The new law was based on the Spanish Supreme Court ruling 323/2015, of 30 June 2015
FX LOANS, known in Spain as multi currency mortgages, are starting to make the national and international banks loose in court
As a derivative financial instrument, a multi-currency mortgage loan would be subject to the Spanish Securities Market Act, including obligations established after implementation of the MiFID regulations in Spain.
The Supreme Court’s ruling is inconsistent with the European Commission criterion and lower courts’ rulings.
The Spanish Supreme Court (Tribunal Supremo) stated in july 2015 that FX loans is a derivative financial instrument. This means that to this specific bank product it necessarily had to be covered by the MiFID regulations. As Alen & Overy explains “The ruling is inconsistent with the European Commission’s criterion as published on the European Commission’s official webpage and the decisions of lower Spanish courts. The ruling means that banks will need to comply with MiFID requirements when commercializing with FX loans. Only when the Spanish Supreme Court has issued two decisions on the same subject matter following the same criterion, do those decisions become binding jurisprudence under Spanish Law. However, as an exception, single decisions issued by the Supreme Court in plenary session are always binding jurisprudence”.
This leads to a future where banks are obliged to inform the customers correctly of all the faults the products that have been placed by them may have. Spanish lower courts (Audiencias Provinciales) will view them as loans including derivative financial instruments and, as a result, examine whether MiFID obligations were properly complied with. After the statement of the Spanish Supreme Court, banks no longer have excuses to justify themselves with the placement of FX loans. The court also found that the financial entities (Bankinter, Bankia, Santander, Banco Popular etc) did not comply with their obligations concerning the commercialisation of FX Loans.
As Allen & Overy state “The most controversial element of the ruling was the finding that a mortgage loan denominated in a foreign currency includes a financial instrument, and more specifically, a derivative financial instrument. The court considered that in this type of loan, the extent of the obligation of the borrower in Euros (ie to pay the repayment installments and the outstanding loan principal) depends on the exchange rate of the foreign currency into Euros (defined in the decision as an “underlying asset”), and that therefore the loan includes an implicit derivative”.
The European Commission has specifically stated on its official webpage that FX Loans are not a financial instrument, as is now is considered in Spain.
The European Commission criterion, as stated here above, also induces them to believe that FX Loans are then not defined by the MiFID. The Advocate General before the European Union Court of Justice recently stated that: “A loan expressed in foreign currency but advanced and repayable in national currency at the actual rate on the day of payment is neither itself, and nor does it contain, a financial instrument or a financial service in the sense of Directive 2004/39, and therefore the directive is not applicable to the arrangement.” According to these words, the rulings have been based on the grounds that a loan cannot be construed or interpreted as an investment subject to MiFID obligations, and that FX loan is nothing more but an ordinary mortgage loan, only possible difference would me it is denominated in a foreign currency. The obligations of the borrower are not established in Euros but in such foreign currency, but these obligations, and the essence of them, still respond to the common grounds of mortgages.
The judgment of the Spanish Supreme Court is contradictory to rulings from lower Spanish courts that have found that the MiFID obligations are not applicable to FX Loans.
The decision of the Supreme Court has raised the possibility that in future finance disputes on FX Loans, Spanish lower courts have viewed these loans as a derivative financial instruments and, as a result, the courts have examined whether MiFID obligations are actually being properly complied with. The Spanish association ASUFIN has been able to win 9 out of 10 of the cases of FX Loans that are being taken to court.
It is necessary to understand, that this does not literally make any owner of an FX Loan This does not mean that non-compliance with MiFID obligations would automatically imply that the client did not give valid consent to the loan, since the Spanish Supreme Court has refused an automatic nexus between non compliance with obligations established in financial regulations and lack of valid consent.
Thank to what is going on in countries like Spain, Europe is being obliged to change its point of view. Finally, it cannot be ruled out that the European Union Court of Justice may establish in the coming months a position regarding whether MiFID is applicable or not to the mentioned FX Loans. This would be likely to have an impact on future decisions on this matter by the Spanish Supreme Court. This is why, more than ever, it is fundamental to create a European Association to protect bank customers and eradicate FX Loans, in the rest of the countries that are not having the same luck.