Unfair terms in Swiss franc loans: Overview of European Court of Justice case law

04-03-2021

In the first decade of the 21st century, loans denominated in or indexed to foreign currencies, in particular the Swiss franc, became very popular in a number of EU Member States, including Greece, Croatia, Hungary, Austria, Poland, Romania, and Slovenia, and also in two non-EU countries, Montenegro and Serbia. For a certain period, in some Member States these loans became the most popular type of loan issued to consumers. By pegging loans to a stable foreign currency, banks could lend more money to the same consumer by virtue of interest rates being lower than those for the same type of loan expressed in the national currency. However, when, as a result of the global economic crisis, the rate of exchange between the Swiss franc and these national currencies (zlotys, forints, kunas, etc.) soared, consumers found themselves trapped. Often, they had to repay as much as twice the value of the loan taken, and could not escape the unfavourable contract by simply selling the property they had bought, as this would cover only a fraction of their debt. While certain Member States implemented mechanisms aimed at protecting consumers and bringing the situation under control, the case law of the European Court of Justice (ECJ), based on dynamic interpretation of the Unfair Terms Directive (93/13), has proved to be a significant factor in securing effective consumer protection. This briefing explains the legal significance of the relevant ECJ judgments, against the backdrop of the Swiss franc loan situation in Europe.

In the first decade of the 21st century, loans denominated in or indexed to foreign currencies, in particular the Swiss franc, became very popular in a number of EU Member States, including Greece, Croatia, Hungary, Austria, Poland, Romania, and Slovenia, and also in two non-EU countries, Montenegro and Serbia. For a certain period, in some Member States these loans became the most popular type of loan issued to consumers. By pegging loans to a stable foreign currency, banks could lend more money to the same consumer by virtue of interest rates being lower than those for the same type of loan expressed in the national currency. However, when, as a result of the global economic crisis, the rate of exchange between the Swiss franc and these national currencies (zlotys, forints, kunas, etc.) soared, consumers found themselves trapped. Often, they had to repay as much as twice the value of the loan taken, and could not escape the unfavourable contract by simply selling the property they had bought, as this would cover only a fraction of their debt. While certain Member States implemented mechanisms aimed at protecting consumers and bringing the situation under control, the case law of the European Court of Justice (ECJ), based on dynamic interpretation of the Unfair Terms Directive (93/13), has proved to be a significant factor in securing effective consumer protection. This briefing explains the legal significance of the relevant ECJ judgments, against the backdrop of the Swiss franc loan situation in Europe.