Spanish Supreme Court applies MIFID to multi-currency mortgage loans
Spanish Supreme Court ruling 323/2015, of 30 June 2015
The Spanish Supreme Court (Tribunal Supremo) has recently stated that a multi-currency mortgage loan is a derivative financial instrument and therefore covered by the MiFID regulations. 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 commercialising multi-currency mortgage loans.
The Spanish Supreme Court in plenary session1 ruled on a finance dispute in which the plaintiff alleged that she was unaware of the risks associated with a multi-currency mortgage loan, and therefore her consent to the transaction was invalid. The court refused the appeal, finding that she was aware of the risks.
Although not affecting the court’s decision on consent, the court also found that the financial entity did not comply with its obligations concerning the commercialisation of a multi-currency mortgage loan.
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.
As a derivative financial instrument, a multi-currency mortgage loan would be subject to the Spanish Securities Market Act,2 including obligations established after implementation of the MiFID3 regulations in Spain).
The Supreme Court’s ruling is inconsistent with the European Commission criterion and lower courts’ rulings.
European Commission criterion
The European Commission has specifically stated on its official webpage that a multi-currency mortgage loan is not a financial instrument. In response to questions regarding the applicability of MiFID regulations the European Commission stated:4
“Mortgages are not financial instruments as defined in MiFID, irrespective of the currency in which they are denominated.”
The Advocate General before the European Union Court of Justice recently stated5 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.”
Lower courts’ judgments
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 multi-currency loans.6 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 a multi-currency mortgage loan is nothing but an ordinary mortgage loan denominated in a foreign currency, in which the obligations of the borrower are not established in Euros but in such foreign currency.
Comment
The decision of the Supreme Court raises the possibility that in future finance disputes on multi-currency loans, Spanish lower courts will view them as loans including derivative financial instruments and, as a result, examine whether MiFID obligations were properly complied with.
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.7
In any event and for the time being, banks will need to comply with their MiFID obligations when marketing new multi-currency loans.
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 foreign currency loans. This would be likely to have an impact on future decisions on this matter by the Spanish Supreme Court.
Footnotes
1. 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.
2. Spanish Act 24/1998, of 28 July year, on the Securities Market.
3. Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/ECC and 93/6/EEC and Directive 200/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22EEC, implemented in Spain through Act 47/2007, of 19 December, which amends the Spanish Securities Market Act.
4. http://ec.europa.eu/yqol/index.cfm? fuseaction=question.show&questionId=289.
5. Conclusions delivered on 17 September 2015, on Case C‑312/14, Banif Plus Bank Zrt. v Márton Lantos and Mártonné Lantos.
6. See judgments No 483/2013 of the Section 18 of the Court of Appeals of Madrid of 18 November 2013; judgment No 41/2015 of Section 19 of the Court of Appeals of Madrid of 5 February 2015 and judgment No 34/2014 of Section 7 of the Court of Appeals of Asturias of 10 February 2014.
7. See judgments rendered by the Spanish Supreme Court no. 716/2014 and no. 323/2015.
