CJEU ruling reminds banks of transparency requirements in consumer credit agreements

The preliminary ruling by the CJEU concerned information included in a credit agreement between a consumer and a bank in Poland. The consumer, through Polish debt collection company Lexitor, claimed that the bank failed to fulfil its obligation to provide clear and transparent information to the consumer when concluding the contract and sought the recovery of the interest and fees paid by the consumer to the bank under the agreement.

Lexitor argued that the annual percentage rate of charge (APRC) in the credit agreement in question was overstated because certain terms of the agreement were found to be unfair and, therefore, not binding on the consumer. It also contended that the agreement did not clearly specify the reasons and methods for increasing the fees related to its execution. Lexitor said that these shortcomings should trigger the sanction provided by Polish law, which forfeits the bank’s entitlement to interest and fees set out in the contract.

The EU’s highest court was asked to clarify the application of the information requirements under the EU directive on credit agreements for consumers (the Directive), which sets out rules to ensure high standards of consumer protection and requires the provision of clear and sufficient information to consumers, enabling them to make informed choices when signing up to a credit agreement. Specifically, the Lexitor case raised three questions relating to the rules around APRC, information required on the methods of increasing fees, and the sanctions under EU law if the bank failed to meet these requirements.

The court ruled that creditors must provide clear information about the APRC and the total cost of credit, as well as set out transparently the reason for and method of any variation of the charges for the service to be provided. Simply listing a certain number of circumstances justifying an increase in charges may not be enough to satisfy the obligations under the Directive. The court clarified that consumers should be informed in a clear and detailed way, so they are able to understand whether these circumstances have arisen and their effect on those charges.

The court also ruled that if a bank fails to meet these requirements, the consumer may be entitled to seek reimbursement of any charges that have not been adequately disclosed.

Dr Eric Perru of Pinsent Masons said that the CJEU ruling sends a very strong signal to banks and lenders about the importance of consumer protection, particularly given the current economic climate of volatility and inflation. “Financial actors in the EU will need to be very vigilant about the content of their consumer credit agreements and ensure clear and transparent presentation of the method of calculating interest and all additional fees,” he said.

Although the court confirmed that the sanctions against banks and creditors for breaching their obligations under the consumer credit agreement rules may consist of depriving them of their right to interest and charges, the ultimate penalties should be decided according to national legislation of EU member states.

It also emphasised that national courts keep a broad prerogative to assess all the circumstances of each case, including the terms of the contract and the seriousness of the breaches, and apply the principle of proportionality, when determining the sanctions against non-compliance.

“Without a uniformity of sanctions across the EU, investors, banks, lenders and consumers must remain very cautious about the possible discrepancy of national legislation, especially in cross-borders businesses,” said Perru.