Multicurrency loans litigation in Spain
March 2013
During 2007 and 2008, many banks in Spain offered Spanish consumers the opportunity to subscribe to multicurrency loans. Whilst originally attractive prior to the financial crisis, the fall of the Euro has resulted, for many of these borrowers, in their loans being more expensive than they had originally hoped.
This article considers the resultant claims that are being made against banks.
A multicurrency loan is a loan in which a borrower may borrow money, not just in euros, as per a typical loan in Spain, but in a different currency such as U.S. dollars, Swiss francs and Japanese yen, among others.
Multicurrency loans are particularly useful to multinational corporations that wish to reduce their foreign exchange risk associated with financing a project in several countries at once. However, an individual may decide to take out a multicurrency loan for financing a real estate property in Spain in the hope that it will incur lower interest rates and also reduce the balance of the loan if the chosen currency depreciates when compared with the euro. There is obviously a risk for individual borrowers who perhaps do not have interests abroad against which to hedge their currency exchange risk. So, while a multicurrency mortgage can work in a borrower’s favour, it can also go the other way.
Many Spanish banks offered this product to borrowers in 2007 and 2008, highlighting the fact that multicurrency loans could save them money if currency markets moved in their favour. There was a potential to obtain a lower loan interest rate and thus reduce the monthly loan payments. In fact, during 2007 and most of 2008, those clients who entered into multicurrency loans denominated in Japanese yen paid much less interest than clients who subscribed to a regular loan, as at that time the euro was a strong currency as compared to the Japanese yen.
However, after the Lehman collapse and with the euro crisis, the euro started to fall and multicurrency loans subscribers started to suffer. Interest rates increased and the total amounts owed on each loan also increased. There has been a consequent rise in the number of claims in Spain against banks requesting the court (i) to declare the multicurrency clauses of the loan agreement null and void due to a lack of valid consent and (ii) for redress for the increased amounts paid as a consequence of the fall in the euro.
In our experience, these cases have been usually initiated by borrowers of multicurrency loans secured by a mortgage over a property in Spain, thus the agreements have to be documented as “public deeds”. A public deed has to be very specific about risks so the banks should have a strong argument that clients were duly informed about the risks associated with foreign exchange movements. Some borrowers claim that their bank did not comply with requirements under MiFID. However, the European Commission has expressly addressed this issue, stating that MiFID does not apply to multicurrency loans. In the European Commission web page link to questions and answers on Single Market Legislation,1 there is the following question: “Do the following products fall under MiFID: […] 4. mortgages offered to euro based customers that are denominated in FX?”
The answer of the European Commission to this question was that “Mortgages are not financial instruments as defined in MiFID, irrespective of the currency in which they are denominated”.
Comment
These claims are at a early stage, and there is no case law yet from the Court of Appeals or the Spanish Supreme Court regarding the issue, so it remains to be seen whether the strict requirements of the public deeds will adequately protect the banks. Nevertheless, in a multicurrency loan case heard by a First Instance Court of Barcelona, the court decided that the borrower was not provided with enough information to understand fully the risks associated with the product. The decision has been viewed as quite controversial, since the borrower was a lawyer, and therefore presumably a person capable of properly understanding the risks of a multicurrency loan.
Footnotes
1. http://ec.europa.eu/yqol/index.cfm?fuseaction=question. show&questionId=289
