VERÐTRYGGING _ Price-indexation - European law - Letter 12.2.2012 Services European Commission

Summary of legal opinion of Commission services on price-indexation (after analysis of real example of   house loans) in Iceland

Indexation on consumer credit would not be directly prohibited per se but subject to strong requirements of European law on information, disclosure and method of calculation throughout the credit process.

It has to be assessed under the Consumer Credit Directive but also under European contract law on abusive clauses and misleading practices.

Indexation on mortgage credit is still under harmonisation process at European level.

1) Directive 2008/48/EC

Can indexation of principal and payments be treated as total amount of credit? No.

Is indexation of principal and/or payments to be treated as total cost of credit? Yes.

Can indexation operate and be calculated outside the framework of the Directive and its rules on disclosure and method of  calculation (APRC) ? No

2) Directive 93/13/EC on Unfair Contract Terms  and  Directive 2005/29/EC on Unfair Commercial Practices

Indexation practices can be potential abusive clauses and/or misleading practices when requirements of European law have not been respected (information, calculation and disclosure of total amount of credit, total cost of credit and total amount to be paid by consumers).

3) Lawfulness of indexation as abusive clauses and/or misleading practices to be assessed by national courts/administrations taking account of real cases and circumstances in practice.

4) Consequences for consumers. To be determined by national authorities/courts in national contract law in the light of principles European consumer (credit) law determined by the Court of Justice of the European Union on its case-law ( nullity abusive clauses and effect of misleading practices).

EU law as part of the EEA Agreement. Icelandic current legislative framework

As Iceland has informed the European Union in the framework of EU accession negotations

 

Directive 2008/48/EEC has been incorporated into the EEA Agreement. Credit agreements are covered in existing legislation in Act No 121/1994 on Consumer Credit[1].

Directive 93/13/EC is a part of the EEA Agreement. Iceland has transposed Directive 93/12/EC with amendments made to Act No 7/1936, on Contracts, Agency and Void Legal Instruments,21 provided in Annex 28:3. The legislation is therefore fully transposed into Icelandic law[2].

Directive 2005/29/EC is a part of the EEA Agreement. Iceland has transposed Directive 2005/29/EC with Act No 57/2005, as amended, on Surveillance of Business Practices and Marketing. The legislation is therefore fully transposed into Icelandic law[3].

As for pre-contractual information to be given to consumers by lenders offering home loans (Commission Recommendation 2001/193/EC) which is not mentioned in the letter sent to the European Commission, Iceland has replied to the EU[4]:

This is a non-binding Act that has been incorporated into the EEA Agreement. The Ministry of Trade and Commerce (later the Ministry of Business Affairs and now Ministry of Economic Affairs) introduced these principles to the relevant parties when this Act was incorporated in the EEA Agreement.

As Iceland has recognised in the INTERGOVERNMENTAL CONFERENCE ON THE ACCESSION OF ICELAND TO THE EUROPEAN UNION[5]:

EU legislation in the field of consumer protection is covered by the EEA Agreement and transposed into the Icelandic legal order on an ongoing basis.

Icelandic legislation in the field of non-safety related issues provides the basis for protecting consumers’ economic interests and is aligned with the acquis. The following highlights key EU legislation in the field and implementing legislation in Iceland:

Directive 2008/48/EC (credit agreements for consumers) is partially transposed by Act No. 121/1994 on consumer credit. An amendment to Act No. 121/1994 in order to implement all the provisions of the Directive is foreseen in 2012[6].

Directive 93/13/EC (unfair terms in consumer contracts) is partially transposed by Act No. 7/1936 on contracts, agency and void legal instruments, as amended. An amendment to the Act in order to implement all the provisions of the Directive is foreseen in good time before the date of accession[7].

Directives 2006/114/EC (misleading and comparative advertising) and 2005/29/EC (unfair commercial practices) are transposed by Act No. 57/2005 on surveillance of business practices and marketing, as amended.

Iceland has introduced relevant principles of consumer protection as laid out in Commission recommendations such as 98/257/EC (out-of-court settlement of consumer disputes), 2001/310/EC (consensual resolution of consumer disputes) and 2001/193/EC (pre-contractual information on home loans).

[1] See assessment done by Icelandic authorities at pp. 22-24  http://www.vidraedur.is/media/esb_svor/28_-_Consumer_and_Health_Protection/Chapter_28_-_final.pdf

 

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] See document at http://eu.mfa.is/media/ESB/samningskaflar/28/NegPosIceCh28_FINAL_20122011.PDF

 

[6] Directive 87/102/EC as amended by Directive 98/7/EC was incorporated into Icelandic legal order through Act No. 121/1994 on consumer credit.  See also Regulation 377/1993, as amended 491/1993 and 236/2000.

 

Article 5 of Directive 87/102/EEC  provided for the introduction of a Community method or methods of calculating the annual percentage rate of charge. Annex II of Directive 87/102/EEC introduced a mathematical formula for the calculation of the annual percentage rate of charge and Article 1a(2) of that Directive provided for the charges to be excluded from the calculation of the 'total cost of credit to the consumer`. During a transitional period of three years from 1 January 1993, Member States which prior to 1 March 1990 applied laws which permitted the use of another mathematical formula for calculating the annual percentage rate of charge, were permitted to continue to apply such laws. The Commission  submitted a Report to the Council which made it possible, in the light of experience, to apply a single Community mathematical formula for calculating the annual percentage rate of charge. Since no Member State has made use of Article 1a(3) of Directive 87/102/EEC by which certain costs were excluded from the calculation of the annual percentage rate of charge in certain Member States,  it became obsolete. New Article 1a(1)(a) of  Directive 87/102/EEC was amended as follows by Directive 98/7/EC:

 

'The annual percentage rate of charge which shall be that rate, on an annual basis which equalizes the present value of all commitments (loans, repayments and charges), future or existing, agreed by the creditor and the borrower, shall be calculated in accordance with the mathematical formula set out in Annex II.

 

[7] According to information on the negotiations between Iceland and the EU on consumer protection (Chapter 28), this is how Contract Law No 7/1936, as amended has incorporated Directive 93/13/EC on unfair terms in consumer contracts:

 

Art 36.a: Implements Art 2, 3(1)-(3) of the Directive, i.e standard contracts unfair if contrary to good faith or imbalance in obligations and sellers burden of proof that it is not a standard contract

Art 36. b: Implements Art 4(2), 5 of the Directive, i.e. Terms must always be drafted in plain, intelligible language and where there is doubt the most favourable interpretation to the consumer shall prevail (except when agencies safeguarding consumer interest apply this legislation)

Art 36. c:  Implements Art 3(1) Art 4 (1) and 6(1) of the Directive, i.e.  assessment of unfairness

Art. 36. d : Implements Art 6(2) of the Directive, i.e. regarding choice of law

Article 7 of the Directive is not implemented, since Act No 8/1993 has been repealed and the Consumer Agency has no legal powers to monitor contracts – Plans to remedy this by amending Act No 57/2005 entrusting the Consumer Agency to monitor contracts and ensure effective means to prevent continued use of unfair terms – proposal possibly 2011 or 2012

 

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Consequences and impact of legal opinion of Commission Services for Iceland.

All the EU legislation has been incorporated into Icelandic legal order with the exception of some parts of Directive 2008/48/EC now discussed by the Parliament.

Directive 2008/48/EC on credit agreements for consumers  has repealed Council Directive 87/102/EEC as amended by Directive 98/7/EC for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit. The principal element in the original Directive (as modified by Directive 90/88/EC) was the obligation to apply a single mathematical formula ("the EC formula") for the purpose of calculating the annual percentage rate of charge for consumer credit. This Directive 87/102/EEC was incorporated into the Act 121/1994 on consumer credit.

In my opinion, the Icelandic practice as it has been predominantly implemented by many institutions (ie. leaving inflation as 0% or ignoring future inflation in the precontractual and contractual stages)  is an oxymoron, impossible contradiction in practice in the light of European law.

Information given in the credit process on total amount of credit to be paid by the consumer has to be exact and disclosed in advance.  In practice, bank institutions should predict future inflation and its effects on total cost of contract informing about method of calculation and effect on the contract and payments. This means treating indexation as European banks deal with inflation: through variable interest or charge impossible to quantify at the time of contracting but subject to obligations of previous calculations and quantification. Information disclosure duties are strongly regulated in European law. All information on cost of credit and total amount to be paid by consumers has to be updated  on a regular basis (according to contracts). It is not possible for financial institutions to claim higher payments without complying with these requirements of previous calculation/information.

Implementation of indexation in practice leads to most banking institutions in Iceland (also ILS) having signed contracts with potential abusive clauses and incurred in misleading information cases (since entry into force of Icelandic law extending similar protection to mortgage loans in December 2000).

Attention, the national assessment on the legality of abusive clauses must be done in the light of European law on consumer credit agreements. the Need to refer to case-law ECJ, especially case Pohotovost C-76/10 and Perenicová C453/10.  Failure to mention APRC could mean that credit granted is deemed to be interest-free and free of charge (case C-76/10). Unfair terms can be void if that ensures better protection for consumers (case C-453/10). In both cases omission of decisive information from a credit agreement contrary to an express requirement of European Union law is assessed by ECJ. It does not matter whether we contemplate absence of an indication (APR) rather than an incorrect indication of cost of credit (see para. 119 Opinion Advocate General Trstenjak on case C-453/10).