CJEU clarifies reduction of costs in early repayment of credit under Directive 2014/17/EU
by Ganado Advocates
12th May 2023
On 9 February 2023, the Court of Justice of the European Union (“CJEU”), in delivering a ruling in the case of UniCredit Bank Austria AG vs. Verein für Konsumenteninformation (Case C-555/21), considered the provisions on reduction of costs in the event of early repayment in respect of credit agreements subject to Directive 2014/17/EU on credit agreements for consumers relating to residential immovable property (“Directive 2014/17”) and credit agreements subject to Directive 2008/48/EC on credit agreements for consumers (“ Directive 2008/48”). It concluded that in terms of Article 25(1) of Directive 2014/17 national legislation may in the case of early repayment, limit the reduction in the total cost of the credit to only interest and costs which are dependent on the duration of the contract.
Background to the case and Judicial Proceedings before the Austrian Courts
In the main proceedings brought before the Austrian Courts, Verein für Konsumenteninformation (“VKI”), an Austrian consumer protection association, claimed that a specific standard contractual term used by UniCredit Bank Austria AG (“UCBA”) in their credit agreements concerning residential immovable property and subject to Directive 2014/17, should be removed. The clause in question stated that in case of early repayment of credit by a consumer, interests and costs dependent on the duration of the contract would decrease proportionally whilst processing costs which are not dependent on the duration of the contract would not be reimbursed (even proportionally).
Before the court of first instance in Austria, VKI referred to the Lexitor judgement whereby the CJEU had held that in the event of early repayment the reduction in total cost of credit included all costs imposed on the consumer (i.e., not just those dependent on the duration of the contract). However, the court of first instance dismissed VKI’s claims on the basis that the Lexitor judgement (C-383/18) did not interpret the clauses in Directive 2014/17 (the Directive which regulates the standard contractual clauses in question) but rather interpreted clauses within the context of Directive 2008/48 which establishes a different system.
Subsequently, the court of appeal in Austria did not agree with the court of first instance and held that since Directive 2014/17 and Directive 2008/48 include similar wording in relation to early repayment, and in view of the Lexitor judgement, it cannot be held that costs which are not dependent on duration of the contract cannot be reimbursed proportionately.
In a further appeal, the Oberster Gerichtshof (Supreme Court, Austria) (the “Referring Court”), which was to decide the case following UCBA’s appeal, on the one hand considered that the objectives of both Directive 2014/17 and Directive 2008/48 are to ensure a high degree of protection for consumers, but on the other hand considered that contracts which fall under Directive 2014/17, whereby credit is required in the context of residential immovable property, would normally involve various costs which are not dependent on the duration of the contract and which are ultimately not necessarily within the control of the credit institution providing the credit (including inter alia, valuation costs and costs for registration of mortgage in Land Registers).
The Referring Court decided to stay the proceedings and referred the case to the CJEU for a preliminary ruling to determine whether Article 25(1) of Directive 2014/17 should be interpreted in a manner which permits national legislation to allow for the proportional reduction of interest and costs which are dependent on the duration of the contract only without allowing any proportional reduction for costs which are not dependent on the duration of the agreement, in instances of early repayment.
Legal Context and CJEU’s Legal Considerations
Article 25(1) of Directive 2014/17 (the article to be interpreted in the preliminary ruling) and Article 16 of Directive 2008/48 are very similar in that they both provide that if a consumer discharges, whether fully or partially, its credit obligations under a credit agreement prior to its expiry, the consumer would be entitled to a reduction in the total cost of the credit to the consumer, such reduction including the interest and the costs of the remaining duration of the contract.
The CJEU referred to Directive 2014/17’s recitals which state that in order to ensure legal certainty, consistency of frameworks and the reduction of administrative burdens on creditors and credit intermediaries, the core framework of Directive 2014/17 should follow that of Directive 2008/48 where possible. Nonetheless, the recitals of Directive 2014/17 also provide that a differentiated approach is required from that of Directive 2008/48 given that specificities concerning credit agreements relating to residential immovable property must be taken into consideration and a higher level of protection is required.
The CJEU observed that the aim of the reduction of costs in Article 25(1) of Directive 2014/17 is not to place the consumer in the situation such consumer would have been had the credit been granted for a shorter period, or for a smaller amount, or under different conditions. Rather, the aim is to adapt the agreement according to the circumstances of the early repayment. Therefore, the right to reduction cannot cover costs for services payable by the consumer, which irrespective of duration of contract, have been previously carried out by the creditor or third party, in their entirety prior to early repayment.
The CJEU also considered the fact that consumers subject to Directive 2014/17 would have received, prior to entering into any credit contract, pre-contractual information included in the European Standard Information Sheet (ESIS) (as set out in Annex II Directive 2014/17 and required by Article 14 Directive 2014/17). The ESIS, apart from providing the consumer with information required to make an informed decision, would include a breakdown of charges payable by the consumer indicating whether they are payable regularly. According to the CJEU, such information being provided to the consumer reduces the credit institutions’ flexibility in terms of invoicing as the charges are clearly provided and it can be determined whether a fee is objectively linked to the duration of the contract. Therefore, the CJEU held it would be possible to provide that only interest and costs which are dependent on the duration of the contract are to be reduced in case of early repayment under Article 25(1) of Directive 2014/17.
The CJEU held that this approach and interpretation of Article 25(1) Directive 2014/17 is different to the position and interpretation of Directive 2008/48 and the Lexitor judgement (which relates to the interpretation of Article 16 Directive 2008/48) since Directive 2008/48, as opposed to Directive 2014/17, does not include a requirement for the ESIS to be provided to the consumer and costs are generally unilaterally determined by the creditor which include a certain profit margin. This means that creditors under Directive 2008/48 have more flexibility when invoicing creditors and in practice it is difficult to determine which costs are objectively linked to the duration of the contract. Additionally, it was held that creditors under Directive 2008/48 may be tempted to impose a higher one-off payment at time of conclusion of contract in order to reduce costs depending on the duration of the contract. Hence why, the court under the Lexitor judgement, held that in case of contracts regulated by Directive 2008/48, the total cost of credit reduction in case of early repayment is to apply to all costs imposed on the customer.
In light of the above considerations and in accordance with the scope of Directive 2014/17, the CJEU held that Article 25(1) Directive 2014/17 cannot be interpreted as precluding national legislation from providing that the reduction in the total cost of credit in case of early repayment is limited to the reduction of only interest and costs which are dependent on the duration of the contract.
Moreover, the CJEU stated that national courts should ensure that where consumers in cases of early repayment are paying for costs due, irrespective of duration of contract, such costs should objectively not include remuneration to the creditor for temporary use of capital or payment of services which have not been provided at time of early repayment.
Disclaimer: Ganado Advocates is responsible for contributing to this law report but was not in any way involved as legal advisor for the parties in the judgement being covered in this law report.
This article was first published in the Malta Independent on 29/03/2023.