Today the EFTA Court handed down its advisory opinion on the interpretation of provisions in Directive 87/102/EEC on consumer credit, and Directive 93/13/EEC on unfair terms in consumer contracts. The opinion was requested by the Reykjavík District Court in connection with a case brought by Mr. Sævar Jón Gunnarsson against Landsbankinn. The case centres on the legality of the inflation indexation provision in a bond Mr. Gunnarsson issued to the Bank in 2008.
As regards Directive 87/102/EEC on consumer credit, the EFTA Court finds that the when a credit agreement is linked to a consumer price index (CPI), it is not compatible with the Directive to calculate the total cost of the credit and the annual percentage rate of charge on the basis of 0% inflation if the known rate of inflation at the time of the credit agreement is not 0%. It is for the national court to assess, taking account of all the circumstances of the case, the legal consequences of and the remedies for such incorrect information, provided that the level of protection established by the Directive, as interpreted by the Court, is not compromised.
As regards Directive 93/13/EEC on unfair terms in consumer contracts, the EFTA Court, inter alia, finds that the Directive does not generally prohibit contractual terms on the indexation of loans in contracts between a lender and a consumer. It is for the national court to assess whether the term at issue is unfair. The Directive does not limit the discretion of an EEA State to determine in legislation or administrative regulation the factors that may cause changes in a pre-determined index, such as the Icelandic CPI, as well as the methods for measuring those changes, provided that they are explicitly described in the contract. It is for the national court to establish whether a particular contract term has been negotiated individually in the understanding of the Directive. It is for the national court to establish whether a contract term relating to the indexation of repayment instalments of a loan must be regarded as having been explicitly and comprehensibly described to the consumer. Moreover, the EFTA Court finds that where a national court considers that a given term is unfair within the meaning of that Directive, the national court must ensure that such a clause is not binding on the consumer provided that the contract is capable of continuing in existence without the unfair term, in so far as such continuity of the contract is legally possible under the rules of domestic law.
The Reykjavík District Court will now consider the EFTA Court's advisory opinion and establish, based on Icelandic law, whether and to what extent it impacts judgement in the aforementioned case. It is not possible, at this stage, to determine the final conclusions of the Court in the case.
The Act on Interest and Price Indexation, No. 38/2001, clearly authorises the price indexation of loans. Landsbankinn is of the opinion that the inflation indexation provisions of loans in its portfolio comply with that Act and other rules of law that apply to the indexation of loans. The Bank further considers information provided in connection with the granting of indexed loans to have been in compliance with Icelandic laws on consumer credit. At the time when the loan disputed in the aforementioned case was taken out, the Act on Consumer Credit, No. 121/1994, was in effect. This legislation transposed into Icelandic law Directive 87/102/EEC, on consumer credit. The first paragraph of Article 12 of the Act provides that the annual percentage of cost for inflation-indexed loan contracts shall be calculated based on the assumption that price levels, interest and other charges will remain unchanged for the term of the loan. Landsbankinn interpreted the provision to clearly mean that inflation should not be considered in the calculation of the annual percentage rate of charge (0% inflation). The opinion of the EFTA-Court is advisory and it is now for the Icelandic courts to consider the case. One of the issues that will be considered is whether the Directive was correctly implemented into Icelandic law. The Bank takes the view that the Icelandic Act on Consumer Credit, in force at the time, very clearly stipulated that changes in price levels (inflation) were not to be considered in the calculation of the annual percentage rate of charge. The opinion of the EFTA Court, furthermore, indicates that it matters whether the consumer knew or could have known about the impact of inflation if inflation was not taken in the calculation. Various issues will therefore be considered by the Icelandic courts.
Landsbankinn has reviewed the potential impact of a ruling holding the Bank responsible for the illegitimacy of provisions on inflation-indexation or of it being established that information provided in connection with the granting of indexed loans was insufficient. Such a verdict could negatively impact the value of the affected portion of the Bank's inflation-indexed loan portfolio. The Bank's equity ratio is, however, very strong and would remain well above the FME's minimum capital requirement despite such an outcome. Such a verdict would not impact the Bank's capacity to repay the covered bonds issued by the Bank and admitted for trading on a regulated market in Iceland.
For further information, please contact
Kristján Kristjánsson, pr@landsbankinn, +354 410 4011/ +354 899 9352