Tuesday, March 21, 2017

Floor clauses in mortgage loans – Do we need to protect the consumer?

The Court of Justice of the European Union has decided on floor clauses in mortgage consumer loans. What does that actually mean?


What is a floor clause?

Imagine a bank grants a variable mortgage loan to a consumer. In such loan, a floor clause provides that, even if official interest rates falls below a certain threshold (or “floor”), the borrower must continue to pay minimum interest equivalent to that threshold, without being able to benefit from a lower rate.

The consumer obviously doesn’t like such a clause: While he hears in the news that interest rates are lower than his agreed threshold, he has to continue paying.


Floor clauses are unfair.

Normally, you would think that this should bind the consumer. After all, he has accepted the threshold. But, because banks are mighty and banking complicated, the consumer needs protection. This is, at least, what the Spanish Supreme Court thinks: The consumer had not been informed about the economic and legal burden placed upon them.” Floor clauses “lack transparency due to insufficient information for the borrowers as to the material consequences of their application in practice”.

As a consequence, the Spanish Court declared floor clauses void.

However, the Court also held that such invalidity has its (temporal) limits: On the basis of the principle of legal certainty, the effects of the judgment are limited to the time after the date of the judgment’s publication”.


Unfair means unfair – for the future and the past.

It is this absence of any retroactive effect that the Court of Justice of the European Union has canceled in its judgment dated December 21, 2016: The EU Law is not “limited to the requirement for formal transparency of contractual clauses in relation to the plain and intelligible nature of their drafting, but as extending to their substantive transparency linked to the adequacy of the information supplied to the consumer concerning the extend, both legal and economic, of the consumer’s contractual commitment”. […] EU Law “must be interpreted as meaning that a contractual term held to be unfair must be regarded, in principle, as never having existed, so that it cannot have any effect on the consumer”. In other words, emphasis is put on the dissuasive effect of the EU Law’s consumer protection.


Is this the end of floor clauses?

I don’t think so. It’s perhaps a step in the direction of such end but it would, in my view, be unwise to consider any floor as invalid from now on:

  • First, the case is about consumers. Beyond consumer retail banking, this is a different story.
  • Second, the Advocate General has brought it to the point:
    The case relates not so much to floor clauses in themselves as to the effects that must follow a declaration that such terms are unfair.” In other words, the case tells us what happens once a national court has declared a floor clause invalid. It doesn’t actually say that any national court would be obliged to declare a floor clause necessarily invalid.

By the way, the Advocate General did not recommend the European Court to order the retroactive effect of the floor clause’s invalidity. It is, indeed, rather uncommon that the Court of Justice of the European Union does not follow the opinion of its Advocate General.


Resource:


  • Court of Justice of the European Union – Judgment dated December 21, 2016
  • Opinion of Advocate General Mengozzi dated July 13, 2016