Advocate General to the Court of Justice of the EU gives his opinion on whether a sale of a consumer debt portfolios breach the EU's unfair contract rules or not
In 2017 consumer debt portfolios with a value of around £35billion were traded in the UK alone. The value of the market in the EU is €100billion. However there are now question marks about whether the trading in the underlying consumer loan agreements contravenes the EU rules on unfair contract terms or not.
Questions referred to the CJEU for an opinion
On 10 January 2018 the Court of Justice of the European Union in Luxembourg heard arguments in 2 separate cases that had been referred to it from Spain. The first case (Cortés) was referred by Spain’s highest court. It asked the 5th chamber of the CJEU to rule as to whether a default rate of interest of 2% above the annual ordinary interest rate is unfair or not. In the other case (Demba & Bonet) there was an attack on the validity of debt sales. There the CJEU was asked whether the business practice of assigning or buying debts without offering the consumer the opportunity to extinguish his debt first contravenes the EU’s unfair contract rules under the Unfair Contract Terms Directive (UTCD) or not.
Opinion of AG Wahl
On 22nd March 2018 Advocate General Nils Wahls delivered his written opinion to the CJEU. At the time of writing this opinion had been translated into most official European languages but not English. Spanish law permitted a higher default interest rate but this practice is specifically outlawed in the UK in relation to regulated consumer credit agreements under section 93 of the Consumer Credit Act 1974.
Default interest rates
The Advocate General answers the referred questions by saying that loan agreements with a default interest rate of more than 2% over the contract rate are unfair, that a national court must strike these down as unfair and must not attempt to substitute an alternative or lesser default interest rate. A default interest rate of up to 2% more than the contractual rate could be found to be unfair by a national court but it would depend on the circumstances. He ruled that default interest rates were not 'core' terms under the UTCD as opposed to annual ordinary interest rates which are 'core' terms.
On debt sales his opinion is that these do not contravene either the UTCD or other fundamental rights under the EU treaties. He rules that an assignment of a debt by a bank to a debt purchaser has a 'neutral' effect on a debtor and should not change their obligations under the contract. Where, before a debt sale, a bank does not offer a debtor a prior opportunity to extinguish the debt by paying the price with interest this does not contravene the UTCD. He ruled that the debt sale does not cause detriment to the customer that would result in there being a significant imbalance between the lender and the customer.
Next steps in case
At a later date the 5th Chamber will issue its judgment saying whether it agrees with this opinion or not. A ruling from the CJEU is final and there is no appeal. An adverse ruling on these unfair contract terms issues could have severe consequences for the UK’s debt sale market.