can be bundled in a streamlined process. Once the questions at stake have been decided upon in a model order (Musterentscheid), the order binds the other courts before which individual cases were stayed. The findings of test case proceedings thus have a binding effect on the other claims, but the individual cases are kept separate.

No to national restrictions on EU-approved GMOs

Last week, on October 28, the European Parliament voted against a new draft law that would allow Member States to restrict or prohibit the sale and use of EU-approved GMO food or feed on its territory. The background of this decision is that once a GMO product has been approved by the EU, then it should be freely accessible and freely marketable across the EU. If Member States would get to decide on additional restrictions in trade in their own countries, this would not only hinder cross-border trade in the EU in these products, but also complicate and, in practice, reinstate border controls. Interestingly, the European Commission may not withdraw the proposal but instead direct it to the EU ministers' review next (Parliament rejects national GMO bans proposal).