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Edmond-Claude Frety
Frety Avocats, Paris
ecfrety@frety-avocats.fr

 

An unintelligible and misleading financial loan offer

On 26 February 2020, following an investigation that lasted more than ten years and a trial lasting several days, the Paris Criminal Court found BNP Paribas Personal Finance guilty of misleading commercial practices and the concealment of this offence.

During 2008, UCB, BNP Paribas Invest Immo, Cetelem and, following a merger, BNP Paribas Personal Finance, granted 4,655 loans known as ‘Helvet Immo contracts’, amounting to approximately €800m.

This type of loan, which is technically complex, was in principle intended for a discerning clientele of rental investors. The loan’s interest rate was variable and could be revised every three or five years. Its main characteristic was that the sum was borrowed in Swiss francs but repaid by the borrower in euros.

As a result, in the event of a depreciation of the euro against the Swiss franc, the monthly instalment would repay less capital and the term of the loan could be extended by a maximum of five years on the basis of the same maturities. If this proved insufficient, the loan agreement provided that the amount of the instalments would be ‘uncapped’. Therefore, despite the regular repayment of the monthly instalments, the outstanding capital would increase.

Such a financial arrangement therefore entailed two major risks to borrowers:

• the exchange rate risk in the event of an unfavourable EUR/CHF alignment; and
• the risk of an unfavourable change in interest rates.

Following the Global Financial Crisis of 2008, such risks materialised: the Swiss franc soared against the euro (which depreciated by 36.5 per cent between 2007 and 2015), leading to a sharp increase in outstanding capital.

As a result, borrowers saw the initial term of their loans lengthened and, for some, the amount of their maturities uncapped, leading to dramatic financial consequences. Faced with this nightmare situation, no less than 2,535 borrowers and three consumer associations filed a complaint against the BNP Paribas subsidiary and became civil parties to the criminal investigation.

BNP Paribas subsidiary found guilty of misleading commercial practice and concealment of offence

In sanctioning this behaviour, the Paris Criminal Court found in a 600-page judgment that it was the bank’s duty to inform its customers of these issues clearly and that such practices were unfair.

The offence of misleading commercial practice, provided for and punished by Articles L120-1 et seq. of the French Consumer Code in force during the prevention period (now Articles L121-1 et seq. of the same Code), is the result of the faithful transposition, by Act 2008-3 of 3 January 2008, known as the Châtel Law, of European Directive 205/29/EC of 11 May 2005, the aim of which is to achieve ‘a high and harmonised level of consumer protection’.

Within the meaning of the Directive, a commercial practice is considered unfair if it is ‘contrary to the requirements of professional diligence’ and especially if it ‘materially distorts or is likely to materially distort the economic behaviour with regard to the product of the average consumer whom it reaches or to whom it is addressed.’

Within the category of unfair commercial practices, those defined in Articles 6 and 7 of the Directive shall be regarded as misleading:

Article 6:

‘1. A commercial practice shall be regarded as misleading if it contains false information and is therefore untruthful or in any way, including overall presentation, deceives or is likely to deceive the average consumer, even if the information is factually correct, in relation to one or more of the following elements, and in either case causes or is likely to cause him to take a transactional decision that he would not have taken otherwise:

[...]

b) the main characteristics of the product, such as risks [...] to be expected from its use [...]

[...]

c) the extent of the trader’s commitments[...]

d) the price or the manner in which the price is calculated [...] [...].’

Article 7: 

‘1.   A commercial practice shall be regarded as misleading if, in its factual context, taking account of all its features and circumstances and the limitations of the communication medium, it omits material information that the average consumer needs, according to the context, to take an informed transactional decision and thereby causes or is likely to cause the average consumer to take a transactional decision that he would not have taken otherwise.

2.   It shall also be regarded as a misleading omission when, taking account of the matters described in paragraph 1, a trader hides or provides in an unclear, unintelligible, ambiguous or untimely manner such material information as referred to in that paragraph or fails to identify the commercial intent of the commercial practice if not already apparent from the context, and where, in either case, this causes or is likely to cause the average consumer to take a transactional decision that he would not have taken otherwise.’

Therefore, in the light of the Directive and the applicable case law, the Paris Criminal Court, in ruling whether or not the bank’s commercial practice were misleading, sought to determine whether the marketing of the Helvet Immo:

1. was contrary to the requirements of professional diligence;
2. was based on misrepresentation relating to the essential characteristics of the loan which were likely to mislead as to its cost or as to the calculation of the cost; and
3. omitted, concealed or provided unintelligible, ambiguous or untimely material information concerning the price or the price calculation method, in its commercial communication (either through the loan offer or information given by intermediaries).

However, the Court’s careful analysis of the contractual documents and advertising material issued to the borrowers confirmed that the exchange rate risk was deliberately concealed. This was both by the unintelligible or misleading explanations of the loan offer and by the speeches made by the intermediaries at the time of marketing, who were themselves trained by the bank on the basis of training documents that have been expunged of any notion of ‘exchange rate risk’, ‘increase in outstanding capital’, ‘negative depreciation’ or ‘cap removal’.

The Court also found that while the credit information masked the foreign exchange risk, on the contrary, it highlighted its alleged qualities, including its advantageous interest rate. In the course of the trial, the Court also noted that the bank, which was extolling the merits of a stable economic environment to its customers, marketed the loan at a time when the subprime crisis had begun and the Swiss franc was beginning to appreciate against the euro.

Finally, some borrowers were identified as young people starting out in their working lives, others as first-time home buyers, or, on the contrary, people who are already retired. For the latter, the possible five-year extension had, in some cases, the effect of lengthening the duration of the loan beyond life expectancy (90 years).

In the end, the Court considered that they were not sophisticated borrowers but rather ‘average consumers’ within the meaning of the European Directive. They therefore deserved a higher level of protection, and had been deprived of the opportunity to understand the scope of risks of the commitments they entered into, with the result that their consent was vitiated.

An unprecedented and heavy sentence by the French courts

In a ruling exceptional in its severity, the judges found the bank’s subsidiary guilty of misleading commercial practice and concealment of the offence and imposed a fine of €187,500 (the maximum amount incurred), as well as damages in the amount of the harm suffered by the consumers and the financial and non-material loss resulting from their interminable indebtedness. The Court noted in passing that, in order to reap as much interest as possible, the Bank had taken advantage of the exchange rate risk by subjecting its customers to it and keeping them there.

Borrowers may consequently receive between €10,000 and €20,000 for moral damage and between €40,000 and €60,000 for financial damage, not including the reimbursement of legal costs of up to €3,500 per borrower.

Two consumer associations, including UFC-Que Choisir represented by the law firm Frety Avocats, also obtained more than €1m each, in the name of the ‘infringement of the collective interest of consumers’. This amount is totally unprecedented in the field of consumer law but the Court justified it by ‘taking into account the number of consumers concerned, the duration of the infringement of their rights, the extent and seriousness of the trader’s shortcomings, the reputation of the trader in question and the gains he has made from his misleading commercial practice’.

The Court also noted: ‘that the action of consumer associations and in particular the association UFC-Que Choisir had contributed, along with the complaints filed on their advice, to the creation of the Lefevre Commission, which had the effect of amending the regulations (ACP recommendation of 6 April 2012, Act of 26 July 2013), to greater consumer protection by imposing rules on banking or financial organisations. In application of this new regulation, the Helvet Immo loan would now be illegal. It is thus established that the action of consumer associations has proved indispensable in defending the collective interest of consumers.’

Another surprising peculiarity is that, very unusually in this type of case, the Court ordered provisional execution of its decision, allowing the civil parties to receive the damages awarded promptly, notwithstanding appeal.

This financial penalty of exceptional severity is a great first in France: unlike the US legal system, which allows punitive damages to be awarded, French law strictly applies the principle of full reparation, which excludes the idea of punishment and profit.

However, it would seem that, faced with the distress of thousands of borrowers and the sums at stake, the Court made a point not only to compensate the harm suffered individually by the borrowers but also to punish the scale, seriousness, greed and consequences of such commercial conduct against the community of consumers. This was achieved by imposing the heaviest possible fine and awarding compensation for the infringement of the collective interest of consumers, of a considerable amount.

This ruling could therefore be a first and fundamental step in discouraging other banks from attempting to market such risky and nebulous loans in the future.

Lessons learnt from the 2008 Global Financial Crisis

Safeguards against such unfair practices have been created since the 2008 Global Financial Crisis.

The Autorité de Contrôle Prudentiel (ACP), now the Autorité de Contrôle Prudentiel et de Résolution (ACPR) (ie the French Prudential Supervision and Resolution Authority), which reports to the Banque de France, had not yet been created when the Helvet Immo loans were marketed.

Furthermore, since the Act of 26 July 2013, the marketing of a loan in foreign currency for consumers who do not have their main income or assets in that currency is now strictly prohibited.

BNP Paribas Personal Finance, which probably fears subsequent weakening in the other legal proceedings currently under way, has appealed against the decision. It has also requested the suspension of the provisional enforcement of the judgment, to the detriment of the civil parties, who often find themselves in dramatic financial circumstances.

Moreover, proceedings are pending before the Court of Justice of the European Union (CJUE) on this type of practice and, more particularly, on unfair terms. Perhaps the long-awaited turning point, marking the end of these so-called ‘small print’ practices? To be continued.

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