In two recent cases, in the Netherlands the Financial Services Appeals Committee (Commissie van Beroep) (the "Appeals Committee") of the Complaint Institute for Financial Services (Klachteninstituut Financiële Dienstverlening) ("Kifid") has provided a long awaited guidance to the question as to what extent a consumer credit lender is allowed to exercise its discretionary contractual right to adjust a floating rate of interest vis-à-vis its borrowers, including in relation to loans secured by a residential mortgage right. The Appeals Committee came to the conclusion that a consumer credit lender, when exercising its contractual right to adjust the floating interest rate, is not necessarily bound by a pre-determined reference (such as Euribor). The contractually negotiated freedom to amend the interest rate did not leave a gap in the agreement, but rather allowed for the consumer credit lender to weigh in other relevant circumstances such as funding costs, costs of business and considerations of a competitive nature, provided that the exercise of such right is kept within the applicable boundaries of reasonableness and fairness. The Appeals Committee did not find the consumer credit lender's conduct to be unacceptable with a view to these principles.
In the first case, on 20 August 2001, the bank (the "bank") had extended to Mr. X (the "borrower") a consumer loan up to a maximum of fl. 250,000.- against a floating interest rate. In order to secure repayment of the loan, the borrower had granted the bank a second mortgage on his house. The agreement between the bank and the borrower stipulated that the bank would provide the borrower with written notification of any adjustments to the interest rate. Throughout the duration of the agreement, the bank exercised its contractual right to adjust the interest rate several times. The borrower started proceedings at the Kifid's Dispute Committee (geschillencommissie), claiming that in determining the adjusted interest rate the bank should base itself on the reference rate of three month Euribor, as well as claiming compensation for the excess interest paid.
In the second case, the bank had extended a consumer loan to Mr. Y (the "borrower") on 9 December 2002 up to a maximum of € 45,000.- against a floating interest rate. Up until 22 June 2009 various adjustments in the interest rate took place. The borrower started proceedings at Kifid's Dispute Committee, claiming compensation for the excessive amount of interest charged in result of the - allegedly - faulty adjustments to the interest rates.
In both cases, it was the bank's duty to notify the borrower in writing of any adjustments to the interest rate. Under the general conditions of both contracts, the borrower was also allowed to repay the loan at any time during the course of the agreement without costs being due.
The Dispute Committee
In both cases, the Dispute Committee ruled that it was not sufficiently clear that the bank would be permitted to determine the interest rate independently from market developments. In addition, the agreement lacked the inclusion of an external reference rate. These two deficiencies left a gap in the agreement, the shortcomings of which would need to be mended by the principles of reasonableness and fairness (art. 6:248 sub 1 of the Dutch Civil Code). Therefore, the Dispute Committee ruled, that the adjustment of a floating rate of interest applicable to the consumer loan had to be referenced to the rate of three month Euribor.
Decision of the Appeals Committee
The bank appealed the Dispute Committee's decision in both cases on the grounds that the terms in the agreement were in fact sufficiently clear, that the bank has the discretionary authority to adjust the floating rate, and that the additional risk/liquidity surcharges banks require when doing business with each other makes Euribor an inaccurate standard.
Contrary to what had been decided by the Dispute Committee, Kifid's Appeals Committee came to the conclusion that a consumer credit lender, when exercising its contractual right to adjust the floating interest rate, is not necessarily bound by a pre-determined reference (such as Euribor). The contractually negotiated freedom to amend the interest rate did not leave a gap in the agreement, but rather allowed for the bank to weigh in other relevant circumstances such as funding costs, costs of business and considerations of a competitive nature, provided that the exercise of such right is kept within the applicable boundaries of reasonableness and fairness. The Appeals Committee did not find the bank's conduct to be unacceptable with a view to these principles.
The Committee also ruled that in conformity with recent legislation (such as article 7:60 of the Dutch Civil Code), the consumer credit lender is obliged to inform the borrower adequately and in such a manner that he is able to ascertain whether the bank has used its discretion within the boundaries of reasonableness and fairness. In addition to this, the Appeals Committee interprets the contemporary trend in transparency case law at the CJEU as requiring banks to inform the borrowers of (i) which components the floating interest rate comprises and (ii) in the event where the consumer credit lender adjusts the applicable floating rate of interest vis-à-vis the borrower, which circumstances gave cause to said adjustment.
The Appeals Committee goes on to provide borrowers with an idea of what they may reasonably expect. In principle, the borrower may assume that the floating interest rate applicable to their consumer loan shall follow the development of interest rates applied on the market for comparable consumer loans. Any deviation therefrom that may prejudice the borrower's interests should be based either upon particular circumstances relating to the consumer credit lender, to be identified and explained to the borrower, or on particular risks in relation to the borrower, of which he should then be notified. Nevertheless, considering legal certainty, this information is only to be considered applicable as of 1 January 2013. The Appeals Committee declared each separate claim of the borrowers to be unfounded.
These two rulings of the Appeals Committee finally provide guidance among consumer credit lenders as to what extent they are allowed to exercise their discretionary contractual right to adjust a floating rate of interest vis-à-vis the borrower, including in respect of loans secured by a residential mortgage right.