When a financial institution grants a loan denominated in a foreign currency, it must provide the borrower with sufficient information to enable him to take a prudent and well-informed decision, the Court of Justice of the European Union (CJEU) has recently ruled.
EU law protects consumers against unfair terms and conditions in contracts for the purchase of goods or services. The contractual goods or services, circumstances of the transaction and all the other terms and conditions determine whether a provision in a contract is fair or not.
Terms relating to the definition of the main subject matter of the contract or the adequacy of the price and remuneration are not as a rule assessed by a court for unfairness provided that these terms are drafted in plain intelligible language. The directive contains a list of unfair conditions.
These include requiring consumers to pay unreasonable compensation or binding them with conditions which they had no time to fully understand before signing the contract.
The facts of this particular case which came before the CJEU were briefly as follows. A number of individuals who received their income in Romanian lei (RON) took out loans denominated in Swiss francs (CHF) with a Romanian bank. According to the loan agreements, the borrowers were obliged to make the monthly loan repayments in CHF and they accepted to bear the risk related to possible fluctuations in the exchange rate between the RON and the CHF. Subsequently, the exchange rate concerned changed considerably to the detriment of the borrowers.
The latter brought actions before the Romanian courts alleging that the term according to which the loan had to be repaid in CHF, regardless of the potential losses that the borrowers might sustain on account of the exchange rate risk, is an unfair term which is not binding on them. They argued that at the time of conclusion of the contract the bank presented its product in a biased manner, only pointing out the benefits to the borrowers without highlighting the potential risks and the likelihood of those risks occurring.
According to the borrowers, the disputed term must therefore be regarded as being unfair and hence illegal. The Romanian Court of Appeal seized of the case filed a preliminary reference before the CJEU requesting guidance as to the extent of the legal obligation on banks to inform their clients of exchange rate risks related to loans denominated in foreign currencies.
The CJEU observed that the disputed term, that is, the contractual clause stipulating an obligation to repay a loan in a certain currency, constitutes an essential element of the loan agreement. It is therefore part of the main subject-matter of the loan agreement. This means that, in accordance with EU law, its unfairness may be examined only if it was not drafted in plain intelligible language.
Financial institutions must provide borrowers with adequate information
In practice, this means that the contract must set out in a transparent manner the specific functioning of the mechanism to which the relevant term relates. Where appropriate, the contract must also explain the relationship between that mechanism and that provided for by other contractual terms relating to the advance of the loan. In this way, the consumer can evaluate the economic consequences on his or her financial obligations deriving from the contract.
The CJEU emphasised that financial institutions must provide borrowers with adequate information to enable borrowers to take well-informed and prudent decisions. All information likely to have a bearing on the extent of a borrower’s commitment must be communicated to the consumer. The latter would thus be able to estimate the total cost of his or her loan.
Consumers must therefore not only be informed of the possibility of a rise or fall in the value of the foreign currency in which the loan was taken out, but also of the impact on repayments of fluctuations of the interest rate and a rise in the interest rate in the currency of the loan.
This means that a borrower must be clearly informed of that fact that, by concluding a loan agreement denominated in a foreign currency he/she is exposing himself/herself to a certain foreign exchange risk which will, potentially, be difficult to bear in the event of a fall in the value of the currency in which he/she receives his/her income.
The financial institution must also explain the possible variations in the exchange rate and the risks inherent in taking out a loan in a foreign currency, particularly where the consumer does not receive his income in that currency.
If the bank does not fulfil such obligations, a court can then assess the unfairness or otherwise of the disputed term. It is up to the national court to determine the possibility that the bank has failed to observe the requirement of good faith and the existence of a significant imbalance between the parties to the contract. Such assessment must be made by reference to the time of conclusion of the contract concerned, taking account of the expertise and knowledge of the bank, as far as concerns the possible variations in the rate of exchange and the inherent risks in contracting a loan in a foreign currency. It is possible that the imbalance between the parties only manifests itself during the performance of the contract.
The protection of consumers in any trade arrangement which they enter into, be it for goods or services, ranks high on the agenda of the EU institutions. Indeed, EU law itself provides that when there is doubt about the meaning of a contractual term, it should be interpreted in a manner favourable to the consumer.
Mariosa Vella Cardona is a freelance legal consultant specialising in European law, competition law, consumer law and intellectual property law.
mariosa@vellacardona.com