ECJ ruling 'could lead to withdrawals from credit agreements'

The Court of Justice of the European Union (ECJ) ruled in a dispute between a lender and a consumer that the Consumer Credit Directive requires that credit agreements must provide clear and concise information on when people can withdraw from them.

Relying on wording that refers to other national legislation undermines the effectiveness of the right to withdraw, the ruling said.

Christian Schmidt, expert on litigation and arbitration of Pinsent Masons, the law firm behind Out-Law, said: “This decision might have an impact on withdrawal from consumer credit agreements in Germany. Financial institutions should prepare for an increase in withdrawals.”

The lender in this case, Kreissparkasse Saarlouis, used a credit agreement that set the date for withdrawal by referring to a provision in German law that in turn referred to another part of German law. The Court ruled that this made it too difficult for the consumer to exercise their rights.

The ruling said that the Consumer Credit Directive must be interpreted “as precluding a credit agreement from making reference […] to a provision of national law which itself refers to other legislative provisions of the Member State in question”.  References lined up in this way are referred to as "cascade reference".

“The judgment has no binding effect on any individual cases other than the one subject to the Court's decision," said Michèle Heil, expert on litigation and arbitration at Pinsent Masons. “Many credit agreements on the German market contain the referral method held to be insufficient by the ECJ, but this ruling does not trigger an ‘automatic’ right to withdraw from credit agreements on a wider basis.”

The effect of this decision in Germany is questionable, as national regulations leave no space for interpretation, Schmidt said.  The ECJ’s interpretation of the Consumer Credit Directive contradicts German law: the “Einführungsgesetz zum Bürgerlichen Gesetzbuch” (Introductory Law to the German Civil Code), the "EGBGB" gives an example where cascade references in consumer credit agreements like the one challenged by the ECJ are explicitly envisaged.

This was also the view of the German Federal Court of Justice in a parallel case with regard to the case now decided by the ECJ. It is to be seen whether the German federal Court of Justice abides this view in the light of the ECJ decision. “This would be adequate with regard to the division of powers: the decision of the European Court of Justice has shown that the national law includes regulations that contradict European law. It would be on the German legislator to rectify this”, Heil said.

“We anticipate that, in light of the current interest rate situation, a considerable number of consumers will attempt to revoke their loan contracts on the basis of the ECJ judgment. It will be essential for any financial institution whose book of business may fall within the scope of the judgment to closely monitor the further developments in the German market, in particular as to any upcoming legislative changes and judgments by the German national courts," said Schmidt.

The ECJ decision refers to a dispute among a customer and the Kreissparkasse Saarlouis, which prompted the responsible District Court in Saarbrücken to refer the matter to the ECJ.

In 2012 a consumer had concluded a mortgage-backed loan agreement for €100,000 with Kreissparkasse Saarlouis, which was bound until 30 November 2021 and had a debit interest rate of 3.61% a year.

The contract lacked mandatory information the consumer must receive to trigger the withdrawal period. Instead, the contract only referred to a paragraph in the Bürgerliches Gesetzbuch (German Civil Code, the "BGB"), which in itself referred to an EGBGB paragraph.

When the consumer exercised his right to withdraw, Kreissparkasse Saarlouis was of the opinion that this came too late. The consumer filed a case before the District Court Saarbrücken.

The District Court doubted that the consumer had been instructed properly about the right to withdrawal. The cascade referral required that the consumer take the information for the start of the period from the relevant legal texts, but also to carry out an additional legal examination of the closer conditions. The District Court believed this to be a contradiction to the European Consumer Credit Directive, which demands of consumer credit agreements to contain in clear and precise words “the deadlines and other modalities for exertion of withdrawal”. So the District Court requested a preliminary ruling from the ECJ.