The well-known policy of selling Swiss Franc-linked loans in the past decade, and in particular during the period 2006 – 2009, has lead bank borrowers, into a deeply troubled situation. The negative impact of their exposure to mortgages denominated on foreign currencies, and in particular the Swiss Franc, has created for the European state institutions and governments some major concerns as to how they could deal with strong consumer reactions throughout the European continent.
Courts in the EU and in Cyprus are now seeing the floodgates opened with regards to Swiss Franc-linked borrowers’ actions who are simply now trying to find a way to hamper the soaring course of their debt-lending tranches. This connotes in parallel the fact that for the vast majority of these borrowers, essential information was concealed to their detriment at the time of entering the loan agreements.
The nature of such loans denominated in foreign currencies and in particular the Swiss Franc, can be analysed in the light of two main components. On the one hand is the exchange rate of the Swiss Franc, which in essence determines the actual subject matter of the loan itself. On the other hand, is the floating interest rate which for the most part relates to the London Interbank Offered Rate (LIBOR). These two components interact with each other in an adverse way over the duration of the loan leading to the never ending growing outstanding balance that a borrower is required to disburse.
Concerning the first component related to the exchange rate, it appears that most of the financial institutions have concealed from the borrowers the risk a loan in a foreign currency usually bears which relates to a volatile exchange rate and which in essence would determine the ultimate duration of the repayment of the loan itself. For many borrowers, the case is that due to the rising exchange rate of the Swiss Franc, the amount of their outstanding balance keeps climbing notwithstanding the diligent repayment of their already agreed instalments.
With regards to the second component of the floating rate, it seems that the exact nature of the pre-contractual terms was also not fully understood by the borrowers. Terms like these in essence enable banks to unilaterally adjust the interest rate. As is well known, the imposition of interest rates is one of the most crucial factors in increasing the borrower’s debt to the bank.
The question that arises therefore is whether the majority of the Swiss-Franc borrowers would have still entered into these loan agreements had they been presented in clear terms with the full extent and the potential consequences of each of those aforesaid provisions.
Various views have been expressed as to whether these loan agreements are indeed compliant with the provisions of the European Directive 93/13/EEC. The primary purpose of this directive is to redress the imbalance between consumers – borrowers in the present scenario, and banks, rendering ineffective from a contract, any potential term that could be classified as unfair. The unfairness in the present context is traced in the agreement between the borrowers and the banks in the light of the fact that the borrowers had been induced to enter the loan contracts without having been presented with the whole picture of the contract they were signing.
In the light of the above, the European Court of Justice in the case of Kasler and Rabai v OPT Jelzalogbank C-26/13 attempted to provide some clarity concerning some of the major questions that arise in respect of the consumer’s legal standing vis-à-vis the banks. The main question in this Case was not related to the embedded risk that a conversion of a currency entails. Rather it had to do with the extent of transparency of the contractual terms provided for in that conversion. The European Court of Justice has reiterated that the principle of transparency requires the clause in question to be as clearly and comprehensively drafted as possible. It also expects information to have been properly disclosed to the borrower as to the possible volatile nature of the exchange rate and in effect the adverse consequences on the final outstanding balance that would be required to be paid. That being said, the Court emphasised that a potential cancellation of a contract as a whole may also in the end turn out to be detrimental for the borrower.
It is on the above-mentioned Case that the European Court of Justice relied in a preliminary reference ruling request made before it by a Polish Regional Court. That Case had to do with an allegedly unfair term in a Swiss Franc-linked loan that in essence was granting leeway to the bank to fix arbitrarily the conversion rate between the Polish national currency and the Swiss-franc (C-260/18 Kamil Dziubak, Justyna Dziubak v Raiffeise, 3 October 2019). It was held that in a contractual relationship between a borrower and a bank, parity of forces needs to be present and any unfair term found should be regarded as of null legal effect.
The above decisions constitute the flagship for every Member State in the European Union including Cyprus, since they are called upon to follow a protective attitude towards borrowers of such loans. In the light of the European law and jurisprudence, banks have also become willing to settle relevant Cases in order to rectify the adverse position that their policies had caused to many of their clients.
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