Consumers – in particular borrowers – are generally very well protected in Austria. The rules protecting consumers directly and indirectly are enforced by Austrian courts and – as far as they derive from financial regulatory acts – the Austrian Financial Market Authority (FMA). During 2021, the FMA continued to put an emphasis on collective consumer protection, in particular, ensuring their trust in the financial market by securing transparency. The priorities for consumer protection in 2021, also in response to the coronavirus pandemic, increasing digitalisation and ongoing changes in the economy, included, among other things:
- providing information to consumers in a comprehensive and understandable manner;
- improving market and cost transparency for consumers;
- strengthening financial literacy among consumers and investors; and
- providing consumers with efficient tools (such as e-banking and smart contracts) to keep up with ongoing digitalisation.
Legislative and regulatory frameworki Legislation
In Austria consumers benefit from a very high level of statutory protection. Consumer finance issues are mainly provided for in the following laws and – where applicable – their European law equivalents:
- the Federal Act concerning the Distance Marketing of Consumer Financial Services implementing Directive 2002/65/EC of the European Parliament and of the Council of 23 September 2002 concerning the distance marketing of consumer financial services;
- the Federal Act Establishing Provisions for the Protection of Consumers (KSchG) implementing Directive 2011/83/EU of the European Parliament and of the Council of 25 October 2011 on consumer rights;
- the Federal Act on Off-Premises and Distance Contracts (FAGG) implementing Directive 2011/83/EU of the European Parliament and of the Council of 25 October 2011 on consumer rights;
- the Federal Act concerning Consumer Credits (VKrG) implementing Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers (CAFCD);
- the Federal Act concerning Consumer Credits with respect to Mortgages (HiKrG) implementing Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property; and
- further, various consumer protection rules and provisions derive from MiFID II,2 PSD2,3 CRD4 (respectively, their national implementation acts) and other financial regulatory regulations and directives.
Additional provisions in other laws such as data protection laws, general civil laws or certain other administrative laws further strengthen the very high statutory safety level for consumers.ii Regulation
Generally, laws are implemented by the Austrian parliament, ordinances are established by the competent authorities and both are enforced by the relevant administrative authorities. With respect to financial market issues (including consumer finance regulations), the supervising authority for banks are the FMA, partially the Austrian National Bank and the European Central Bank (the latter being the single supervisory mechanism). In general, banks that infringe the administrative provisions of consumer protection laws face administrative fines (in a worst-case scenario the loss of their banking licence is theoretically also possible) and also may be sued by consumers who incurred damage as a result of the breach.
Additionally, consumers may contact the ombudsman of the Joint Alternative Dispute Resolution Institution of the Austrian Credit Institution Sector, or – but only with respect to foreign currency loans – the Alternative Dispute Resolution Institution for Consumer Deals. Both bodies are responsible for out-of-court settlement of consumer disputes and are competent bodies under Article 3 of the Alternative Dispute Resolution Act, which implements Directive 2013/11/EU of the European Parliament and of the Council of 21 May 2013 on alternative dispute resolution for consumer disputes. Generally, alternative dispute resolution procedures require the consent of the defendant and are not mandatory, meaning that a bank may refuse to participate, which leaves the consumer with the option to file a claim.
Furthermore, consumers may approach the Consumer Association for Consumer Information (VKI), the most well-known, organised and powerful consumer association in Austria. The VKI is very active with respect to the supervision of general terms and conditions of banks and other financial institutions. Its aim is to inform and advise consumers and to fight for the enforcement of their rights. The VKI continues to win many cases for consumers, leading to a very detailed and consumer-friendly Austrian Supreme Court practice. Case law has certainly proved that consumers are generally very well protected in Austria.
The Federal Act on the Provision of Payment Services 2018 (ZaDiG)5 sets forth the rules under which payment service providers may operate and service users are protected. Payment service providers are not able to opt out of various transparency, information and other obligations when providing their services to consumers. Direct cash transactions between payer and payee, under Section 3(3)(1) ZaDiG, are, however, exempted. The general civil law rules apply to direct cash transactions.
Consumer protection measures are mainly set forth as part of the duties of payment service providers to inform consumers (Article 26 et seq. ZaDiG) as well as the rules applicable to transaction content (HiKrG with respect to a mortgage credit, etc.).ii Recent developments
The market for online payment services, including mobile payment services, continues to increase rapidly, in part because of the continuously developing fintech culture, but also due to the overall advancement of technology in the context of digitalisation and the growing negotiation power of consumers. Hence, innovative ideas with respect to the identification of new clients and the use of mobile and online payment methods are becoming increasingly important. Therefore, banks are looking to cover the gap between client demand for easy and quick payment methods and the legal framework requiring the financial institutions to provide high safety standards and comply with anti-money laundering and anti-terrorism financing regulations, and know-your-client duties.
Financial technology start-ups (fintechs) and financial innovation think tanks are driving the market's development and continuously bringing new challenges with them. The FMA operates a Fintech Navigator on its homepage, which is continuously updated and includes the option of contacting the regulator directly if the company does not already have a licence.
The replacement of the 'old' Payment Service Directive with the PSD2, not only increased transparency but also introduced the information requirement and led to a development of new and innovative payment systems. One of the prominent developments resulting from the shift is the use of third-party providers upon customer request, leading to two additional types of payment service providers, detailed below.
First, providers of payment initiation services (PIS), who are third-party providers, can initiate payments on behalf of customers. For customers, this means a great variety of secure payment options, allowing for a better customer service. However, customers are not the only ones who reap the benefits of this convenient alternative to conventional online payments by credit card. Online merchants also appreciate the option of PIS, as it is often cheaper than other payment services and its technical implementation is fairly easy.
Second, in comparison to PIS, providers of account information services (AIS) access information stored with account-keeping financial institutions on behalf of a customer. They analyse and consolidate customer and account data so that in turn they can be used for services from other banks and third-party providers. Popular services include multi-banking apps that use AIS to aggregate various online banking accounts under one user interface, or online credit platforms that conduct a real-time credit check based on an aggregated expenditure account and liquidity assessment.
Deposit accounts and overdraftsi Overview
Banks must hold a banking licence under the Austrian Banking Act (BWG)6 to administer funds or accept deposits (deposit business) and for the provision of non-cash payment transactions, clearing services and current-account services for other parties (current-account business). Most of the regulations are protective laws allowing the consumer – if a bank breaches its obligations – to claim damages from the bank.ii Recent developments
In 2020, Austria officially onboarded the first Austrian bank to one of its digital deposit platforms, and since then several of Austria's well-known credit institutions have relied on this concept. Basically, open banking deposit platforms allow banks to offer attractive third-party deposit products to their own customers through their existing accounts. As a result, customers who desire a choice of deposit products are not forced to laboriously open additional accounts elsewhere anymore. The product bank – as far as requiring additional funding for strategic or regulatory aims – is able to access this deposit market without having to operate its own expensive retail infrastructure in each foreign country.
In February 2021, the European Banking Authority (EBA) issued an opinion regarding the removal of obstacles to open banking.7 Its opinion, which is based on the EBA Regulation (Regulation (EU) 1093/2010), addresses national banking authorities directly, which is the FMA in Austria. Evidently, its key message is that national supervisory authorities should take action against payment service providers that still have obstacles in place that hinder the service of open banking.
The decision to give credit to a consumer is at the sole discretion of the credit institution, which must comply with all its obligations under the VKrG (and HiKrG), and the general obligations under the KSchG, the FAGG and the general civil law rules. These regulations do not actually differentiate between revolving credits or instalment credits (hence, see the applicable provisions below). From an Austrian point of view, the use of revolving credits is only of little significance for consumers.
Instalment crediti Overview
The most relevant law, the VKrG, applies to (non-property) loan agreements involving a total loan amount of a minimum €200 (there is no maximum limit) entered into by an entrepreneur as the lender on the one hand and a consumer as the borrower on the other hand; this also applies to instalment loans.
The VKrG contains, inter alia, certain pre-contractual information and audit obligations for the lender. In particular, Articles 3 to 10 CAFCD have been implemented by the VKrG almost identically into national law and must be complied with by the lender. Before the conclusion of the loan agreement, the lender must assess the consumer's creditworthiness on the basis of sufficient information, where appropriate, obtained from the consumer and, where necessary, on the basis of a consultation of the relevant database.
The VKrG also contains a right of withdrawal for the consumer according to which the consumer shall have a period of 14 calendar days in which to withdraw from the loan agreement without giving any reason. The consumer is entitled at any time to terminate unlimited loan agreements free of charge whereby a period of notice is only permissible where it has been explicitly agreed and, if so, only up to one month. The consumer is entitled at any time to discharge fully or partially his or her obligations under a loan agreement whereby he or she shall be entitled to a reduction in the total cost of the loan, this reduction consisting of the interest and the costs for the remaining duration of the contract.
Even if not specifically stipulated in the VKrG, where the lender grants the consumer a loan that the borrower will not be able to repay (because he or she is financially too 'weak'), there may be a risk that enforcement over a certain amount will not be permissible; that rule nowadays becomes even more relevant owing to covid-19 and the connected uncertainty resulting from it.ii Recent case law
In recent years, the topic of negative interest rates and banks' obligation to let borrowers benefit from them dominated the discussion of market participants. However, the Austrian Supreme Court has in the meantime developed a standard practice that with respect to 'old' loans, which have no limitations, wording or clauses on negative interest rates — negative interest rates must be passed on to the consumer (but capped at zero).8 Nowadays, every variable rate arrangement contains such a zero-cap.
The European Court of Justice confirmed in one of its recent judgments that consumers have the right to withdrawal if any of the mandatory disclosures required to be provided in the credit agreement under the Consumer Credit Directive has neither been accurately included in the agreement nor properly communicated retroactively.9iii Current developments
Over the last two years, the covid-19 outbreak has led to a sudden slowdown in consumer lending in Austria, with the pandemic significantly reducing appetite among consumers to take on debt. Declining incomes and rising uncertainty over economic prospects also negatively impacted demand for loans. In 2021, the situation has only looked slightly better and the growth in consumer loans has just been a gradual process. The reasons for this are continued low consumer confidence and a decline in the use of public guarantees for borrowing. In contrast to consumer loans, other loans to households, such as loans for home improvement, recorded growth.
Other areasi Use of smart contracts
The use of smart contracts has been a topic of discussion in various areas of the finance sector. Smart contracts can be understood as digital computer programs that can automatically and independently (without human intervention) carry out processes if a specific event occurs. With the growing interest in sustainability and with the changing customer expectations for faster and easier processes, smart contracts could be a solution by providing these mechanisms to efficiently reduce costs and time.
The areas of application for smart contracts are widespread and include corporate finance, banking systems and the insurance sector. Also, in the credit sector, further developments in the use of smart contracts are to be expected. One relevant application could be found in the monitoring of conditions of interest and repayments for loan agreements.ii Statutory limitation periods
The Austrian Supreme Court's practice with respect to statutory limitation periods and consequential damages in foreign currency loans should be noted. In summary, the Supreme Court holds that the moment when the borrower recognises (or has been in the position to recognise or should have recognised) that the loan is detrimental to the borrower's purpose, the statutory limitation period of three years for a damage claim commences. If the borrower is not in the position to claim an exact amount, the borrower must file a claim for a declaratory judgment. If the borrower waits until the damage has actually occurred but the court finds out that the borrower has known (or should have known) that the loan was detrimental for more than three years without filing a claim, the borrower's claim becomes time-barred, and – which is in many cases very important – the same applies to consequential damages resulting from foreign currency loans.10iii Changing legislation
The year 2022 brings new legislation, some in respect to consumer protection.
The EU Regulation on European Crowdfunding Service Providers for Business (the ECSP Regulation) entered into force on 10 November 2020 and has been applicable since 10 November 2021. It allows crowdfunding service providers to offer crowdfunding services across the EU, thereby establishing a union-wide harmonisation. Member States had to designate an authority responsible, and in Austria the FMA has taken over the roles as supervisor. Two of the instruments included in the ECSP Regulation are loans and transferable securities within the meaning of MiFID II.
The Directive on representative actions for the protection of consumers' collective interests (Directive (EU) 2020/1828) entered into force on 24 December 2020, repealing the Injunctions Directive of 2009 (Directive (EU) 2009/22/EC). The Directive must be transposed into national law by 25 December 2022 and its provisions must be applied as of 25 June 2023. For consumers, this change should mean that any obstacles regarding the access to legal protection should be removed, or at least diminished, and consumers should also have the possibility to obtain compensation for damages suffered.
The recently adopted Warranty Directive Implementation Act (GRUG), implements the provisions of the Sale of Goods Directive (EU) 2019/771 and the Digital Content Directive (EU) 2019/770 and applies to all contracts entered into as from 1 January 2022. The new warranty law has been implemented in the new Consumer Warranty Act (VGG) and has led to amendments of the Austrian Civil Code and the KSchG. The new VGG will apply to agreements conducted between consumers and businesses relating to, in particular, (1) contracts for the purchase of goods (tangible property) and (2) contracts for the provision of digital services. It also includes several amendments, including the right to amend contracts, withdrawals from contracts and warranties.
Over the years the Austrian Supreme Court and inferior courts have dealt with many claims challenging general terms and conditions clauses with respect to unfair and non-transparent practice. As the Supreme Court has implemented a very strict standard with respect to transparency, many of the clauses used by banks have been found invalid, especially under the KSchG. In general, the transparency requirement is intended to allow customers to be informed about their rights and obligations in an understandable manner. As such, the general terms and conditions ought to state provisions as transparently as possible and be modified based on the type of the contract.
Especially regarding terms and conditions of banks and credit institutes, there has been an increased interest in the correct application of provisions regarding transparency, also owing to the involvement of the VKI. The following cases are noteworthy: (1) a case in which the court held that the consumer must be able to calculate or to understand the calculation of adjustments of the applicable interest rate to the loan – the court of appeal confirmed the court's decision that clauses that do not meet these criteria are not transparent and consequently invalid;11 and (2) a case in which the court held that the consumer must have precise information on potential cost with respect to a loan and its securitisation – the Supreme Court confirmed the court's view that unclear provisions are invalid12 and that unspecified debt collection costs that – in the worst case – might lead to unjustified cost transfers to consumers are also invalid.13
In general, many cases dealt with the following aspects:
- interest calculation including the lack of transparency of calculation methods, leading in most cases to the invalidity of clauses, which the courts hold should be transparent and understandable; and
- shifting of cost to consumers and extending the term 'cost' to fees and expenses that might be generated in connection with a business relationship, whether or not the consumer has caused this cost, leading in most cases to the invalidity of such clauses as the courts would like costs to be proportionate.
The Austrian courts have also decided cases where banks had new clauses implemented in their general terms and conditions that resulted in detrimental provisions for the consumer as to fees or other provisions, leading in most cases to the invalidity of such clauses, as the Austrian courts only recognise balanced new clauses for agreements with respect to consumers.
A slightly surprising turn regarding transparency clauses has been brought forward by the European Court of Justice in one of its recent judgments. The question on the admissibility of tacit consent clause has been a topic of discussion for many years (especially since the decision of the Austrian Supreme Court that found a generally used tacit consent clause to be void due to gross discrimination and non-transparency).14 Now the European Court of Justice has decided that tacit consent clauses, which meet all essential requirement for the protection of consumers are permissible within the scope of ZaDig and the PSD2.15 Therefore, they are not to be assessed as grossly disadvantageous or non-transparent under Austrian national law. In summary, tacit consent clauses that regulate the procedure for a contract amendment, and that meet all the requirements for consumer protection, are permissible.
Recent casesi Enforcement actions
The FMA is not obliged to publish its sanctions, but it will do so in certain situations where publishing is justified for reasons of investor protection. The following descriptions are based on the sanctions made public on the FMA's homepage but should not be seen as representative of the FMA's focus. The FMA regularly imposes sanctions against:
- non-authorised entities providing licensable banking, payment or investment services or activities to Austrian investors, especially consumers;
- an authorised credit institution not fulfilling the credit institution's obligations to its creditors, in particular for the safeguarding of assets that have been entrusted to it; and
- private investors breaching the ban on market manipulation or providing a public offering without publishing a prospectus.
Relating to infringements by authorised entities (such as licensed credit institutions), the FMA in certain cases does not impose administrative fines, but instead orders the entity to stop operation or to change its management board, or both, holding that certain directors are no longer fit and proper. Those actions are not made public according to current law but are one of the regulator's most powerful tools.ii Disputes settled before the regulator
A dispute between a consumer and a bank may lead to an administrative fine for the bank or the bank's management, but the regulator will not settle the dispute between the consumer and the bank. Individual consumer protection cannot be derived from Austrian regulatory provisions and disputes cannot be settled before the FMA, but consumers can protect their rights before the competent Austrian courts.
As there is no standing practice in Austria with respect to the public disclosure of alternative dispute resolution, neither the Joint Alternative Dispute Resolution Institution of the Austrian Credit Institution Sector nor the Alternative Dispute Resolution Institution for Consumer Deals has published any relevant cases with respect to consumer finance issues. In most cases publication would not be expected, as from a bank's point of view the confidentiality of out-of-court settlement prevails; while, from a consumer's perspective, there seems to be no interest in publication because the consumer will have already benefited from the alternative dispute resolution (as the consumer's claim is likely to have been fulfilled).
Austria is 'overbanked', meaning that many banks are competing for a limited number of wealthy clients, which could be interpreted as a very consumer-friendly environment where consumer expectations and claims are more often satisfied than denied.iii Litigation
One of the most important cases for the protection of consumers (apart from the above-mentioned negative interest decisions by the Austrian Supreme Court) has been decided before the European Court of Justice.16 In this case, a major bank operating in Austria was offering contracts for internet e-banking to its customers and providing payment services. As part of the general terms in its e-banking contracts, it included a term under which 'notices of changes' were communicated to the customer through the internal mailbox of the bank's internet e-banking system. The bank created a mailbox for every customer in its e-banking system. Customers could access their personal mailbox by logging in with their personal password through the e-banking website. Electronic messages were then transmitted by the bank to that mailbox. There was no supplementary communication, for example, through a message sent to the personal private email of the client informing him or her that a message had been sent to the corresponding e-banking mailbox. The VKI considered that the term and the described set-up did not comply with the duty of providing information in a 'durable medium' set out in Directive 2007/64.
Following the request for a preliminary ruling of the Austrian Supreme Court, the key question for the European Court of Justice was whether electronic information transmitted by the bank to its customer into the respective e-banking mailbox of the customer as described above was provided on a durable medium.
In its ruling, the European Court of Justice established the following two conditions that must be fulfilled for such a system to provide information in a durable medium: (1) 'that that website allows the user to store information addressed to him personally in such a way that he may access it and reproduce it unchanged for an adequate period, without any unilateral alteration of its content by that service provider or by another professional being possible'; and (2) 'if the payment service user is obliged to consult that website in order to become aware of that information, the transmission of that information must be accompanied by active behaviour on the part of the provider aimed at drawing the user's attention to the existence and availability of that information on that website'.
In summary, this decision led to the result that the e-banking solutions have been (heavily) 'renovated' to include some sort of notification (such as email) for customers regarding messages in their e-banking mailbox.
Another local important case17 dealt with a bank that calculated the cost for reminder fees in cases of late payment without reference to cause or other limitation as 5 per cent on top of the other interest plus additional reminder fees. The court held that unlimited fees – without linking them to the consumer's fault or other circumstances – breach Austrian mandatory law, which provides that only the necessary cost for out-of-court expenses can be recovered, and the costs in this case were extremely detrimental and invalid as there was no balanced relation between the listed reminder fees and the actual delayed payment or enforced claim.
Throughout the last year, the Austrian Supreme Court has ruled over various questions regarding general terms and conditions of banks and financial institutions and has therewith offered valuable guidance on the practical use of these terms. For example, the Austrian Supreme Court deals with complaints concerning inadmissible disclosure obligations, clauses on interest and contractual provisions on the liability of customers in cases of abuse.18 In one of its recent cases, the Austrian Supreme Court clarified that it is not called upon in any case to interpret general terms and conditions clauses, but only if the second instance disregarded principles of Supreme Court jurisprudence or if questions of importance for the unity and development of the law had to be resolved.19 Accordingly, a decision in an individual case is only reviewable by the Supreme Court if a gross error in the interpretation of the applicable legal norm has to be corrected.
It is without a doubt that the covid-19 pandemic has led to high levels of uncertainty and has had an overall negative impact on the economy. We have seen a small improvement in consumer lending compared to 2021; however, the chances of reaching pre-covid-19 levels in terms of financial certainty and economic improvements in the near future are slim. With all the negative outcomes, we should not forget that the pandemic has also brought enhancements and developments, especially in the digitalisation of the financial sector. The concept of open banking has certainly benefited from the restrictive movement of people during the pandemic, and the development of cryptocurrencies and the digitalisation of banking have flourished over time.
In general, it is very likely that digitalisation is unstoppable (in all areas) and will continue to drive the market and gain more and more popularity among all 'players'. Ultimately, digitalisation will revolutionise the classic 'old-school' banking business in Austria, and this development will not and cannot be stopped by any regulator. The introduction of several new regulations during the upcoming year will lead to some changes in the protection of consumers. Overall, regulators, in particular the FMA, will continue to focus on this area to ensure proper supervisory mechanisms are in place regarding new technologies. This becomes, in particular, evident in relation to virtual currencies, where regulators do all in their power to ensure the application of various supervisory laws (even where the interpretation of various regulatory laws is clearly wrong under a purely formal view).20 Undeniably, supervisory authorities want to regulate any and all development in the fintech sector, regardless of whether the financial market rules are fitting to the relevant fintech service or activity.