Incorrectly calculated APR in Czech consumer credit agreements
Financial Arbiter rulings: decisions ref. no. FA/2656/2015, 13 March 2015, and FA/8999/2015, 27 August 2015
Several Czech consumer credit providers have been sued by customers for providing incorrect information on the annual percentage rate (APR) applicable to their consumer credit agreements and for their failure to meet certain other information requirements set out in the Czech Consumer Credit Act, which implements Directive 2008/48/EC on credit agreements for consumers, as amended (the Directive). The courts and the Financial Arbiter have taken conflicting positions on the issue.
The statutory sanction for a failure to provide correct information under the Czech Consumer Credit Act is severe. No matter how serious the breach is, the credit is deemed to be subject not to the agreed rates, fees or charges, but solely to the discount rate published by the Czech National Bank, currently set at 0.05% per annum. The issue affects several major providers of consumer credit on a potentially large scale.
Two recent Financial Arbiter decisions have been in favour of the claimant customers. This reflects also the position of the regulator (ČOI), who has repeatedly fined lenders for this type of conduct.
In contrast, several first instance court decisions,1 some of which have already been confirmed on appeal,2 support the lenders’ position that their method of calculation of the APR was based on a legitimate interpretation of the Czech Consumer Credit Act at the time the relevant consumer credit agreements were entered into and that the discounted rate sanction should not be applied mechanically and formalistically but only where there has been a serious breach, causing real detriment to a consumer.
The APR debate
At the heart of the debate is how various fees charged by a lender for credit should be treated for the purpose of calculating APR. The fees are effectively paid from the loan amount. This means that the loan consists of two components: one covering the consumers’ real financial needs and the other covering the fees. However, it is not difficult to see that these fees are at the same time also the costs of that same credit. How to reflect this fact in the calculation of APR has become a source of substantial controversy.
Conflicting decisions
The Financial Arbiter takes the view that the funds to cover these fees increase the total amount of the credit advanced to a customer only artificially. In reality, these funds are immediately set off against the fees payable to the lender as a direct cost of the credit. As a result, only the part of the credit that is effectively given at the consumer’s disposal should be taken into account for calculating the applicable APR. Needless to say, the APR calculated in this way may be substantially higher than the APR calculated in respect of a credit that includes also the funds designated for the payment of the fees.
By way of example, if one borrows GBP 1,000 for a flat interest rate of 5% p.a. and a fee of GBP 100 and makes a lump sum repayment after one year, it is undisputed that the total costs of such credit are GBP 150 (GBP 50 interest and GBP 100 fee). However, according to the Financial Arbiter, the consumer only borrowed GBP 1000, whereas the lenders maintain that he or she borrowed GBP 1,100, GBP 100 of which were used to pay the fee. As a result, the APR calculated by the Financial Arbiter would be higher than that the lenders’ figure, because the consumer got less money for the same price.
The Financial Arbiter also argues that the APR, as calculated by the lenders, cannot possibly serve as a benchmark for comparing prices of consumer credits, because the fees paid in connection with a credit are not duly accounted for. Treating such fees as a part of the loan principal obscures the real cost of the credit.
The courts agree with the lenders’ argument that by signing the credit agreement, the consumer has agreed, among others, to borrow money for the payment of the relevant fees and to repay such debt in agreed installments. There is thus no reason to treat this part of the credit differently from any other parts borrowed for any other purposes, whether for the purposes of calculation of the APR or otherwise. In the courts’ view, it was legitimate for the lenders to interpret the law in this way. Although other interpretations were also possible, and indeed later prevailed in ČOI’s practice, this cannot justify the imposition of the above sanction on the lenders.
Current state of affairs and possible implications
As a result of the decisions of the Financial Arbiter and the current administrative practice of ČOI, Czech consumer credit providers have generally changed their methods of calculation of the APR in new credit agreements. While Czech courts have tacitly accepted this practice, which appears to be in line with the Directive as interpreted by the EU case law and institutions, they have so far generally refused to recognise that the lenders’ previous calculation methods were incorrect or unlawful. Moreover, even where the courts have actually found a breach of certain other information requirements by the lenders, they have refused to apply the only available sanction of changing the interest rate to almost nil on the grounds of low materiality of those breaches, despite the fact that the Czech Consumer Credit Act does not appear to give them any discretion in this respect.
The reason for this approach may be the courts’ fear of opening floodgates for thousands of consumers to make use of some relatively minor deficiencies in their contracts to completely redefine their terms to their advantage. However, such fear was apparently not shared by the Financial Arbiter, whose decisions are nevertheless ultimately subject to judicial review. It therefore remains to be seen if courts of higher instances and/or judicial review courts will listen more to the detailed technical reasoning presented by the Financial Arbiter, or to the rational policy arguments pursued by the courts.
Footnotes
1. Judgment of the District Court in Nymburk ref. No 14C 211/2014, judgment of the District Court in Vsetín ref. No 108C 40/2014 and judgment of the District Court in České Budějovice ref. No 34 C 31/2015.
2. Judgment of the Regional Court in Prague ref No 28 Co 192/2015 and judgment of the Regional Court in České Budějovice ref. No 42 ICm 1592/2015.
