Are the rights of banks and customers balanced?

Almost every resident of Latvia, as well as a company or organization, has a legal relationship with a financial service provider - a bank account, a loan, a deposit for old age, etc. How fair, just and balanced is this relationship? Fairness and balance are not only moral but also legal concepts. In practice, don't banks rather resemble an elephant, while the client is an ant, to which not quite fair and equal conditions are applied in many situations? A conversation with LINDA PURENKOVA, head of the Legal Department of BDO Law, a sworn attorney, about these issues.

In Latvia, sharp discussions have developed about bank mortgage loan interest rates. On the one hand, the banks' position is justified by the fact that contracts with consumers state that if the Euribor rises, the interest rate will rise. Legally and formally everything seems to be correct. But, on the other hand, the increase in the Euribor rate, at least in the case of mortgage loans, does not affect the real costs of loans for banks, because according to the data published by the Bank of Latvia, loans are mostly financed not by loans on the interbank market, but by deposits of citizens. How to assess this dual situation?

If we look at it from a legal point of view, then, of course, each customer has signed a contract with the bank, which specifies a specific loan interest rate tied to Euribor (most often for a period of six months or twelve months). It must be admitted that the consumer (or the company) who took the loan is currently in trouble to a certain extent, because the bank does not violate anything by applying the interest rate according to the contract. Banks have every right to increase the amount of interest payable in connection with the increase in the Euribor rate. Of course, this makes it difficult for consumers, because the amounts to be paid in interest have increased several times in the last two years. At the same time, the costs for the banks in connection with the rise in Euribor have not increased so much, which is why the high profits are also formed.

Even if everything is in order from the point of view of the contract, as is known - if the terms of the contract conflict with the law, the contract must yield. Article 6 of the Law on the Protection of Consumer Rights (PTA) stipulates that contract terms must not be "unfair" and "unbalanced". There is also a specifically mentioned example with financial service contracts and changing interest rates, which may only happen if there is a "reasonable reason" for this (Article 6 (33) paragraph (1) of the law). Question: What does "reasonable cause" mean? Assuming that this article speaks directly about the prevention of unfair contract terms, the "reasonable cause" cannot be the contract terms themselves...

The practice of the Consumer Rights Protection Center (PTAC) and the courts show that consumers have many times succeeded in proving that the amount of liquidated damages or the arbitration clause in the loan agreement is unfair. Banks currently do not change interest rates for credit agreements. The fixed part of the rate remains as originally discussed, but the decisions to change the Euribor rates are made by the European Central Bank. Of course, banks must inform the client in time about changes in the amount to be paid. Taking into account the difficulties of the consumers to pay, the revision of the interest rates specified in the contract should be a tool for creating a fair and reasonable solution in the interests of the consumer, since the revision of the interest rate can also mean its reduction.

The law also talks about the need to observe a "balance" between the rights of service providers and consumers. From this point of view - if there is a balance, then why, when the Euribor rates were negative, only the variable rate of zero interest was applied to loans, and not a negative one (by subtracting it from the base rate applied by the bank)? This is another justification found in the law, which makes one ask whether credit agreements concluded by banks with consumers are fair and should not the compliance of these agreements with the law be assessed?

You can definitely look at it from this point of view as well. However, if we look at the regulation of consumer rights, it is necessary to take into account the moment when the contract was concluded. If we cannot prove that the bank has "imposed" unfair terms at the time of concluding the contract, then it would be more reasonable for the consumer to negotiate with the bank - to express his pain and talk about the fact that the interest payment is too high in the particular case. However, banks cannot be obliged not to follow the established Euribor rates. Asking to "voluntarily" reduce the fixed part would be quite a challenging task. Therefore, a solution is sought at the national level. I agree that the situation is not very fair and just from the point of view of consumers.

The specific norm in the PTA Law entered into force already on June 13, 2014. So it would be applicable to almost nine-year-old mortgage loan contracts. Don't you see that the existing consumer protection regulation would already be enough for the borrower to not only "express his pain" and plead with the bank, but also legally argue?

To be honest, in our practice so far, we have not yet seen examples when, by referring to the norms of the PTA law, it was possible to achieve a reduction of the bank interest rate specified in the contract through the court. It is possible that such legal proceedings are yet to come.

The social network Twitter recently featured an exchange of views between two high-ranking lawyers - the judge of the Court of the European Union Ineta Ziemele indirectly encouraged the sworn lawyer Sandi Bērtaiti to appeal even to the Court of the European Union, because so far there has been no precedent from Latvia on such a topic. Maybe it's time to start building this case law?

I agree that the consumer is in a difficult situation, and the provisions of the PTA law could serve as a basis for evaluating this problem. However, it would be very challenging for each individual consumer to fight for their own justice. Perhaps PTAC should also look for a solution that could encourage banks to rethink the current situation. However, legally, the consumer's position is difficult, because the bank does not apply anything additional or unwritten.

Could not the reference to the Euribor floating rate in the mortgage loan agreement be treated in the context of the aforementioned article of the law? That is, it would not be considered as changing the interest rate at all?

Considering the fact that the clause of the contract regarding the fixed interest rate itself is not amended, the interest rate is not changed. If the rate is not fixed, but tied to Euribor, then the situation cannot be interpreted as the bank wanting to change the existing rate. Of course, the actual result, when the rate is fixed semi-annually or annually according to Euribor changes, and the consumer is sent information about the amount to be paid in the future (not the interest rate changes), regardless of the explanation, results in "paying more". Therefore, I do not claim that the application of consumer rights norms would be completely hopeless, but it would be difficult, because the unbalanced outcome is more related to the decisions made by the European Central Bank, than to the actions of commercial banks.

How much right does the state have to interfere in the banking business, trying to balance the rights of banks and customers? For example, in October, the Saeima supported the proposal to halve the mortgage interest rate in the first reading. On the one hand, the argument is made that it is like socialism to regulate food prices. On the other hand, there is a counter-argument that the banking business is still a specific business, it is more strictly regulated than the free market in general. Where is proportionality to be found here, what does international law say about it? How serious are the litigation risks for Latvia in this case, and what is the practice of other countries?

The state should decide on assistance to borrowers, but when introducing a special regulation, it should be carefully evaluated, because ill-considered solutions can result in long and complicated legal proceedings in the Constitutional Court. Already during the Covid-19 crisis, so-called moratoria or credit holidays were temporarily adopted in several countries, which exempted consumers from making loan interest payments for a while. This was due to the upheaval caused by the pandemic, because at the time no one knew how the situation would develop. From a legal point of view, it is important to provide justification - for which groups, why, for how long we are implementing such support instruments. If we implement them over a long period of time and for everyone, then the risk of legal proceedings is much higher. One state-defined maximum threshold that financial service providers may apply to credit interest (0.07% per day) already exists. So what makes this situation different? Why can't separate regulation be applied to mortgage loans as well? Is the "salt" in the fact that in this case it would apply retroactively to contracts already in force, while the limit on credit interest mostly in practice limited short-term "quick" loans whose previously concluded obligations had already expired by the time the new regulation came into force, that is, it did not limit previously concluded agreements?

Yes, applying regulatory acts retroactively is extremely difficult, contrary to the principle of legal expectation. Therefore, if a new norm is a conceptual solution that has no time limit or target groups, then it must be focused only on the future - starting from a certain date, giving a transition period so that service providers can prepare for it.

People's financial literacy and the need to accumulate capital, especially for old age, are often discussed. However, the available investment and accumulation instruments are quite different from the point of view of legal regulation. How do the main savings and investment services available in the financial market differ in this respect - funded pension levels, deposits, savings bonds, accumulative insurance and others? What are the legally safest ways to save for retirement? For example, the protection of deposits up to 100,000 euros is roughly guaranteed by law, but what about other cases?

From a security point of view, the safest and easiest thing for the consumer to understand is a current account or a savings account, in which the funds are protected and, if the consumer needs them, easily accessible (in the case of a deposit, of course, the terms for withdrawing funds specified in the contract must be observed). However, at the same time, it should be taken into account that you will not be able to earn anything and save extra in this case, because the interest received is lower than inflation. So actually the value of that money is shrinking