Iceland, the EFTA Court and the indexation of credit to inflation: operating in nature ex-post but need to calculate and disclose ex-ante.A law of contradiction?
| Author | M. Elvira Mendez Pinedo |
| Position | School of Social Sciences, Faculty of Law, University of Iceland |
| Pages | 7-39 |
STUDIES AND COMMENTS
Iceland, the EFTA Court and the indexation of credit to inflation:
operating in nature ex-post but need to calculate and disclose ex-ante.
A law of contradiction?
Professor M. Elvira MENDEZ-PINEDO
1
Abstract
Indexation of credit to inflation (ex-post) is a unique legal practice in Iceland
based on valorism theory on money vs. nominalism. Two rulings issued in 2014 by the
EFTA Court try to clarify the legality and fairness of this particular price-variation clause
under the European Economic Area consumer credit acqu is. The stud y summarizes the
rulings and analyses critically the interpretation provided by the court. It argues that the
judgements defy the logic of non-contradiction since indexation of credit proves to be an
impossible oxymoron under EU/EEA law. The results are confusing. On one han d, cost of
credit and usury practices tend to fall outside the scope of Europea n harmonisation
(provided disclosure obligation of cost o f credit and transparency ex-ante are respected). A
fairness co ntrol is thus dependent on national and case circumstances to be assessed by
domestic courts. On the other hand, European rules also impose with no derogations that
the cost of indexation of credit to inflation is disclosed in a transp arent way and calculated
ex-ante. The paradox is there. Since indexation of credit operates ex-post on the basis of
real inflation, it is impossible to disclose ex-ante in a transparent way. The findings of the
study help to u nderstand the situation of impasse in Iceland. Without a clear interpretation
from the EFTA Court, the saga has continued at na tional level and will probably head for a
second round of assessment at European level.
Keywords: EFTA Cou rt; Iceland; indexa tion of credit; fairness; information and
transparency; consumer protection.
JEL Classification: K33, K41
1. Introduction
The EFTA Court issued in 2014 two important judgments in the field of
European consumer protection and credit which are probably difficult to
understand in Europe since they deal with a specific Icelandic problem. The cases
Engilbertsson/Íslandsbanki
2
and Gunnarsson/Landsbanki
3
refer to the
1
M. Elvira Mendez-Pinedo - School of Social Sciences, Faculty of Law, University of Iceland,
mep@hi.is.
2
Case C-25/13 Gunnar V. Engilbertsson and Íslandsbanki hf. [2014 ] EFTA Cou rt Reports, not yet
reported (nyr.). Judgment of the EFTA Court of 28 August 2014.
3
Case C-27/13 Sævar Jón Gunnarsson a nd Landsbankinn hf. [2014 ] EFTA Court Reports
nyr. Judgment of the EFTA Court of 24 November 2014.
Volume 6, Special Issue, October 2016 Juridical Tribune
8
compatibility of inflation-indexed secured and unsecured loans (consumer credit
and/or mortgage credit) with European Economic Area (EEA) law.
Indexation of credit is a novel issue in European law although it is related
to price-variation clauses in consumer law. This indexation to real inflation ex-post
(after the signature of credit contract) is a unique practice found in Iceland but also
known in other countries of Latin America
4
. In the field of credit and financial
services, Iceland is an exception to the general theory of debt adopted in Europe
based on nominalism
5
. All EEA countries have adopted a nominalistic approach to
credit and debt. When an obligation/debt keeps its nominal value, inflation erodes
slowly the real value of debt (since it keeps its original nominated or face value
while the salaries tend to follow inflation). In a context of inflation, nominalism
and time help debtors and damages creditors. When creditors are financial
professional institutions and debtors are consumers, nominalism and inflation tend
to compensate the original imbalance of power and asymmetry of information and
education that exists between contracting parties.
In Iceland the opposite occurs since credit is constructed on the basis of
valorism theory. Inflation benefits creditors because the principal of the debt is
directly linked/indexed to the general inflation index and thus keeps its real value
or purchasing power over time. Indexation is thus a practice which operates ex-
post, a sort of semi-automatic price-variation clause embedded in the contract
which deploys its effect during the whole life of the credit and updates the
principal, the interest and other charges on a regular basis. Indexation clauses seem
to be standard terms; they are not individually negotiated (indexation of credit has
been a ―take it or leave it‖ situation for consumers). In practice, the loan agreement
is articulated through a bond (financial instrument) that the consumer issues to the
bank promising future payments and pledging guarantees. Empirical research done
by consumer associations has proved that the method of calculation of cost of
credit is never explicitly disclosed to consumers ex-ante, usually there is only a
general referral to indexation to the consumer price index (―CPI‖) in the contract.
The financial sector has traditionally argued that there this indexation is not
a choice but a necessity in Iceland due to the historic inflation
6
and a micro-
4
Ásgeir Jónsson, Sigurður Jóhannesson, Valdimar Árman, Brice Benaben and Stefania Perrucci,
“Nauðsyn eða val? Verðtrygging, vextir og verðbolga‖ (―Necessity or choice? Indexation, interest
and inflation‖), Report for the Association of Financial institutions SFF (Reykjavík, 2012) available
on internet at
verdbolga.pdf> (consulted last time in July 1, 2016). See Chapter 7 ―Inflation Indexation and
Housing Finance‖, at 171- 1 96 which presents a good summary of the problem in English with a
history of indexation to indexation in Latin America for comparison purposes and final policy
suggestions for Iceland. As the report shows, Chile has a similar system of indexing loans to the
consumer price index (using a different currency called Unidad de Fomento UF).
5
On the different theories of debt (nominalism vs. valorism) see Mann, The leg al aspect of money
(OUP, 1938 and 1992) and Kessler, "Book Review: Money in the Law" 40 Columbia Law Review
175 (1940) available on internet at >
(consulted last time in July 1, 2016).
6
Jónsson and others, op. cit. supra note 4.
Juridical Tribune Volume 6, Special Issue, October 2016
9
currency. Consumer associations, on the contrary, have consistently argued to the
legislative, executive and judicial powers that credit indexation is extremely
prejudicial not only for consumers but also for the economy since it fuels, in fact,
inflation
7
.
The core of the disputes is whether indexation practices allowed by
Icelandic legislation -as they have been implemented in Iceland during 2001-2013
comply with the requirements of European consumer credit law. From an academic
perspective, the key question is whether loan indexation can pass or not the
European legality and fairness tests that EEA consumer (credit) law requires.
The European legal framework for assessment is given by the EEA
Agreement
8
, the Annex XIX incorporating EU consumer legislation to the EEA
legal order
9
and, in particular, the following secondary law: Directive 87/102/EEC
on consumer credit
10
in force in Iceland at the time (from now on ―1987 Consumer
Credit Directive‖), Directive 93/13 on unfair terms in consumer contracts
11
(from
commercial practices
12
(from now on ―2005 Unfair Commercial Practices
Directive‖).
The relevance of the interpretation could not be greater. The current
judicial review on the legality and fairness of indexation of credit under EEA
consumer law by the EFTA Court affects thousands of loan contracts and the
majority of families in Iceland as well as the public sector (Housing Financing
7
Mallet has argued that indexation of loans to the consumer price index (CPI) has failed to address
the economic prob lem and consequences of the hyperinflation and has directly contributed to
increase the inflation rate through creation of secondary monetary sup ply. She summarizes it as a
―positive feedback loop within the banking system‘s monetary regulation―. Mallet, ―An
Examination of the effect on the Icelandic Banking System of Verðtryggð Lán (Indexed-Linked
Loans)―, (2013) IIIM TECH REPORT IIIMTR 2013-01-001 (Icelandic Institute for Intelligent
Machines), available at (consulted last time in July 1, 2016).
8
The EEA Agreement extending the internal market to Iceland, Norway and Lichtenstein entered
into force on 1 January 1994, see O.J. 1994 L 1, p. 3. It has never been formally amended since
the update of all subsequent and relevant legislation is done through the inclusion of new EU/EEA
acts into the an nexes of the Agreement. There is a paralell Aagreement between the EF TA States
on the establishment of a Surveillance Authority and a Court of Justice (ESA/EFTA Court
Agreement) O.J. 1994 L 344, p. 3.
9
EU legislation on consumer p rotection is regularly incorporated to the Annex XIX of the EEA
Agreement by the relevant decisions of the EFTA Joint Committee. Once incorporated to the EEA
legal order, th e Icelandic Parliament adopts it as national domestic law. The new database EEA-
Lex allows to search all EU acts that have been incorporated into the EEA Agreement or are under
consideration for future incorporation
10
regulations and administrative provisions of the Member States concerning consumer credit.
O.J. 1987 L42, p. 48.
11
Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts. O.J. L 09 5,
p. XX.
12
Directive 2005/29/EC of the European Parliament and of the Council of 11 Ma y 2005 concerning
unfair business-to-consumer commercial practices in the internal market. O.J. L 149, p. 29.
Volume 6, Special Issue, October 2016 Juridical Tribune
10
Fund)
13
.
This study focuses on the advisory opinions given by the EFTA Court in
2014. The judgments are extremely important for society since the problems
relating to indexation of credit in Iceland have been one the most important
economic issues discussed in the country in the aftermath of the financial crisis
during 2013 and 2014. During the economic crisis the working population feels
insecure about their future as many people have been affected by the wage cuts,
and uncertainty still remains concerning the retention of the work place. New
risk groups whose incomes have undergone a significant decrease during the crisis,
join those risk groups already in a crisis situation (the disabled, pensioners,
in particular single pensioners, the long-term unemployed, single-parent families
and families with many children, the homeless, ex-convicts). The population
becomes increasingly more convinced that they can rely only on themselves or
informal contacts and the state and policies implemented by the government cannot
be trusted
14
. In fact, the promise to write-off/restructure the principal of household
indexed-debt and to put an end to indexation brought to power the political party of
the current Prime Minister in 2013 (coalition of Progressive Party with
Independent Party). A national plan of household debt-relief (called ―leiðrétting‖)
was approved in 2014 and executed in 2015 where the principal of indexed
mortgage loans was reduced taking into consideration the inflation after the crisis
15
.
At the time being, the Parliament still has to discuss the promise to put an end to
indexation of consumer/mortgage credit from 2016 onwards
16
.
2. The facts and the questions referred
The case Engilbertsson /Íslandsbanki
17
refers to secured credit (guaranteed
by mortgage lien on property). This individual took out three loans in 2005 and
2007 from Íslandsbanki in order to buy property in Reykjavík. As it is usual in
Iceland, the loan contracts were framed as securities-backed bonds issued by the
13
Empirical research done by consumer association Samtök heimilanna (SHH) (the Homes
association) shows that, unfortunately, there are too many loan contracts in force (both secured
and non-secured credit) where the information given on total cost of credit and the amount of the
principal due are inaccurate and do not correspond with the factual payments that consumers are
requested to pay on a regular basis.
14
Signe Do belniece, Tana Lace, Global economic crisis in La tvia: social policy and individuals’
responses, ‗Filosofija-Sociologija’, 2012. Vol. 23, issue 2, p. 115.
15
Information on the houseld debt relief programme executed in Iceland in 2014-2015 can be found
in English at the website
1, 2016).
16
Written reply of Prime Minister to MP Sigríður Ingibjörg Ingadóttir of 23 February 2015 available
at http://www.althingi.is/thingstorf/thingmalalistar-eftir-thingum/ferill/?ltg=144&mnr=485
(consulted last time in July 1, 2016).
17
EFTA Court, case C-25/13 Gunnar V. Engilbertsson and Íslandsban ki hf. [2014 ] EFTA Court
Reports, not yet reported (nyr.). Judgment of the EFTA Court of 28 August 2014.
Juridical Tribune Volume 6, Special Issue, October 2016
11
bank
18
. The loans disputed were linked to the Icelandic consumer price index (CPI)
and the contract also included a provision on the review of the interest rates. The
debtor stopped complying with financial obligations mid-2009 and enforcement
actions were started for the execution of the bond resulting in an partial attachment
on the Reykjavík real state property securing the loans. The dispute made it to the
courts where the individual argued, inter alia, that the indexation practice/clause
was an unfair contract term contrary to EEA law.
The second case Gunnarsson/Landsbanki
19
refers instead to non-secured
credit (with personal guarantee). The individual took out a loan from
Landsbankinn. The bond /financial contract disputed contained standardised
contractual terms prepared by the financial institution. One of them stated that the
loan was linked to the consumer price index (CPI), with both indexation
adjustments and a variable interest rate. The individual also signed a document
annexed to the bond/contract with a descriptive list of future scheduled repayments
of the loan. The announced cost of credit and calculations of interest rate and
indexation cost were based on a 0% rate of inflation. This hypothesis did not
correspond to the actual rate of inflation at the time nor with the inflation predicted
by monetary authorities. The real inflation that Iceland experience later turned out
to be considerably higher. As a result, the nominal cost of credit and the repayment
of financial obligations turned out to be much higher than those announced and
signed in the repayment schedule plan. The individual brought the case to the
courts and argued, inter alia, that the indexation violated both EEA law and the
national implementing legislation (on double grounds, unfair term and breach of
information).
In both cases the banks rejected the claims on the basis of the legality of
indexation of credit under Icelandic law and the fact that the loans complied prima
facie with all legal requirements. Confronted with these arguments, the Reykjavík
District Court requested the EFTA Court an assessment of the credit indexation
practice allowed by Icelandic legislation with European consumer contract law.
The EFTA Court delivered advisory opinions on the fairness and legality of
indexation under the 1993 Unfair Terms Directive in the first case (Engilbertsson
/Íslandsbanki); and under both the 1987 Consumer Credit Directive and 1993
Unfair Terms Directive in the second case (Gunnarsson/Landsbanki). It also
replied to a question regarding the mandatory nature of the sanction prescribed by
the European legislator for unfair terms (non-binding) in the EEA legal framework,
a question already replied by the ECJ.
18
Arnar Kristinsson, ―Framkvæmd verðtryggingar á skuldbindingum almennra fjárfesta og
neytenda―, (2012) Masters´ thesis under supervision of M. Elvira Mend ez-Pinedo (University of
Bifröst, Iceland).
19
EFTA Court, case C -27/13 Sævar Jón Gunnarsson and Landsbankinn hf . [2014 ] EFTA Court
Reports nyr. Judgment of the EFTA Court of 24 November 2014.
Volume 6, Special Issue, October 2016 Juridical Tribune
12
3. The EFTA Court´s advisory opinions
In the first case Engilbertsson /Íslandsbanki
20
, the EFTA Court rules that
indexation of mortgage loans is not generally prohibited as long as the practice
respects the provisions set by the 1993 Unfair Terms Directive (as interpreted by
the Court of Justice of the EU). While a general interpretation on consumer credit
law concepts is given, most of the questions are sent back for final assessment to
the national court. The Court does not provide guidance, on this occasion, on the
interpretation of 1987 Consumer Credit Directive.
In a preliminary manner, the Court deals with the applicability of the
Directive to the case (para. 79). The Court decides that it is for the national court to
ascertain whether contractual terms on loan indexation such as the ones at issue,
reflect mandatory statutory or regulatory provisions and, consequently, are
exempted from the scope of the Directive (Article 1(2)). The limited scope is
justified on the legitimate assumption that the national legislature has excluded
unfair terms in consumer contracts – in substance- since the mandatory rules are
supposed to strike a fair balance between the rights and obligations of the parties.
The Court adds that, from the perspective of the consumer, it is therefore of
particular importance that EEA States actually ensure that balance in all cases.
It is therefore for the national court to decide whether the 1993 Unfair
Terms Directive is applicable to the case. If the reply was to be affirmative, the
Court also states that that the question whether the indexation terms at issue are
unfair, is a matter also to be assessed by the national court in the light of European
consumer credit law and due interpretation of the concept of ―unfair term‖.
Regarding the set of questions, the Court finds, in the first place, that the 1993
Unfair Terms Directive does not categorically prohibit a price-indexation clause in
a mortgage loan agreement, such as the one challenged. In this sense, the Directive
(Articles 3,4 and 5) only lays down general principles for the assessment of
whether a particular contractual term is unfair. The final assessment is for the
national court taking account of all circumstances of the case (para. 86).
In this regard, however, it notes that Article 3(3) of the Directive read
together with point 2(d) of the Annex to the Directive, explicitly provides that
price-indexation clauses do not, in and of themselves, amount to terms that may be
regarded as unfair, where these clauses are lawful and the method by which prices
vary is explicitly described (para. 97). However, on the other hand, it adds that
clarity and quality of information are essential for the final assessment by the judge
(para. 98).
The Directive does not limit the discretion of a EEA State to regulate a
reference/base index but the method of calculation of price changes must be
explicitly described in the contract (para. 110). Whether the indexation of the
challenged bond to the base index was individually negotiated or not is a question
to be finally determined by the national court (para. 121-122) although the Court
20
Case C-25/13 supra note 1.
Juridical Tribune Volume 6, Special Issue, October 2016
13
points that it looks like indexation was a standard term non individually negotiated
and falling under the scope of the Directive (para. 125-126).
From a consumer´s perspective the most crucial part of the ruling refers to
the requirement of an explicit and comprehensive description of the method of
calculating price-changes in the contract (para. 140-146). While the national court
must assess this taking into account its precise wording and all other relevant data
circumstances as well as national legislation; the Court sets a clear rule. The
financial institution is required to respect the obligation of information disclosure
of all credit information ex-ante, pointing that it is of crucial importance for a
consumer to obtain adequate information on a contract‘s terms and consequences
before concluding it.
The Court adds that it is particularly the case if the parties agree on a price
variation clause that leads automatically to adjustments of the principal of the debt,
such as the indexation (para. 141). And the Court clearly rules in para. 142 that the
contract must set in a transparent fashion a description of the indexation
mechanism of the loan so that the consumer can foresee, on the basis of clear,
intelligible criteria, the alterations that may occur to the principal of the loan. This
obligation is not found to be satisfied by a mere reference in the contract to a
national legislative act (para. 143). In this regard, the Court reasons that such a
description must enable the consumer to make an informed choice before signing
the contract (para. 144). It is on the basis of that information that the consumer
decides to be bound or not by the terms previously drawn up by the seller or
supplier (para. 144). It follows that the payment schedule must be disclosed as
provisional and not definitive since financial obligations will change with price
indexation (para. 145).
The Court also clarifies obligations for the national court. It finds that
Article 6(1) of the Directive must be interpreted as meaning that, where a national
court considers that a given term is unfair within the meaning of the Directive, that
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, in accordance with the rules of domestic law, such continuity of the contract is
legally possible (para. 147).
In the second case C-27/13 Gunnarsson/Landsbanki
21
, the EFTA Court
answers a set of new and similar questions referred by the Reykjavík District Court
concerning the interpretation of 1987 Consumer Credit Directive and the 1993
Unfair Terms Directive in relation with the indexation of a loan agreement. While
the first directive is found to be applicable to the case (para. 61), the application of
the second directive is for the national court to decide taking into account that
indexation terms may reflect or not mandatory or regulatory provisions excluded
from the scope of the Directive (para. 63). In this regards the Court refers to para.
66 to 79 of first case Engilbertsson.
21
Case C-27/13 supra note 2.
Volume 6, Special Issue, October 2016 Juridical Tribune
14
The most important finding of the Court in this second case refers to the core
question of calculation of the total cost of credit, the reference to inflation in the
contract (para. 86-96) and its compatibility with EEA consumer credit law. The
Court finds that the term ―total cost of the credit‖ in the 1987 Consumer Credit
Directive comprises all the cost that the consumer is liable to pay under the credit
agreement, including both interest charges and any other charges resulting from the
price indexation of the principal. In para. 92 it rules that an estimation or
hypothesis of 0% rate of inflation indicated in a loan agreement, at a time when the
actual rate of inflation was considerably higher, did not correctly represent the
charges resulting from the price indexation and thus the total cost of credit for
consumer.
Having said this, it rules that it is for the national court to assess, taking
account of all the circumstances of the case, the legal consequences and the
remedies for such incorrect information, provided that the level of protection
established by the 1987 Consumer Credit Directive, as interpreted by the Court, is
not thereby compromised (para. 96). Furthermore, the Court notes that a failure by
a credit institution to provide the consumer with full information regarding the total
cost of credit and annual percentage rate of charge specified in the Consumer
Credit Directive may also qualify as an unfair business-to-consumer commercial
practice under the 2005 Unfair Commercial Practices Directive. Once more, this
will be an issue to be taken into account by the national court for the final
assesment of the case at hand.
The five questions concerning the interpretation of the 1993 Unfair Terms
Directive are in substance identical to the questions examined in case
Engilbertsson. The Court finds that there is no reason to make a distinction
between a mortgage credit, as in Engilbertsson, and a consumer credit loan, as in
the present case (para. 97). Icelandic law, in fact, provides equal protection to both
categories of consumers by extending the scope of the 1987 Consumer Credit
Directive to mortgage credit, an issue dealt in case Engilbertsson where the Court
rules that provisions borrowed from EEA law should be interpreted uniformly
(para. 53-56).
4. The legal context
A short explanation on the legal context applicable to the disputes is
necessary for the sake of clarity and understanding. Icelandic law deals with
consumer protection under Act No 179/2000 amending Act No 121/1994 (―the
Consumer Credit Act― now superseded by new Act No. 33/2013) and Act No
7/1936 (―the Contracts Act―).
In the first place it is important to note that Act No. 121/1994 on Consumer
Credit was in force at the time. This Act transposed the 1987 Consumer Credit
Directive. The most recent Directive 2008/48/EU on consumer credit
22
(from now
22
Directive 2008/48/EC of th e European Parliament and of the Council of 23 April 2008 on credit
agreements for consumers and repealing Council Directive 87/102/EEC. O.J. 2008 L 133, p. 66.
Juridical Tribune Volume 6, Special Issue, October 2016
15
on ―2008 Consumer Credit Directive‖) was incorporated by the Icelandic
Parliament by the most recent Act No 33/2013 on Consumer Credit but only
entered into force on 1 November 2013. The EFTA Court rules on the basis of the
legislation in force at the time (principle of legality obliges) and therefore the 2008
Directive on Consumer Credit is left aside.
In the second place, it must be added that the national legal framework
reflects EEA consumer credit law but also encompasses some acts on interest and
indexation. Indexation of savings and credit was first regulated in Iceland by Act
No 13/1979 on Economic Policy. Chapter VI of Act No. 38/2001 on Interest and
Indexation sets out the mandatory provisions currently in force in relation to all
indexed savings and loans. Price indexation is allowed if it is based on the
consumer price index (―CPI‖) as calculated by Statistics Iceland in accordance with
legislation applicable to the index (Act No. 12/1995 on the CPI) and published
monthly in the Legal Gazette. Furthermore, rules of the Central Bank No 492/2001
on Price Indexation of Savings and Loans require a minimum period of five years
for the indexation of the principal of a loan (Art. 4.1 para.). Last but not least, Act
No 14/1995 amending Act No 7/1936 on contracts, agency and void legal
instruments has incorporated the 1993 Unfair Terms Directive adding four new
articles to its Article 36.
In the third place, it must be remembered that while European law has not
directly harmonised cost of credit per se and does not affect national contract law
in general terms, it has nevertheless regulated this question in an indirect way. The
European legislator has set obligations to calculate and disclose cost of credit in a
certain transparent way through the 1987 and 2008 Consumer Credit Directives.
European law has also introduced a general ban on abusive clauses for contracts
and commercial practices through 1993 Unfair Terms Directive and 2005 Unfair
Commercial Practices Directive. Consumer protection in the field of credit is
articulated in the EU acquis through the following paradigm and framework:
information disclosure legality requirements + fairness test
23
.
In particular, European consumer credit directives provide for a set of
information to be given to consumers in good time and in a comprehensible way
before the credit contract agreement is concluded. The methodology to disclose ex-
ante the cost of credit to consumers has been harmonized so that EU/EEA Member
States have no margin for appreciation in this regard. In order to improve the
comparability of different offers from financial services providers and to make the
information clearer and better understandable, the pre-contractual information
needs to be supplied in a standardised form (Standard European Consumer Credit
Information). What is more important, consumer credit cost must be calculated
through the Annual Percentage Rate of Charge (APRC), a single unique figure
based on a common formula. Where a credit agreement allows for the variation of
interest rates and this increases the cost of credit, a notice of a variation must be
23
Mendez-Pinedo, ―The Cost Of Credit In Iceland Under European Judicial Review: May Legality
And Transparency Justify Unfairness?‖, 2 (2014) Europarättslig Tidskrift (ERT), 303-329.
Volume 6, Special Issue, October 2016 Juridical Tribune
16
provided to the consumer before the change takes effect. These provisions are
similar in the 1987 and 2008 Consumer Credit Directives.
4.1 Indexation of credit to inflation. A unique practice and problem
in Iceland that needed judicial interpretation
One of the core questions dealt by the EFTA Court is to determine whether
indexation of credit to CPI (on the basis of valorism theory) can constitute or not a
derogation from the European framework of consumer credit law (based on
nominalism). The 1987 and 2008 Consumer Credit Directives do not regulate this
sort of practice although a mention is done of price-variation clauses in the 1993
Unfair Terms Directive.
The question is a fresh novel one in the European legal order that had been
impossible to resolve at national level during the incorporation of 2008 Consumer
Credit Directive to the domestic legal order.
24
At the end, the Icelandic legislator
adopted the Act No. 33/2013 on Consumer Credit and opted to allow indexation of
credit provided it was done within the framework of Act No 38/2001 on interest
and indexation and under the conditions set by 2008 Consumer Credit Directive
(indexation must be transparent, calculated through APRC rules, and disclosed ex-
ante). However, the legislative and executive powers acknowledged that the
competence to clarify the legality and fairness of indexation of credit under EEA
law was a difficult question of interpretation to be left to the national courts (and
24
The Icelandic legislator tried to clarify this issue during 2013 without initial success. In order to
help the legislator to reach a conclusion, a set of questions was sent by th e author to the European
Commission, EFTA Surveillance Authority (ESA) and the European Parliament with a view to
assess the legality of indexation of credit. These institutions disagreed at the time on whether or
not p rice-indexation (which increases de facto the cost of money as the prin cipal is indexed to
inflation ex-post) fell into the scope of harmonization as ―cost of credit‖ or not. The Commission
held that, n o matter its denomination or construction, Article 3 of the 2008 Consumer Credit
Directive was applicable. Co nsumers must pay the amount of credit given and the total cost of
credit announced. In this construction, indexation would b e cost of credit so it has to be calculated
under the formula of annual effective rate of charge (APRC). The ESA, on the contrary, argued
that price-indexation might not be cost of credit per se but some additional charge for money
currently falling outside the scope of European harmonization. At any case, both institutions
agreed that transparency and clarity of language for consumers were key factors. European
disclosure information obligations concerning future indexation effects on the contract could not
be set aside as consumers needed to assess ex ante their capacity to take on financial obligations.
Letters from the European Commission to th e author of 12.2.2013 and from the ESA to the author
of 20 .3.2013 can be requested to the author. The European Commission also repli ed in similar
terms to SHH (The Homes Association of Iceland) in a letter of 15.2.2013. The replies only
provide incidental comments on the fairness test as this is a question for judicial interpretation
However, the European Commission stated very clearly that -when indexation was non
transparent- it did not escape control of abuse un der 1993 Unfair Terms Directive applicable to
mortgage contracts. In its reply from 20.3.2013, on the other hand, the ESA acknowledged that
transparency could not justify abusive or unfair terms.
Juridical Tribune Volume 6, Special Issue, October 2016
17
eventually on the EFTA Court)
25
.
4.2 EEA law. A parallel sui generis legal order constructed
on homogeneity, reciprocity and effectiveness
European Economic Area (EEA) law is based on the EEA Agreement
which entered into force on 1 January 1994 and brings together the 28 EU Member
States and the three EEA EFTA States — Iceland, Liechtenstein and Norway —
together under a unique and sui generis legal order with the internal market as a
center of gravity
26
. The Agreement guarantees equal rights and obligations for
citizens and economic operators in the EU/EEA
27
.
There is a common substantive law (four freedoms and other policies) but
there is a distinct institutional framework constructed around a two pillar system
(EU – EFTA). This construction is explained by the political compromise agreed at
the time and the impossibility to agree on a transfer of competences to a
supranational organization
28
. The legal autonomy of EFTA countries was preserved
at the prize of a lack of participation in the EU formal legislative procedure.
25
The relevant Committee of the I celandic Parliament (Efnahags- og viðskiptanefnd) or Economic
and Business Comittee) considered this question during October 2012 to February 2013. The
author forwarded to the Parliament the replies from the European institutions and was called to a
meeting to discuss this issue. Following this preliminary assessment, as well as research and legal
opinions sent to the Parliament during the legislative process by the author an d other parties, the
doubts persisted. No institution nor individual could determine with final authorit y whether this
solution was compatible with EEA consumer/credit law. Both the Economic and Business
Comittee from the Parliament and the Committee o n Consumer Protection on Financial Markets
(nominated by the Prime Minister) expressed their concerns about the potential illegality of the
indexation practice (as it had been traditionally con structed) u nder European law. See
Forsætisráðuneytið (Prime Minister Office), Neytendavernd á fj ármálamarkaði (Consumer
protection in financial markets) (Re ykjavík, 2013) at 7 and 61-62. Report available in Icelandic at
(consulted last time in July 1, 2016). All documents referring to the legislative adoption of Act No
33/2013 o n Consumer Credit can be accessed (in Icelandic) at http://www.althingi.is/thingstorf/
thingmalalistar-eftir-thingum/ferill/?ltg=141&mnr=220 (consulted last time in July 1, 2016).
26
Substantive law falling under the scope of the EEA Agreement is basically similar as all relevant
EU legislation covering the four freedoms in the internal market — the free movement o f goods,
services, persons and capital — is incorporated to the EEA legal order and is therefore applied
throughout the 31 EEA States. In addition, the Agreement covers cooperation in other important
areas such as research and development, education, social policy, the environment, consumer
protection, tourism and culture, collectively known as ―flanking and horizontal‖ policies. Since the
crisis in 2008 Iceland benefits from a derogation on free movement of capital.
27
The main general reference books for EEA law in English are as follows: Norberg, Hökborg,
Johansson, Eliasson and Dedichen The European Economic Area EEA Law. A Commentary on the
EEA Agreement (Kluwer, 19 93); Blanchet, Piipponen, and Westman-Clément, The Agreement on
the EEA. A guide to the free movement of goods and competition rules. Foreword by Jacques
Delors (Oxford : Clarendon Press, 1994); and Stefán Már Stefánsson, The EEA Agreement and Its
Adoption Into Icelandic Law (Scandinavian University Press,1997).
28
The institutional framework is a two p illar construction based on the EU institutions, on one side,
and EFTA institutions on the other, joining forces and becoming unique EEA institutions.
Volume 6, Special Issue, October 2016 Juridical Tribune
18
Judicial review and general surveillance/supervision are also organised on the basis
of two pillars.
29
Special mention also must be made of the issue of the legal effect of EEA
law since the compromise to secure equal or comparable rights has to be assured,
on the EFTA/EEA pillar, on the basis of international and/or domestic law. While
EEA law is certainly a non-supranational legal order, it cannot be affirmed either
that it is not unlike the EU in a certain way. Article 3 of EEA Treaty is binding
regarding outcomes and/or effects in practice and establishes the duty of loyal
cooperation
30
. The principle of the supremacy/primacy of EU becomes thus a
―quasi-primacy‖ of EEA law expressed through Article 7 and Protocol 35 of the
EEA Agreement. Two essential features of EU law cannot be extended
automatically to EEA law, i.e. direct effect and direct applicability. Last but not
least, the doctrine of State liability for infringements of EEA law derives directly
from the EEA Agreement and was introduced by the jurisprudence of the EFTA
Court (case Erla María adopting the same outcome of the ECJ Francovich
doctrine
31
). The nature of EEA law is therefore a delicate issue that must be treated
with caution.
Legislative and judicial homogeneity
32
are the main foundation of this
European legal system strongly complemented by the principle of reciprocity
between contracting parties. Together with common substantive rules, a similar
application and interpretation of rules throughout the EEA is needed. The
principles of homogeneity and reciprocity form a trio with the general doctrine of
effectiveness of more recent appearance. In fact, the need to secure authority and
effect to this European corpus –while respecting the national legal autonomy- has
provided the EFTA Court with a strong argument to search for doctrines that can
hold together this unique legal construction and fill up the gaps and silences of the
EEA Agreement lacking in supranational character
33
. The effectiveness doctrine is
29
There is another agreement that provides for the establishment of the EFTA Surveillance
Authority (with a role similar to the Commission but without any legislative/political power) and a
Court of Justice with exclusive jurisdiction for the resolution of EEA disputes, the EFTA Court.
See EFTA Court, The EEA and the EFTA Court: Decentred Integration (Hart Publishing, 2015).
30
Article 3 EEA reads: The Contracting Parties shall take all appropiate measures, whether general
or particular, to ensure fulfilment of the obligations arising out this Agreement. The shall abs tain
from any measure which could jeopardize the attainment of the objectives of this Agreement.
Moreover, the shall facilitate cooperation within the framework of this Agreement.
31
EFTA Court, case E-9/97, Erla María Sveinbjörnsdóttir v. the Government o f Iceland [1998]
EFTA Court Rep. 9 5 later confirmed in case E -4/01 Karlsson [2002] EFTA Court Rep. 240, para
32. See originally ECJ, Joined Cases C-6/90 and C-9/90 Francovich [1991] ECR I-5357.
32
On the concept and scope of the judicial homogeneity, see Baudenbacher, ―The EFTA Court and
the ECJ – Coming in parts but winning together‖ in The Court of Justice and the Construction of
Europe: Analysis and Perspectives on Sixty years of Case Law (TCM Springer/Asser Press,
2013),at 183. See also Frediksen, ―One market, two courts: Legal pluralism vs. homogeneity in the
European Economic Area‖, 79 Nordic Journal of International Law (2010), 481.
33
Mendez-Pinedo, The effectiveness of European law. A comparative study between EC and EEA
law (Europa Law Publishing, 2009) and Mendez-Pinedo and Hannesson, The authority of
European law. Exploring primacy of EU law and effect o f EEA law from European and Icelandic
perspectives, (Law Institute, University of Iceland, 2012).
Juridical Tribune Volume 6, Special Issue, October 2016
19
therefore of paramount importance to this legal order and is referred to quite often
by the EFTA Court
34
.
If it could be summarised in one sentence, one might say that the EEA
guarantees one single internal market with two legal orders and a two-pillar system
for the adoption/incorporation of EU legislation, supervision and judicial review
(EU on one side and EFTA on the other side). Ideally, both legal orders function
and coexist together peacefully for the benefit of private individuals and economic
operators who are given comparable rights. In spite of its legal complexity, the
general view since 1994 was that this scheme worked in practice surprisingly well.
35
However the tensions between national legal autonomy and obligations to
provide similar effects to supranational legislation have always been there
36
. Some
recent authors now refer openly to the need to critical revision of the EEA
Agreement
37
. The even more acute democratic deficit of the legislative process/es
designed 20 years ago is so far the most important flaw of the EEA legal system
from a political perspective.
38
In spite of this critique what is for sure, in fact, is
that the case-law of the EFTA Court provides occasionally the field of European
law with novel and extremely relevant questions and judgements of a high moral
authority
39
.
5. Comment and analysis
5.1 Judicial review in the area of credit/mortgage law.
The path set by the ECJ
In this context of judicial review, it is very important to remember some
essential points already decided by the ECJ
40
. Taking into account the extensive
case-law on credit/mortage law, what follows is a selection of most relevant points
for the assessment of indexation of credit in Iceland under EEA law and the core
issue of cost of credit.
34
See Dóra Guðmundsdóttir, case note on Case E-3/11 Sigmarsson, 49 CML Rev (2012), 2019 and
more recently Burke and Hannesson, case note on Case E-26/13 Gunnarsson, 52 CML Rev
(2015), 1119-1120.
35
See Almestad, ‗The Squaring of the Circle – The internal market and the EEA‘, in Johansson,
Wahl and Bernitz, Liber Amicorum in Honour of Sven Norberg (Bruylant: Bruxelles, 2006)1-10,
at 10.
36
See in particular Graver, ―Mission impossible: Supranationality and national legal autonomy in the
EEA AGreement―, 7 European Foreign Affairs Review (2000) 73-90, at 73.
37
Franklin and Fredriksen, ―Of Pragmatism and Principles: The EEA Agreement 20 Years On‖, 52
Common Market Law Review [2015] 629-684.
38
See Müller-Graff and Mestad, The rising complexity of European law (BWV V erlag, 2014) at 135
for a critical analysis of the EEA Agreement from Norway.
39
See Skúli Magnusson, ―On the au thority of advisory opinions―, 3 Europarättslig Tidskrift (2010),
532-534.
40
On the case-law of the ECJ see Schilling, ―Inequality of b argaining power versus market for
lemons: Legal paradigm change and th e Court of Justice‘s jurisprud ence on Directive 93/13 on
unfair contract terms―. 3 European Law Review (2008), 336-358.
Volume 6, Special Issue, October 2016 Juridical Tribune
20
5.1.1 On the review of unfairness and core terms excluded
(price control)
European consumer law protects consumers through a double approach
based on information/transparency and general fairness
41
. It protects consumers by
ensuring market transparency (information paradigm). Judicial review on cost of
credit is nevertheless eliptical since core terms on price do not fall in principle
under EU harmonization. The European legislator has not regulated the core issue
of cost of money, that is to say the interest rates and other charges that creditors
may claim to provide capital to debtors through a private contract. Here we find a
situation of national diversity with countries such as Italy and France capping
interest rates and controlling usury by legislation and countries such as Spain, UK
and Germany relying on the judicial control taking into account the context of the
financial credit market
42
. The ECJ has respected in principle this parcel of national
autonomy so that the substntive review of unfair terms (provided transparency is
respected) is for national courts according to main rules of private law. While
direct price control is excluded from a fairness review under 1993 Unfair Terms
Directive as a core term, the Court has offered some guidance concerning the
interpretation of European consumer credit law in relation to transparency. In this
regard it can be said that there is a judicial review which frames indirectly the cost
of credit but it consists mostly on a legality test under 1987 and 2008 Consumer
Credit Directives and a transparency test under the 1993 Unfair Terms Directive.
The 1993 Directive provides for a double control over the fairness: a
formal verification of unfairness (requirement of transparency) and a substantive
test in the light of a general clause. Regarding transparency, the disclosure ex-ante
of all essential financial information on credit seems to be a strong requirement
both in law and in case-law. Article 5 requires that terms must always be drafted in
plain, intelligible language. Consumers need to be informed of their future rights
and obligations and be able to compare offers in the whole internal market. The
failure to mention the real cost of credit ex-ante is found to be a breach of both
1993 Unfair Term and 1987 Consumer Credit Directives and this failure triggers
sanctions under national law (Pohotovost v. Korčkovská
43
). On the other hand, the
European substantive fairness test, however, is a general one. The Court has ruled
41
Mendez-Pinedo, ―The Cost Of Credit In Iceland Under European Judicial Review: May Legality
And Transparency Justify Unfairness?‖, 2 (2014) Europarättslig Tidskrift (ERT), 313-315 on cost
of credit and fairness review.
42
Reifner, Udo and Schröder, Michael, Usury Laws: A Legal and Economic Evaluation of Interest
Rate Restrictions in the European Union (BoD – Books on Demand, 2012). See also the Opinion
of the European So cial and Economic Committee on consumer protection and appropiate
treatment of over-indebtedness to prevent social exclusion, INT/726, Brussels 29 April 2014,
pp. 9-10.
43
ECJ, case C-76/10 Pohotovost’ s.r.o. v Iveta Korčkovská [2010] ECR I-11557.
Juridical Tribune Volume 6, Special Issue, October 2016
21
that a clause is unfair ―if it is not beneficial for consumers‖ (Océano
44
), providing
thus a very open concept following the steps of the European legislator. The
fairness test also extends to marketing, advertising or other business practices.
Prohibition of unfair commercial practices is also applicable to public law bodies
charged with a task of public interest since the protection of consumers prevails
(and BKK Mobil Oil
45
).
Core terms relating to the main subject matter of the contract and/or the
adequacy of the price and the remuneration provided are excluded by Article 4(2)
of the 1993 Unfair Terms Directive. However, this rule has two qualifications.
Assessment of substantial fairness is nevertheless allowed when they are not
drafted in plain intelligible language
46
. Secondly, where the terms are unclear as to
their meaning, the interpretation most favourable to consumer will prevail (the
contra proferentem rule).
47
The Court has ruled that ―it is for the referring court to determine, having
regard to the nature, general scheme and the stipulations of the loan agreement, and
its legal and factual context, whether the term concerned constitutes an essential
element of the debtor‘s obligations, consisting in the repayment of the amount
made available by the lender― (Kásler and Káslerné Rábai
48
and Matei
49
).
However, it has also added that this exclusion from substantive review is
conditional to the drafting of core terms in plain intelligible language and must be
strictly interpreted (Kásler and Káslerné Rábai
50
).
The Court searches a balance between the cost of credit and the general
requirement of fairness. It has ruled that the exemption for core terms does not
stretch without limit either regarding ―price― and/or ―remuneration―. In principle,
the exclusion provided under Article 4 (2) of the Directive is limited in scope and
―concerns only the adequacy of the price or remuneration as against the services or
goods supplied in exchange, that exclusion being explained by the fact that no legal
scale or criterion exists that can provide a framework for, and guide, such a
review― (Kásler and Káslerné Rábai
51
and Matei
52
).
44
ECJ, joined cases Océano Grupo Editorial SA v Roció Murciano Quintero (C-240/98) and Salvat
Editores SA v José M. Sánchez Alcón Prades (C-241/98), José Luis Co pano Badillo (C-242/98),
Mohammed Berroane (C-243/98) and Emilio Viñas Feliú (C-244/98) [2000] ECR I-4941.
45
ECJ, case C-59/12 BKK Mobil Oil [2013] nyr. Judgment of 3 October 2013, para 41.
46
Article 4(2) of the Directive; ECJ, Case C-484/08 Caja de Ahorros y Monte d e Piedad de Madrid
v Asociación de Usuarios de Servicios Bancarios (Ausbanc) [2010] ECR I-04785.
47
Article 5.This rule can only apply to terms whose meaning is unclear and can be interpreted in
several different ways.
48
ECJ, case C-26/13 Kásler and Káslerné Rábai [2014] ECR nyr. Judgment of 30 April 2014,
para. 49 to 51.
49
ECJ, case C-143/13 Matei v. S C Volksbank România SA [2015] nyr. Judgment of 26 February
2015, para. 54.
50
ECJ, case C-26/13 Kásler and Káslerné Rábai [2014] ECR nyr. Judgment of 30 April 2014,
para. 42.
51
ECJ, case C-26/13 Kásler and Káslerné Rábai [2014] ECR nyr. Judgment of 30 April 2014,
para. 54-55.
52
ECJ, case C-143/13 Matei v. S C Volksbank România SA [2015] nyr. Judgment of 26 February
2015, para. 55.
Volume 6, Special Issue, October 2016 Juridical Tribune
22
The requirement of transparency of contractual terms under the 1993
Unfair Terms Directive cannot be reduced merely to their being formally and
grammatically intelligible. It is of fundamental importance, for the purpose of
complying with the requirement of transparency, to determine whether the loan
agreement sets out transparently the reasons for and the particularities of the
mechanism for altering the interest rate and the relationship between that
mechanism and the other terms relating to the lender‘s remuneration, so that the
consumer can foresee, on the basis of clear, intelligible criteria, the economic
consequences for him which derive from it (Matei
53
and Kásler and Káslerné
Rábai
54
).
Last but not least the Court has finally clarified that there is not
equivalence between the transparent and clear core terms excluded from fairness
review and the total cost of credit to be disclosed to consumers ex-ante. It has ruled
that the exact scope of ‗main subject-matter‘ and ‗price‘ within the meaning of
Article 4(2) of 1993 Unfair Terms Directive (exempted from fairness review)
cannot be determined by the concept of ‗the total cost of the credit to the
consumer‘ within the meaning of Article 3(g) of 2008 Consumer Credit Directive
as article refers to disclosure information duties and is very broadly defined (Matei
55
). In a nutshell, while transparency and information are to be interpreted broadly,
exemptions from fairness review are to be interpreted narrowly. The Court keeps
therefore open the possibility in the future to rule on certain issues connected to the
potential unfairness of some cost of credit clauses/terms.
This is a difficult balance between fairness and transparency. On one hand,
the fairness test required by 1993 European Directive and interpreted by the ECJ
has substantive limits justified by the legal diversity within EU Member States on
core terms reflecting cost of credit. The ruling in case Barclays
56
shows what a
fairness test/control cannot do for debtors affected by clear but unfair national rules
or lack of rules on interest. On the other hand, the margin of appreciation for
national judges, the national credit markets and context and the legal autonomy is
recognized as long as the European framework on information under the 1987 and
2008 Consumer Credit Directive is respected (protection by information ex-ante of
total cost of credit).
5.1.2 On legality and ex-ante transparent disclosure of cost of credit
While a general fairness test is weak, the legality test under the 1987
Consumer Credit Directive has allowed the European Court to reach further into
53
ECJ, case C-143/13 Matei v. S C Volksbank România SA [2015] nyr. Judgment of 26 February
2015, para 73-74.
54
ECJ, case C-26/13 Kásler and Káslerné Rábai [2014] ECR nyr. Judgment of 30 April 2014, para.
69 and 71, para. 73).
55
ECJ, case C-143/13 Matei v. SC Volksbank România SA [2015] ECR nyr. Judgment of 26
February 2015, para. 47.
56
ECJ, case C-280/13 Barclays Bank SA v Sara Sánchez García [2015] ECR nyr. Judgment of 30
April 2015.
Juridical Tribune Volume 6, Special Issue, October 2016
23
this field and provide more extensive consumer protection. The formal review of
cost of credit is the result of an extensive European harmonisation on legal
obligations of disclosure of future financial obligations. The first case Pohotovost
57
refers to the failure to mention the cost of credit (APRC or annual percentage rate
of charge) in a consumer credit contract. A breach of European Directives is found.
While the post-contractual regime, sanctions and legal actions still fall under
national laws and there is a judicial discretion in this regard, the Court allows a
national court to declare that the failure to mention the APR in a consumer credit
contract means that the credit granted is deemed to be interest-free and free of
charge. In the following case Perenicova and Perenic v SOS
58
, the ECJ
acknowledges the powers of the national judge to declare the total nullity of
contract affected by unfair terms not properly disclosed. The Court resolves on the
basis of both 1993 Consumer Credit Directive and 2005 Unfair Practices
Directive
59
.
Furthermore, in the case Volksbank România SA
60
, the Court has clarified
the full harmonisation character of the recent 2008 Consumer Credit Directive in
relation with other questions of national consumer law. The issues of total cost
disclosure and method of calculating cost of credit ex-ante fall inside the scope of
the European maximum harmonization. EU/EEA Member States can only deviate
on two cumulative conditions: if the problem falls outside the scope of the fully
harmonised provisions of the Directive (i.e.: sanctions for infringement of
informational duty provisions) and if the national legislation is intended to increase
consumer protection.
5.1.3 On price-variation clauses
There is already a line of jurisprudence on this problem. In the first place,
the Court has confirmed that price variation clauses are not prohibited by EU law
in principle provided they are legal, on one hand; and transparent, clear and
disclosed in plain intelligible language ex-ante, on the other. The case law of the
Court reflects the drafting of point 2 (d) Annex to the 1993 Unfair Terms Directive.
In the second place, it has already clarified that reference to mandatory
legislation does not guarantee an escape from the fairness test under the 1993
57
ECJ, case C-76/10 Pohotovosť [2010] ECR I -11557, para. 44. The Court rules that the Directive,
by excluding them from its scope, regulates the "position" of national contractual rules and also
puts them beyond the reach of general principles (of EU consumer law?), following the prevalence
of lex specialis.
58
ECJ, case C-453/10 Pereničová and Perenič v SOS [2012] ECR nyr. Judgment of 15 March 2012.
59
It declares that ―a commercial practice which consists in indicating in a credit agreement an annual
percentage rate of charge lower than the real rate must be regarded as ‗misleading‘ within the
meaning of Article 6(1) of Directive 2005/29/EC [...] in so far as it causes or is likely to cause the
average consumer to take a transactional decision that he would not have taken otherwise‖. The
most important conclusion is that the national judge may decide that an unfair commercial practice
is an indication of an unfair contract term (para. 43).
60
ECJ, case 602/10 Volksbank România SA SC [2012] ECR nyr. Judgment of 12 July 2012, para. 22
(1).
Volume 6, Special Issue, October 2016 Juridical Tribune
24
Unfair Terms Directive as unilateral variations of prices and charges must still
comply with good faith, balance and transparency (RWE
61
). In the same line of
argumentation, it has held that additional fees, other risk charges ex-post are not
considered core terms excluded from the scope of European law fairness test.
Terms relating to a mechanism for amending the prices of the services provided to
the consumer (additional fees) are not excluded by Article 4(2) of 1993 Unfair
Terms Directive (Invitel
62
). Terms including a ‗risk charge‘ charged by the lender
and authorising it, under certain conditions, to unilaterally alter the interest rate are
not either exempted from fairness control (Matei
63
). Fairness and transparency go
hand in hand in the case of price variations. In this regard, the Court has ruled that
it is of fundamental importance that, in addition to having an effective right to
terminate the contract, the consumer should be able to foresee, on the basis of
clear, intelligible criteria what changes the supplier may make in exercise of the
power of variation (Invitel
64
and later on RWE
65
).
In the third place, a case of price indexation is now pending before the
ECJ. The Court will have to decide whether this this practice constitutes a
modification or simple execution of a long time contract. In the case Verein für
Konsumenteninformation
66
, the Advocate General Cruz Villalón has already
interpreted that a price indexation clause should not be seen as allowing a
contractual modification- and thus should not be accompanied by the possibility for
the consumer to terminate the contract if the said clause complies with
requirements of foreseeability, transparency and legal certainty (para. 37) such as
61
ECJ, case C-92/11 RWE Vertrieb AG v Verbraucherzentrale Nordrhein-Westfalen eV [2013] ECR
nyr. Judgment of 21 March 2013.
62
ECJ, case C-472/10 Invitel [2012] ECR nyr. Judgment of 26 April 2012, para. 23.
63
ECJ, case C-143/13 Matei v. S C Volksbank România SA [2015] nyr. Judgment of 26 February
2015, para 78.
64
ECJ, case C-472/10 Invitel [2012] ECR nyr. Judgment of 26 April 2012, para. 23.
65
ECJ, in case 92/11 RWE [201 3] ECR nyr. Judgment of 21 March 2013: ―46. With respect to a
standard term such as that at issue in the main proceedings which allows th e supply undertaking to
vary unilaterally the charge for the gas supply, it must be observed that .... the legislature
recognized, in the context of contracts of indeterminate length such as contracts for the supply of
gas, the existence of a legitimate interest of the supply undertaking in being able to alter the charge
for its service.― ―47. A standard term which allows such a unilateral adjustment [of price] must,
however, meet the requirements of good faith, balance and transparency laid down by those
Directives― […] ―49. ... the contract (must) set out in transparent fashion the reason for and
method of the variation of the charges for the service to be provided, so that the consumer can
foresee, on the basis of clear, intelligible criteria, the alterations that may be made to those
charges...―[…] ―53. Those strict requirements as to the information to be given to the consumer,
both at the stage of the conclusion of a supply contract and d uring the performance of the contract,
as regards the right of the supplier unilaterally to alter the terms of the contract, correspond to a
balancing of the interests of the two parties. To the supplier‘s legitimate interest in guarding
against a change of circumstances there corresponds the consumer‘s equally legitimate interest,
first, in knowing and thus being able to foresee the consequences which such a change might in
future have for him and, secondly, in having th e data available in such a case to allow him to react
most appropriately to his new situation ―.
66
ECJ, case C-326/14 Verein für Konsumenteninformation pending. Opinion Advocate General Cruz
Villalón of 9 July 2015.
Juridical Tribune Volume 6, Special Issue, October 2016
25
to ensure that that it does not in concreto modify the contract, but rather uphold the
original balance (para. 41). This requirement entails that the index used should be
determined by a third, independent party on the basis of objective criteria (para.
42). As for the final assessment of compatibility with EU law of price-variation
clauses, it is for national judges to decide whether a specific term fulfils the
conditions above (para. 40 and 45). At the time of writing, it remains to be seen
whether the ECJ follows the opinion of AG Cruz Villalón with a similar legal
reasoning or whether it deviates from it.
5.1.4 On the consequences of unfairness, duties of national judges
and procedural law
Judges have positive duties under European law towards individuals.
National courts have the power to ascertain the unfairness of a standard term on
their own motion, even if neither party demands it (Océano
67
). National law may
not limit this power of the judge which stems directly from EU law (Cofidis
68
). The
principle of effectiveness requires that the application of the protection which the
1993 Unfair Terms Directive seeks to confer on consumers is not impossible or
excessively difficult in national judicial /mortgage enforcement proceedings (Aziz
69
and Banco Popular Español and Banco de Valencia
70
). The sanction for unfair
terms under European law must be nullity ex tunc (Garabito)
71
as courts must
declare the terms wholly unbinding. Judges may not weaken the dissuasive effect
of the European rules by rewriting unfair terms (Banco Español de Crédito
72
).
There is no national autonomy in this regard, if the terms or clauses are found
unfair, invalidity may leed to the recalculation of past undue payments (RWE
73
).
67
ECJ, joined cases Océano Grupo Editorial SA v Roció Murciano Quintero (C-240/98) and Salvat
Editores SA v José M. Sánchez Alcón Prades (C-241/98), José Luis Co pano Badillo (C-242/98),
Mohammed Berroane (C-243/98) and Emilio Viñas Feliú (C-244/98) [2000] ECR I-04941.
68
ECJ, case C-473/00 Cofidis [2002] ECR I-10875. On the questions ex officio unfairness vs audi
alteram partem, see also ECJ, case C-472/11 Banif Plus Bank [2013] ECR nyr. Judgment of 21
February 2013.
69
ECJ, case C -415/11 Aziz v. Catalunyacaixa, [2013] ECR nyr. Judgment o f 14 March 2013, see
para. 63.
70
ECJ, joined cases Banco Popular Español SA v Maria Teodolinda Rivas Quichimbo and Wilmar
Edgar Cun Pérez (C-537/12) and Banco de Valencia SA v Joaquín Valldeperas Tortosa and María
Ángeles Miret Jaume (C-116/13) [2013] ECR nyr. Judgment of 14 Nov. 2013.
71
ECJ, case C- 488/11 Asbeek Brusse and da Man Garabito v Jahani BV [2013] ECR nyr. Judgment
of 30 May 2013.
72
ECJ, case C-618/10 Banco Español de Crédito SA v Joaquín Calderón Camino [2012] ECR nyr.
Judgment of 14 June 2012.
73
The case RWE gives way to a recalculation to all past bills in Germany, although the statute of
limitation limited the claim to three years. ECJ, in case 92/11 RWE [2013] ECR nyr. Judgment of
21 March 2013.
Volume 6, Special Issue, October 2016 Juridical Tribune
26
5.1.5 A Court searching to strike the right balance between European
consumer protection rules and national circumstances justifying
diverse cost of credit
The review of the case-law already given by the ECJ lead to the following
provisional conclusions. As stated above, the legality test on transparency and
disclosure information duties is very strict. Consumers/debtors are strongly
protected against lack of information, lack of clarity and lack of transparency.
There is also a strong protection of their procedural rights at national level. On the
other hand, the general fairness test is vague and even weak. There is no direct
substantive control of fairness, for the time being, regarding core terms when they
are transparent duly disclosed ex-ante. When transparency and information ex-ante
are respected, the general theory of unfairness results in a concept left open for the
interpretation of national courts. National autonomy is preserved for most
important issues not directly covered by Directives: cost of credit, usury, over-
indebtedness. Core (national) unfairness is still possible under EU consumer/credit
law and shows the limits of European harmonization. There is not a right to fair
credit cost, only a right to clarity. For the time being, arguments that the ECJ has
used to challenge national procedural laws and increase consumer credit/mortgage
rights (ie. Aziz
74
in Spain) are absent when the question revolves around the core
issue of cost of credit allowed by national legislation (ie. Barclays
75
). In spite of
that limitation, the Court tries its best to offer as much protection to consumers as
possible under the current framework.
5.2 Judicial review by the EFTA Court. Could the Court have ruled
differently?
In this context, it is important to reflect on the conclusions reached by the
EFTA Court on the indexation of credit in Iceland from both a fairness and legality
perspectives in order to reply to a set of questions: 1) taking into account EU/EEA
law... was a different outcome possible? 2) do the legal reasoning and questions
asked and/or answered follow the jurisprudence of the ECJ? and 3) how far are
consumers/debtors protected in the EEA legal order?
5.2.1 On core (national) unfairness and mandatory rules exempted
from European control (case Engilbertsson /Íslandsbanki)
In this first case Engilbertsson /Íslandsbanki
76
the EFTA Court, on the one
hand, acknowledges the framework created by EU/EEA law on consumer and
eventually mortgage credit; but, on the other hand, it shows respect for national
74
ECJ, case C -415/11 Aziz v. Catalunyacaixa, [2013] ECR nyr. Judgment o f 14 March 2013, see
para. 63.
75
ECJ, case C-280/13 Barclays Bank SA v Sara Sánchez García [2015] ECR nyr. Judgment of 30
April 2015.
76
Case C-25/13 Gunnar V. Engilbertsson and Íslandsbanki hf. [2014 ] EFTA Court Reports, not yet
reported (nyr.). Judgment of the EFTA Court of 28 August 2014.
Juridical Tribune Volume 6, Special Issue, October 2016
27
rules that might fall outside of the scope of EU/EEA law harmonization. The goal
of the Court is to strike a balance between the most effective protection of
European consumer rights and the national autonomy still allowed in some parcels
of consumer and mortgage credit, such as cost of money or other issues falling
under Member States´ area of competences.
The logic and assessment is two-folded and articulated around the
information and fairness paradigms. Lets look first to information disclosure. Here
the Court tries to reach a Salomonic conclusion. While it rules that price-indexation
of credit, per se, is not prohibited; it establishes that EEA law requests a general
high standard of clarity and quality of information (para. 97-98). It does so by
referring specifically to the Opinion of Advocate General Wahl in cases Schulz and
Egbringhoff
77
) and requiring an explicit description of the method of calculation of
price changes so that consumers can see alterations to the principal of the loan
(para. 142). However, the final assessment on legality of disclosure of information
is left for national courts, based on the circumstances of the specific case (para.
141-146).
We learn other things from the opinion. It seems to be clear for the Court
that opaque changes of cost of credit done carried out by creditors unilaterally ex-
post are illegal in EU/EEA law (although it is not directly said), that price-
indexation clauses tend to be standard terms (not individually negotiated) and that
sanction for unfair terms is mandatory invalidity under the 1993 Unfair Terms
Directive. However, on the information disclosure test, the Court offers just a
general conclusion but leaves too many questions aside: how this extensive
information obligation should be fulfilled in the contract by creditors? what
standard and model is needed to disclose the method of calculation and the cost
formulas? The Court does not refer to the requirements set by the 1987 Consumer
Credit Directive (obligation to disclose the total amount and cost of credit ex-ante
and strict rules on annual percentage rate of charge or APRC). It simply sets it
aside saying on the grounds that there is another case pending and that a second or
even third question for interpretation can always be requested if necessary by the
national judge. Needless to say, this fragmentation of European consumer credit
law is not very convincing. The exclusion of the most important Directive
regulating extensively the requirements of disclosure of cost of credit ex-ante (in
force until 1 November 2013 in Iceland) is not justified on the sake of judicial
interpretation.
However, the most important conclusions of the opinion for Icelandic
consumers are those referring to the (national) unfairness alleged and the exclusion
of mandatory rules from European control. Here the Court leaves the two core
questions to the national courts that will have to rule whether price indexation
practices are 1) protected as national mandatory/regulatory law and excluded from
European harmonisation and 2) unfair or not in view of context and circumstances
(para. 67).
77
ECJ, Opinion of Advocate General of 8 May 2014 in joined cas es C-359/11 and C-400/11 Schulz
and Egbringhoff [2014] ECR nyr, point 53.
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28
The legal reasoning followed by the Court reflects the arguments of the
parties in the dispute. It looks at the European framework of fairness constructed
by the 1993 Unfair Terms Directive in order to determine that the scope of
European harmonization does not reach core (national) unfairness and mandatory
domestic rules on credit (presumption of national parliaments protecting consumer
rights). On the basis of this argument it concludes that these issues are to be
assessed at national level by domestic courts. The national autonomy is preserved
and the margin of discretion that national judges have in this regard to be exercised
taking into account a legal, economic and political context as well as case
circumstances. In a nutshell, it is for Icelandic courts to decide whether indexation
of credit is exempted from control under 1993 Unfair Terms Directive as
mandatory law and, if not exempted, whether indexation is unfair taking into
account the credit market in Iceland. The assessment will be done on the basis of
national law.
The EFTA Court in this ruling does not seem to think that European law
limits indirectly or elliptically the cost of credit. A parallel is therefore evident
between this case and case Barclays
78
from the ECJ which is only mentioned by
the EFTA Court concerning the competences of national judges for assessing
fairness (para. 162).
Can the cost of credit in Iceland better controlled at national level? In this
sense, it is important to remember that the Iceland legislator decided that to expand
the scope the Directive (Article 4.2) and offer better protection concerning ―core
terms― (main object of a credit contract). Icelandic Act No. 7/1936 allows the
judges to assess the relationship between the price and the service or goods in order
to determine the unfair nature of clearly worded contractual terms
79
. As in other
European countries, the cost of credit in Iceland is not therefore a ―core term‖
excluded from national judicial control on fairness. The EFTA Court does not
mention this issue so a guidance to national courts on this point is missing. A
better explanation of the case RWE
80
and a reference to case Kásler and Káslerné
Rábai
81
on ―core terms‖ would have been very useful in this regard.
Trusting national judges to assess domestic fairness/unfairness of cost of
credit seems, in principle, like a good conclusion taking into account that this is
what the European legislator chose to do. But some questions remain open and
unanswered: what happens if the national legislation fails to offer adequate
protection to consumers against exorbitant cost of credit? Or if mandatory
provisions are simply unfair in a new economic context? Or if national judges
avoid to assess cost of credit in spite of their competence to do so under domestic
78
ECJ, case C-280/13 Barclays Bank SA v Sara Sánchez García [2015] ECR nyr. Judgment of 30
April 2015.
79
Forsætisráðuneytið (Prime Minister Office), Neytendavernd á fjármálamarkaði (Consumer
protection in financial markets) (Reykjavík, 2013) p. 55.
80
ECJ, case C-92/11 RWE Vertrieb AG v Verbraucherzentrale Nordrhein-Westfalen eV [2013] ECR
nyr. Judgment of 21 March 2013.
81
ECJ, case C-26/13 Kásler and Káslerné Rábai [2014] ECR nyr, Judgment of 30 April 2014,
para. 49 to 51.
Juridical Tribune Volume 6, Special Issue, October 2016
29
law? Can European consumer credit law come to the rescue if the assumptions laid
by European law are not complied with? These are difficult questions which reveal
the limits of the European legal framework regarding substantive control of
fairness.
Could the EFTA Court have ruled differently? Yes, here is a possible line
of reasoning that might have been plausible to bring (national) unfairness and
mandatory rules under the scope of EU/EEA law in some circumstances. In this
sense, it can be argued that the European fairness test should also apply to both
private and public practices anchored in domestic legislation in those cases when
protection of consumers is not properly guaranteed at national level (ie. when cost
of credit is not duly disclosed ex-ante according to European rules). Lack of
consumer protection against unfair terms has allowed the ECJ to declare Spanish
mortgage execution procedural law incompatible with the 1993 Unfair Terms
Directive on three occasions, two of them after legislation was reformed (Aziz
82
,
Sánchez Morcillo y Abril García v BANCO BILBAO
83
and BBVA SA v. Gabarro
84
).
The main argument here is that the reference in the 1993 Unfair Terms
Directive to mandatory provisions is essentially constructed on the assumption that
the national legislator will adopt fair general measures intended to secure the
economic interests of consumers. It is implicit for the European legislator that such
measures will only improve but not deprive the persons affected of the rights
secured by European legislation. This is consistent with the obligation for Member
States to ensure that unfair terms are not included in the contracts. When the
assumption no longer holds and is falsified by reality, the derogation for abusive
terms anchored in national legislation should no longer exist.
A second important argument is that the ECJ has already established that
the lack of European control and judicial review on ―core terms‖ allowed by the
1993 Unfair Terms Directive only apply as long as cost of credit is perfectly
transparent, clear, intelligible and disclosed ex-ante (Kásler and Káslerné Rábai
85
).
Since indexation of credit in Iceland operates ex-post and is opaque, it qualifies as
an unfair clause that national legislation cannot save alone.
This interpretation is supported by the fact that 2005 Unfair Commercial
Practices Directive does not exclude mandatory law from its scope. It only allows
an amelioration of consumer rights but not deterioration at national level
86
.
The Court could have very well chosen that paid and said that –by allowing
the use of unfair terms or abusive clauses in loan contracts (because of its opacity)–
82
ECJ, case C-415/11 Mohamed Aziz v. Catalunyacaixa [20 13] ECR nyr. Judgment of 14 March
2013.
83
ECJ, case C-169/14 Sánchez Morcillo y Abril García v Banco Bilbao [ 2014] ECR nyr. Judgment of
17 July 2014.
84
ECJ, case C-8/14 BBVA SA v. Gabarro [2015] ECR nyr. Judgment of 29 October 2015.
85
ECJ, case C -26/13 Kásler and Káslerné Rábai [2014] ECR nyr, Judgment of 30 April 2014,
para. 42.
86
immovable property, Member States may i mpose requirements which are more restrictive or
prescriptive than this Directive in the field which it approximates.‖
Volume 6, Special Issue, October 2016 Juridical Tribune
30
Icelandic legislation showed a deep misunderstanding of the main corpus of
European consumer (credit) law impairing the core protection sought by the 1987
Consumer Credit Directive, the 1993 Unfair Terms Directive and 2005 Unfair
Commercial Practices Directive. In this sense, at the end of the day what would
count is the necessary protection of economic interests of consumers who are
weaker and more vulnerable than credit institutions in the area of financial services
and who need all information on cost of credit ex-ante, not the umbrella provided
by domestic legislation.
The EFTA Court could have ruled in the following way.
European fairness test should also refer to unfair terms/commercial
practices anchored in domestic legislation in some circumstances (particularly in
cases where there is a violation of APCR rules under the 1987 Consumer Credit
Directive, later Directive 2008/48/EU). The scope and limits of the exemption of
fairness control for mandatory provisions of national law are not absolute but
relative (conditional to the effective protection of consumers and to the
requirement of transparency). The presumption of compatibility of national
legislation with European consumer law may be subject to judicial review, both at
national and European level. When substantial abuse of economic consumer rights
are at stake, when national legislation allows opaque practices (unfair terms or
abusive clauses) with are so disproportionate in favour of creditors, such rules
impair the core protection sought by general principles of European law. In these
conditions, the effectiveness of European consumer law and the rights of individual
consumers must prevail. The presumption of compatibility with European
consumer law would be set aside and the national legislation could be subject to
judicial review, both at national and European level. In short, there is no
guaranteed immunity from fairness control in those circumstances in so far as
domestic legislation pursues objectives related to consumer protection already
harmonized at EU/EEA level (calculation and disclosure of cost of credit &
transparency ex-ante) and fails to secure a fair balance between rights and
obligations of debtors and creditors.
The silence of the EFTA Court on core issues and, specially, on how cost
of credit in EU/EEA Member States is or not affected by the European legal
framework reveals other important things. In the first place, it shows how the Court
has not really understood the triple cost of credit that an indexed loan really carries
and the structure of credit contracts. The Court does not mention that financial
institutions are, in fact, charging in two ways (interest and price-indexation) for the
same concept (loss of monetary value of principal withdrawn by debtor over time).
In the second place, the Court does not differentiate either between the CPI-
indexation (regulated by public law) and the extra negative amortization cost of
loans (formulas originating in public/private banking business practices). In the
third place, it shows how the EFTA Court avoids to take taking a position on ever
anything that might come close to a minimum substantive control of fairness
(examining things like e.g. potential extortionate cost of credit, commercial
practices and business models based on misleading information likely to distort the
Juridical Tribune Volume 6, Special Issue, October 2016
31
economic behaviour of the average consumer, significant imbalance and inequality
of contracting parties versus inflation knowledge and influence of credit/debt on
the monetary mass etc). In the fourth place, transparency seems to be
constructed/used as a potential defence against unfairness (at least relating to cost
of credit). This is surprising since lack of transparency in EU law constitutes an
autonomous and sufficient criterion of unfairness (vis à vis the "unfair imbalance"
general clause) as the ECJ has already explained in case RWE
87
(para. 62-63)
which was adopted after Invitel
88
.
Out of all arguments missed, what is really worrisome is to observe how
the EFTA Court does not seem to understand how indexed credit in combination
with a negative amortization scheme really works. It notes rightly one of the main
differences with variable interest rates (the initial principal borrowed is indexed
and updated every month) but that is not all. A real example of an indexed loan
between a bank and a consumer illustrate the cost of credit in Iceland and the
technique used. In the most common contract, indexation is embedded and coupled
with a so called annuity system (negative amortisation). This structure leads to an
extreme form of anatocism which the EFTA Court did not seem grasp correctly.
In general, in Iceland consumers are paying the cost of credit in a three-
fold scheme: through ex-ante disclosed interest rates, through indexation payments
non-disclosed and calculated ex post (principal due is regularly updated although
the debtor does not draw any more capital) and through additional interest
calculated regularly both on principal and interest due but postponed (as all unpaid
principal and interest in a negative amortisation scheme are consolidated regularly
into the principal with a ―snow ball‖ effect as it is the case with the so-called
―revolving credit‖). Through the magic of indexation (of principal and interest) and
negative amortization in a never-ending process, debtors see debt grow
exponentially as they only reimburse a minimum part of the financial obligations.
The triple cost of credit leads to compound interest (interest on interest) of
astronomic nature and, inevitably, to perpetual state of debt
89
.
The argument that Icelandic legislator has opted for a different approach to
credit does not hold alone. Coming back to the different nominalism/valorism
theories, a clarification must be made. While Icelandic choice for valorism may be
87
ECJ, case C-92/11 RWE Vertrieb AG v Verbraucherzentrale Nordrhein-Westfalen eV [2013] ECR
nyr. Judgment of 21 March 2013.
88
ECJ, case C-472/10 Nemzeti Fogyasztóvédelmi Hatóság v Invitel Távközlési Zrt [2012] ECR nyr.
Judgment of the Court of 26 April 2012.
89
Forsætisráðuneytið (Prime M inisters´Office), Report of Expert group on the elimination of
inflation-indexation in new loans, 23 January 2014 available on internet at
This report acknowledges both the problem and the difficulty of eliminating indexation of credit in
Iceland. The dissenting opinion of expert Vilhjálmur Birgisson proposes to prohibit indexation of
all n ew consumer credit in Iceland since 1 July 2014 onwards and to restrict in terest rates and
indexation on existing indexed loans on the basis of the current situation of oligopoly and
extortionate interest rates that the financial sector practices. A summary of his separate opinion in
English is available on internet at
vilhjalms-afnam-vaxtatr-ensk-thyding.pdf> (consulted last time in July 1, 2016).
Volume 6, Special Issue, October 2016 Juridical Tribune
32
justifiable in principle, this does not mean than the practice of indexation -as it is
implemented in Iceland- is automatically fair. This is so because financial
institutions charge for the cost of money both from a nominalistic perspective
(interest) and from a valoristic perspective (CPI-indexation) adding to it a third
dimension (negative amortization). Had the EFTA Court understood it properly, it
could have maybe offered some clarification on whether or not it is fair, from a
European law perspective, to charge credit/mortgage consumers for the same
concept using both theories of valorism and nominalism or put it more simply,
―having the cake and eating it‖, all this taking into account the opacity of the
different business formulas used for the calculation ex-post of this triple cost.
To conclude this section, one may say that the EFTA Court missed the
opportunity in this ruling to lead the European discussions and elaborate some
guiding principles regarding core (national) unfairness, transparency and
mandatory rules exempted from European control in relation with debt/consumer
credit. As it was the case before before the ECJ (Barclays
90
in Spain) the courts
put national unfairness out of reach of general principles of European law. The
problem is that, unlike the case in Spain where moratory interest was transparent
and disclosed ex ante and had not been capped by domestic law (until recently),
indexation of credit to inflation in Iceland is opaque and complex, relies only
partially on public law and cannot –by definition- be disclosed ex ante.
5.2.2 On legality and ex-ante disclosure of cost of credit
(case Gunnarsson/Landsbanki)
It is really in the second case Gunnarsson/Landsbanki
91
that the EFTA
Court really nails the issue finding a breach of European legality (violation of
disclosure information duties based on protection-by-information paradigm) and
finding that, according to the 1987 Consumer Credit Directive, it is not possible to
calculate and disclose a cost of credit with 0% inflation ex-ante but charge a higher
figure ex-post on the basis of real inflation.
The Court finds that European law does not provide justification for the
practices developed by the financial institutions in Iceland in the last decades
where cost of inflation for borrowers was neglected and set aside or left as 0% ex-
ante while indexation clauses embedded into the contracts meant a different cost of
credit ex-post. Traditionally both public and private banks have offered loans
where the principal due by the borrower and the real total cost of credit were
indeterminate and unclear. The Court confirms that this should not be possible
under the constraints of European consumer credit law. It is simply not acceptable
to disclose to consumers ratios of 0% inflation and 0% cost of indexation and then
charge for additional cost and compound interest both on the principal and the
90
ECJ, case C-280/13 Barclays Bank SA v Sara Sánchez García [2014] ECR nyr. Judgment of 30
April 2014.
91
EFTA Court. Case C-27/13 Sævar Jó n Gunnarsson and Landsbankinn hf [2014 ] EFTA Court
Reports, nyr. Judgment of the EFTA Court of 24 November 2014.
Juridical Tribune Volume 6, Special Issue, October 2016
33
interest due later on (calculated on the basis of the monthly CPI index). A credit
agreement allowing for the regular increase ex-post of the principal of the loan and
total cost of credit through opaque and non-disclosed price-indexation method
should be illegal as the European Directives assume that the principal of the loan
remains stable with some limited exceptions (in any case when as here, the
consumer does not withdraw more capital). When consumers are not duly informed
of the effects of indexation on their loans, the information and transparency
paradigm on which the 1987 Consumer Credit Directive is based (as well as the
2008 Directive) fail completely.
With its ruling, the Court confirms that the nature of the variation of the
total cost of credit is such that it cannot be argued that it is incidental or equivalent
to other charges falling out of the scope of the Directive. Indexation is cost of
credit and, as such, it must be disclosed ex-ante mandatorily and in compliance
with the European form, APCR rules and method of calculation. Even if inflation
cannot be predicted accurately in advance, the plan of payments must be realistic
and based on past history/present inflation predictions. Transparency and
disclosure of information ex-ante are essential for the legality assessment of credit
contracts. Consumers must know the total cost of the loan so that they can commit
responsibly to their future financial obligations and compare between offers of
different providers of financial services competing between them. That is the goal
of European consumer legislation in the internal market.
The legality test does not exclude the fairness control required by European
legislation and left to the discretion of national courts (prohibition of abusive
contractual clauses and abusive commercial practices) a question explained in the
first case Engilbertsson /Íslandsbanki
92
to which the EFTA Court refers.
5.2.3 A Court opting for a weak fairness assessment
and a strong legality/disclosure of cost of credit ex-ante
We can now reply to the questions asked before regarding the EFTA
Court´s advisory opinions. Taking into account EU/EEA law and the case-law of
the ECJ and the lack of deep understanding on how indexation works in practice ...
a different outcome was probably not possible. We end up with a weak (European)
fairness assessment but strong information disclosure requirements. A conclusion
where transparency ex ante pre-empts fairness. The legal reasoning and questions
asked and/or answered by the EFTA Court do not exactly mirror the questions
already clarified by the ECJ since this is a new problem in European consumer law.
To the question ―how far are consumers/debtors protected in the EEA legal order
against indexation of credit practices― we may reply the following. Very well
protected for breach of information cases but unfortunately not that well regarding
abusive cost of credit. This is due to legal diversity allowed by both EU/EEA law
92
Case C-25/13 Gunnar V. Engilbertsson and Íslandsbanki h f. [2014 ] EFTA Court Reports, nyr.
Judgment of the EFTA Court of 28 August 2014.
Volume 6, Special Issue, October 2016 Juridical Tribune
34
and the doctrine of a unique right to clarity that seems to come instead of a
European right to fairness.
As the ECJ, the EFTA Court requires a strong legality test guaranteeing
protection against lack of information and lack of clarity and transparency while
yielding the final fairness test to the national courts with general concepts left for
further interpretation. There is no revolutionary approach concerning procedural
rights which are not part of the main case. National autonomy is preserved for
indexation of credit which is, on the other hand, required to be transparent and
disclosed ex-ante. Consumers get therefore no direct protection in European law
against core national unfairness (since the Court does not say that there is an
opaque calculation of cost of credit ex-post and thus an unfair term non-legally
binding). The limits of EEA law are similar to limits of EU law regarding cost of
credit, usury and over-indebtedness .... provided that general disclosure obligations
and transparency are complied ex-ante. And these are probably the only questions
that may yield the balance one way or another at national level.
Only difference is that ECJ tries harder to conceptualize and analyse the
problems, stretching European consumer law to afford as much protection as
possible, providing good solid legal reasoning and understanding most core issues
while the EFTA Court relies too much on arguments set by the parties, misses
some structural problems and sends most important questions of interpretation back
to the national court. By doing that it misses the opportunity to interpret and clarify
this important problem of credit indexation ex-post and the clash between
nominalism and valorism theories. On the other hand, the advisory opinions
illustrate how difficult is to walk on the edge of a knife.
6. Conclusions
The cases prove that the EFTA Court dares to do a judicial review of the
legality and fairness of credit indexation in Iceland in the light of EEA law that
legislative and executive powers in Iceland had not been able to resolve. In this
sense, the rulings are very much appreciated by both specialists, financial sector,
consumer associations and society in general since the clarification of some issues
is essential for the sake of legal certainty.
The interpretation provided, however, defies the logic of non-contradiction.
The Court concludes, on one hand, that EEA law does not reach into the realm of
national core unfairness and yields the final assessment task to the national courts
as the 1993 Unfair Terms Directive requires (Engilbertsson /Íslandsbanki); while,
on the other hand, requires under the 1993 Directive a general duty of transparency
(Engilbertsson /Íslandsbanki) and a strict and high standard of disclosure ex-ante
on total cost of credit (inflation-cost inclusive) under the 1987 Consumer Credit
Directive (Gunnarsson/Landsbanki).
At the end, the legal reasoning and conclusions of the Court in the two
cases try to solve the impossible oxymoron that indexation of credit in Iceland
brings to EU/EEA law. Indexation, cost of credit and usury practices tend to fall
Juridical Tribune Volume 6, Special Issue, October 2016
35
outside the scope of European harmonisation (provided disclosure obligation of
cost of credit and transparency ex-ante are respected). A fairness control is
dependent on national and case circumstances to be assessed by domestic courts.
On the other hand, European rules impose with no derogations that the total cost of
credut is disclosed and calculated ex-ante (the cost of indexation of credit to
inflation is therefore included and not excluded).
The problem lies in the fact that it is not possible to square a circle with
this technique as the cost of indexation of credit to inflation is impossible to
disclose in advance and to explain in a transparent way. It is opaque and relies not
only on CPI but also on secret business formulas. While it is feasible to formulate a
Salomonic approach in theory, it is not possible to block the inherent contradiction
or oxymoron in practice. The solution and attempt to clarify EEA law by the Court
is nevertheless useful as it reveals the paradox. For this reason, it is suggested in
the title that the EFTA Court might have created in this regard a sort of ―law of
contradiction‖. If we look at the ruling from the EFTA Court from the fairness
angle, indexation is not prohibited per se in theory – provided is transparent- and
the assessment is for national judges. If we look at it from the information
disclosure obligations ex-ante, indexation is extensively regulated by European law
and thus impossible in practice. Lack of transparency is a ground of unfairness per
se. The law of contradiction is confusing for the general public: are consumers
‗economic rights protected or not under EEA rules in Iceland? We do not know yet
since the paradox is an oxymoron and the saga continues at national level.
What is most disappointing, however, is that the EFTA rulings do not seem
to grasp and understand the scope, rationale and technique behind the cost of
money/debt. The indexation of credit is not only based on the CPI but on the very
old historical principles of anatocism and compounding
93
structured in formulas
not disclosed to consumers. The triple cost of credit (interest rates, indexation cost
and negative amortization schemes) leads to an exponential increase of debt
without parallel in Europe. While the calculation of CPI index is public and
transparent, the formulas used by financial institutions are secret and opaque.
Valorism (indexation) is cumulative to nominalism (interest). The EFTA Court
seems to misunderstand the assumptions, hypothesis and techniques used for the
calculations of total cost of credit.
Could the EFTA Court have ruled in a different way? It is difficult to say.
On one hand, it is possible to argue in the affirmative. While it is true that the cost
of credit, the fight against usury practices that lead to over-indebtedness have been
left in principle to national regulation due to the differences in consumer credit
markets and legal diversity; the case-law of ECJ has brought the issue under a
minimum common framework of European consumer protection principles.
Member States ´attitudes towards the regulation of cost of credit vary, some
introduce interest rate restrictions in order to prevent consumer insolvency
93
Reifner, Schröder, Usury Laws: A Legal and Economic Evaluation of Interest Rate Restrictions in
the European Union, Instituts für Finanzdienstleistungen e.V. (iff), BoD – Books on Demand,
2012, pages 109-11.
Volume 6, Special Issue, October 2016 Juridical Tribune
36
problems. Others prefer not to regulate and/or introduce a cap on credit justifying
this lack of intervention on the need to assure access to credit for people with
moderate means. The concept of usury, although not mentioned directly by
EU/EEA Directives, is an underlying theme. It could have been inspired by
consumer protection aims stating that any regulatory choice should respect the
purpose of European consumer credit law which is to ensure that the market works
well, that it promotes social welfare of people by means of appropriate and
adequately priced credit agreements. In this context, transparency, information ex-
ante and fairness constitute a limit on the national regulation and its margin of
appreciation/ discretion/ choices. If the Courts take into account not only the
EU/EEA acquis but also the general ethos of consumer protection in the area of
credit and the vulnerability of consumers versus financial institutions, European
law would control the cost of credit in an elliptical way at least.
On the other hand, it is possible to argue in the negative and recognise that
the limits of EEA law are identical to EU law when confronted to national core
unfairness on cost of credit embedded/allowed by domestic legislation as long as
transparency is respected. The case Barklays in Spain shows the scope and limits of
European harmonization on abusive cost of credit. In this line of reasoning,
European law would only a general frame but it would offer neither protection nor
a theory on credit fairness allowing for 31 (28 + 3) different national regimes to
deal with cost of credit and/or extortionate or usurary practices leading to over-
indebtedness, provided that clear information ex-ante is given.
One thing is nevertheless clear. The question ―is indexation of credit ex-
post such as practiced in Iceland a loophole open for circumvention of the
European rules on consumer credit?― is still pending. The EFTA Court has already
said that, as long as indexation of inflation ex-post is legal, transparent and duly
calculated and disclosed ex-ante there will be no European fairness review. This is
an oxymoron and the litigation has continued at national level. The most recent
ruling of the Supreme Court of Iceland of 26 November 2015 (case nr. 243/2015)
recognises the paradox (indexation to inflation is legal under Icelandic law even if
that law breaches EU/EEA consumer credit law – the classic problem of lack of
effect of European law in a dualist country). Consumers´ association will surely
complain to the EFTA Surveillance Authority but we may be very well waiting for
Godot. The indexation of credit to inflation ex-post in Iceland seem, at least for
now, the perfect example of a law of contradiction where statements and
propositions can be true and false, and reality is possible and impossible
simultaneously.
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Table of cases
Volume 6, Special Issue, October 2016 Juridical Tribune
38
EFTA Court
1. Case E-9/97, Erla María Sveinbjörnsdóttir v. the Government of Iceland [1998] EFTA
Court Rep. 95.
2. Case E-4/01 Karlsson [2002] EFTA Court Rep. 240, para 32.
3. Case C-25/13 Gunnar V. Engilbertsson an d Íslandsbanki hf. [2014] EFTA Court
Reports, not yet reported (nyr.). Judgment of the EFTA Court of 28 August 2014.
4. Case C-27/13 Sævar Jón Gunnarsson and Landsbankinn hf. [2014] EFTA Court
Reports nyr. Judgment of the EFTA Court of 24 November 2014.
Court of Justice of European Union
1. ECJ, Joined Cases C-6/90 and C-9/90 Francovich [1991] ECR I-5357.
2. ECJ, joined cases Océano Grupo Editorial SA v Roció Murciano Quintero (C-240/98)
and Salvat Editores SA v José M. S ánchez Alcón Prades (C-241/98), José Luis Copano
Badillo (C-242/98), Mohammed Berroane (C-243/98) and Emilio Viñas Feliú (C-
244/98) [2000] ECR I-4941.
3. ECJ, case C-473/00 Cofidis [2002] ECR I-10875.
4. ECJ, Case C-484/08 Caja de Ahorros y Monte de Piedad de Madrid v Asociació n de
Usuarios de Servicios Bancarios (Ausbanc) [2010] ECR I-04785.
5. ECJ, case C-76/10 Pohotovost’ s.r.o. v Iveta Korčkovská [2010] ECR I -11557.
6. ECJ, case C-453/10 Pereničová and Perenič v SOS [2012] ECR nyr. Judgment of 15
March 2012.
7. ECJ, case C-472/10 Invitel [2012] ECR nyr. Judgment of 26 April 2012.
8. ECJ, case C-618/10 Ba nco Español de Crédito SA v Joaquín Calderón Camino [2012]
ECR nyr. Judgment of 14 June 2012.
9. ECJ, case 602/10 Volksbank România SA SC [2012] ECR nyr. Judgment o f 12 July
2012.
10. ECJ, case C-92/11 RWE V ertrieb AG v Verbraucherzentrale Nordrhein-Westfalen eV
[2013] ECR nyr. Judgment of 21 March 2013.
11. ECJ, case C-472/11 Banif Plus Bank [2013] ECR nyr. Judgment of 21 February 2013.
12. ECJ, case C-415/11 Aziz v. Catalunyacaixa, [2013] ECR nyr. Judgment of 14 March
2013.
13. ECJ, case C- 488/11 Asbeek Brusse and da Man Garabito v Jahani BV [2013] ECR
nyr. Judgment of 30 May 2013.
14. ECJ, case C-59/12 BKK Mobil Oil [2013] nyr. Judgment of 3 October 2013.
15. ECJ, joined cases B anco Popular Español SA v Maria Teodolinda Rivas Quichimbo
and Wilmar Edgar Cun Pérez (C-537/12) and Banco de Valencia SA v Joaquín
Valldeperas Tortosa and María Ángeles Miret Jaume (C-116/13) [2013] ECR nyr.
Judgment of 14 Nov. 2013.
16. ECJ, case C-26/13 Kásler and Káslerné Rábai [2014] ECR nyr. Judgment of 30 April
2014.
17. ECJ, case C-143/13 Matei v. SC Volksbank România SA [2015] nyr. Judgment of 26
February 2015.
18. ECJ, case C-280/13 Barclays Bank SA v Sara Sánchez García [2 015] ECR nyr.
Judgment of 30 April 2015.
Juridical Tribune Volume 6, Special Issue, October 2016
39
19. ECJ, case C -8/14 BBVA SA v. Gabarro [2015] ECR nyr. Judgment of 29 Octo ber
2015.
20. ECJ, joined cases C-359/11 and C-400/1 1 Schulz and Egbringhoff. Opinion of
Advocate General of 8 May 2014 [2014] ECR nyr.
21. ECJ, case C-326/14 Verein für Konsumenteninformation pending. Opinion Advocate
General Cruz Villalón of 9 July 2015.
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