FX loans EU Consumer Protection and Brexit
Charles Stevens is a senior lecturer at De Montfort University (Leicester) where he has taught European Union Law. He is currently researching the European Union consumer protection law issues that are relevant to the problem of foreign exchange denominated loans. He joined the group attending the European Economic and Social Committee to support the associations in their fight to raise awareness of the problems surrounding the mis-selling of FX Loans. In this interview he answers questions posed by Asufin about his research into the estimated 20,000 UK citizens who were sold Swiss Franc denominated loans to finance off plan real estate purchases in Cyprus.
Why did UK consumers borrow from Banks in Cyprus?
Charles Stevens. Brussels. 7.6.2016.
Cyprus has traditionally been viewed as an attractive retirement and holiday location for UK consumers owing to its historical ties with UK culture and its large ex pat community. Between 2006 and 2009, foreign currency denominated loans were sold to UK consumers to finance off plan sales of retirement and holiday homes in Cyprus. During this period a real estate bubble was fuelled by Banks in Cyprus who financed both developers and UK consumers on a significant scale.
Why did Banks in Cyprus offer loans denominated in Swiss Francs?
Lending in currencies that had been predicted to strengthen such as the Swiss Franc gave the Banks the possibility of hedging against any Swiss Franc denominated liabilities and afforded the possibility of making a profit. The Banks, developers and agents actively encouraged consumers to take these loans on the basis that they were low interest (typically 3 month Libor + 1.75% margin) and a cheaper form of real estate finance than borrowing in local currency.
Did consumers actually receive any Swiss Francs?
The short answer is no. Obviously the Cypriot developer expected to be paid in Cypriot currency. Therefore the Bank would advance the loan monies in Cypriot currency – namely Cyprus Pounds prior to Cypriot accession to the Eurozone and following 2008 in Euros- and the Cypriot currency was paid into an escrow account controlled by the Bank and used to pay the developer in stage payments. Typically therefore there was no cash flow in Swiss Franc currency so that the consumer never received any funds in Swiss Francs. However, whilst the actual loan monies were advanced in Cypriot currency the Bank calculated the consumer’s liability to repay instalments and the principal loan balance in Swiss Francs. There was a virtual or imaginary swap of Cypriot currency in exchange for Swiss Francs. Strictly speaking therefore the loans were not actual Swiss Franc currency loans at all. They were Swiss Franc denominated loans in name only and the only relevance of Swiss Francs was to calculate the consumer’s liability to repay the principal and instalments. The inevitable consequence of this virtual currency swap is that any strengthening in the Swiss Franc would result in a loss borne solely by the consumer with a corresponding profit to the Bank. Whilst the burden of appreciation of the Swiss Francs was borne by the consumer no benefit could be obtained from appreciation as the loan monies were advanced in Cypriot currency.
What losses have been suffered by UK consumers?
Most of the UK borrowers receive their income in pound sterling and have no income in Swiss Francs. The Banks failed to provide any hedging or insurance to protect or limit consumers from foreign exchange losses. In 2007 £1 could buy 2.4 Swiss Francs. In June 2016 the exchange rate is £1 for 1.3 Swiss Francs. This represents a 77% increase in liability. In addition some Banks purported to unilaterally increase the interest rate margin over Libor to add to the unaffordability. Following the credit crunch the Cypriot real estate bubble crashed and the market value of properties is estimated to be 30% of the purchase price paid in 2007. UK consumers have been hit therefore by a triple whammy. The result of this calamity has been severe with most victims suffering from stress, anxiety and depression (SAD) leading to relationship breakdown, poor work performance and in some cases suicide.
Were the Risks explained to consumers?
I would answer that question by asking you 2 questions. Would anyone in their right mind take out a loan that is subject to unlimited foreign exchange fluctuations outside their control if the risks and dangers had been explained? Would a bank acting reasonably consider that the sale of an unhedged foreign exchange denominated loan was a suitable means of raising real estate finance for consumers who have limited knowledge, training or experience of foreign currency markets? It is estimated that up to 20,000 UK consumers took out Foreign exchange denominated loans to finance real estate purchase in Cyprus. Is it plausible to suggest that they were all reckless gamblers who had been advised of the risks?
Following a surge in foreign currency denominated lending in 2006, The Central Bank of Cyprus (CBC) became concerned and issued a directive on 11th October 2006 to all Cypriot Banks requiring detailed mandatory warnings to be given by trained staff to all borrowers of the exchange rate and interest rate risks inherent in these products. The directive required the bank to give numerical examples to borrowers. Where a borrower decided to proceed notwithstanding the warnings, a signed statement to that effect was to be obtained as a pre-condition to be retained by the Bank as evidence of the exercise of its duty of care. Notwithstanding the requirements of the CBC directive the evidence from UK victims is that they were not informed of the risks. Lawyers acting for the consumers have requested the Banks to provide evidence of compliance with the CBC directive but in the majority of cases they are still waiting for the evidence to be provided. Furthermore in a number of cases the loan agreement was never sent to the consumer at any stage prior to the loan being advanced and therefore was never signed by the consumer. In such cases the loan agreement was purportedly signed on the consumer’s behalf by lawyers acting under a power of attorney. In Cyprus there is a strict legal requirement that Powers of Attorney must be signed in the presence of a certifying officer but many victims will give evidence that this simply did not happen.
What happened to the properties?
In some cases the developers went into liquidation as a result of the financial crisis and did not deliver the property. In other cases promised facilities such as golf courses and predicted rental returns were not realised. In the majority of cases problems and delays were experienced in obtaining title deeds. Most off plan developments were financed by Cypriot Banks who took a mortgage over the entire land and buildings. Under Cypriot property law the developer is allowed to complete the sale of individual apartment units to consumers without discharging or releasing the prior developer’s mortgage from the apartment unit. This subjects the purchaser to the risk of losing his investment in the event of default or insolvency of the developer. The continuation of developers mortgages following purported completion and the inherent risks posed by this situation were not disclosed to consumers by developers, banks, agents or even by some Cypriot lawyers purportedly acting for the consumers. Would any sensible purchaser enter knowingly into such a dangerous transaction if properly advised? The theory is that on sale of all apartment units the developer’s mortgage would be released. However, in practice the property crash resulted in unsold apartment units and insolvency of developers. In many cases this has resulted in the failure to issue title deeds to purchasers for several years after completion of the purchase. The absence of title deeds prevented consumers from being able to sell apartments they believed they had bought. Legislation has recently been passed by the Cypriot Parliament in an attempt to address this problem but it remains to be seen whether or not this will be an effective solution.
What protection from mis-selling does EU law give to consumers?
The EU Treaties and the Charter of Fundamental Rights imposes a high level of consumer protection to be afforded to consumers. This is supplemented by an impressive array of detailed EU Consumer Protection directives which include inter alia:
- The Distance Marketing of Financial Services Directive
- The Unfair Terms in Consumer Contracts Directive
- The Unfair Commercial Practices Directive.
The above directives and the Banking Code of Conduct all impose transparency obligations on banks to provide detailed and accurate pre-contract disclosure information to consumers so that they can make an informed decision. Similar duties are imposed on developers and sales agents. The Court of Justice of the EU has clarified that to comply with the duty of good faith the economic consequences of consumer contracts must be explained to consumers. In a single EU market these laws are designed to protect citizens of member states throughout the entire EU and are particularly important in cross border transactions.
Why did EU Law fail to prevent mis-selling to UK consumers in Cyprus?
Although the EU directives were transposed into Cypriot law there is no point in any law that is not enforced effectively. Most EU Directives require public enforcement by national bodies with the sanction of administrative fines. In Cyprus the law was not enforced in time to prevent the mis-selling. Even after the event public enforcement has been ineffective and only recently have findings been made against Banks and developers that have ruled that EU Directives have been breached n transactions that took place several years ago.
What about private enforcement?
Private enforcement via civil proceedings has been ineffective owing to cost and delays in both the Cypriot and English Courts. Although much of the mis-selling took place between 2006 and 2009 and numerous proceedings have been issued consumers are still waiting for their cases to be tried.
Would you say that in some parts of the EU the law exists in paper but not in reality?
Yes, that is a good way of putting it. EU Consumer Law looks very good on paper. But there is absolutely no point in having a law that is ignored in practice. In a single market EU law must be enforced effectively in every country. This is particularly important in cross border situations. UK consumers are used to the rule of EU law being enforced effectively in their own country. They never anticipated that it would be any different in other parts of the EU single market. However events have shown that not to be the case.
Do you think the visit by consumer organisations to the European Economic and Social Committee will make a difference?
I was very impressed with the work carried out by the Spanish organization ASUFIN, and the Polish and Romanian consumer groups. Patricia Suarez gave an excellent presentation that was very clear, concise and effective. She explained the large numbers of victims in many EU member States including Spain, Poland, Hungary, Croatia, Greece, Romania, Bulgaria and Austria as well as Cyprus. She also explained that this problem is not new and has happened before in Australia, New Zealand and Iceland where Foreign exchange denominated loans were declared illegal. The European Economic and Social Committee were left in no doubt about the extent and scale of this very serious problem which has yet to be addressed by the EU. This is an important first step forward.
What do you see as the way forward?
EU Law has failed to prevent the problem and has manifestly failed to protect consumers effectively in practice. The European Union passes these excellent laws and imagines that is sufficient to solve the problem. Much more is needed. This is substantiated by the fact that some EU countries such as Croatia and Hungary have been compelled to pass national legislation in an attempt to make up for the deficiencies in enforcement of EU law. Measures the EU need should take should include the following:
- Foreign Exchange denominated loans have been demonstrated by bitter experience to be toxic and highly unsuitable products to fund real estate purchases by consumers. EU legislation to ban the sale and grant of such products to consumers must be introduced and is long overdue.
- Remedies and sanctions for breach of EU Consumer Directives need to be strengthened substantially. This should include a right for consumers to sue in horizontal private enforcement actions. Remedies for breach should include automatic nullification of contracts, a right to reimbursement of all monies paid and a right to compensation.
- Public enforcement should include rights of access to the courts in favour of consumers and the duty of courts to award compensation to consumer victims.
- More effective US style class actions should be introduced by the EU as a compulsory requirement in all EU states to ensure effective access to justice and enforcement of consumer protection rights
What is needed to see this happen?
Considerable political pressure needs to be applied to the EU institutions. FX denominated loans is an EU wide problem and one of the most serious abuses of consumer rights that has occurred in the history of the EU. Effective lobbying of members of the EU Parliament is required from EU citizens and consumer groups such as Asufin. National Governments of each Member state also need to be lobbied to make their voices heard in the Council and Commission. Asufin and the organisations from Romania and Poland have made a good start at the ECSC. This now needs to be followed up.
What effect, if any, will Brexit have on the position of UK victims?
In the short term the uncertainty following the recent referendum result has resulted in a sharp depreciation of the pound sterling. This has exacerbated the foreign currency losses.
So far as the substantive law is concerned most lawyers acting for UK consumers take the view that Cypriot law is law that applies to these contracts. If their analysis is correct given that Cyprus is part of the EU and the EU Consumer Protection Directives mentioned above have been enacted into Cypriot national law the eventual withdrawal of the UK from the EU at some stage in the future should not affect the substantive law applicable to these disputes.
With reference to jurisdiction many of the UK victims have issued proceedings in the English courts and are using the EU’s Brussels Regulation to claim the right for consumers to sue in the courts where they are domiciled. At the moment the Brussels Regulation is part of UK law owing to the European Communities Act 1972. If Brexit proceeds at some stage in the future the European Communities Act is likely to be repealed or amended. Following normal principles of English law repeals or amendments do not normally have retrospective effect in the interests of legal certainty.
However, in a post Brexit world UK consumers who are victims of future mis-selling in EU countries may not be able to invoke EU law protections in their national courts.
