The legal framework for consumer finance in Chile has been strengthened during the past 10 years. This legislative trend was certainly boosted by several recent consumer scandals that shook the credit market, and also by Chile’s admission to the Organisation for Economic Co-operation and Development. New legislation was introduced aiming to reduce information inequality between companies and customers, and to make financial contracting clearer for consumers. In 2011, Chile’s Congress passed a bill concerning financial consumer issues that added new sections to Act No. 19,496 (the Protection of Consumer Rights Act), which gave greater powers to the consumer protection authority, the National Service of Consumers (SERNAC), and enabled it to impose sanctions on financial institutions. Similar efforts had been conducted to protect the confidentiality of debtors’ personal data.
SERNAC has filed several class action lawsuits against financial services on the grounds of abusive clauses in adhesion contracts. The case law available is still limited, but interesting from an academic perspective. There remains little scientific development on financial consumer issues that is clearly reflected in the small amount of manuals, research and papers available in national literature at this moment.
II LEGISLATIVE AND REGULATORY FRAMEWORK
Consumer finance law in Chile is governed by Act No. 20,555 of 2011 (the Consumer Finance Act), which modified the Protection of Consumer Rights Act. Other legislation particularly relevant for consumer law on financial issues includes the Decree with Force of Law (DFL) No. 3 of 1997 (the General Banking Act); Act No. 18,840 of 1989 (the Organic Constitutional Act of the Central Bank of Chile), Act No. 20,715 of 2013, on protection to money credit debtors; Act No. 18,010 of 1981, on money credit operations; Act No. 20,009 of 2005, on limitation of liability of credit card holders; Act No. 20,575 of 2012, establishing the principle of finality on treatment of personal data; Act No. 19,628 of 1999, on protection of private life; Act No. 19,659 of 1999, on illegal collection procedures; DFL No. 707 of 1982, on current accounts and cheques; the Civil Code; and the Commercial Code.
Relevant provisions for consumer financial law can be found in the Updated Digest of Rules (UDR) issued by the Chilean Banks and Financial Institutions Authority (SBIF);2 and in the Compendium of Financial Rules issued by the Chilean Central Bank. Another relevant regulation is Decree No. 44 of 2012, of the Ministry of Economy, on information to consumer on credit cards.
Cash remains the default legal payment method in Chile.
The UDR define a credit card as any instrument that allows its holder or user to obtain credit granted by the issuer to acquire goods or pay for services rendered or sold by the entities affiliated with the corresponding issuer or operator.3 Credit cards are widely accepted as a payment method in Chile.
The SBIF supervises all institutions that issue credit cards,4 with the major exception of cards issued by retailers (since they are not generally accepted in the market). Given that retailers are not compelled to provide up-to-date information to the SBIF, reports submitted by the SBIF regarding debt ratio and levels of payment may be somewhat distorted.
In addition, Chilean law limits the liability of credit card holders in case a card is lost or stolen, once the card holder has notified the issuer.5
The UDR define a debit card as an instrument of payment via electronic devices that operates with online capture of transactions, by which the corresponding amounts are immediately debited in the holder’s account and credited to the beneficiary’s account.6 According to the Compendium of Financial Rules of the Central Bank, only banks and credit unions may issue debit cards. Debit cards are widely accepted as a payment method in Chile.
Chilean legislation defines a cheque as a written order, issued against a bank, to pay upon its presentation, from within the funds that the drawer may have in a current account.7 A cheque is always payable on demand, at its submission before a bank.
Chilean law establishes that banks are liable for paying falsified cheques when the signature differs from the real account holder’s, when the cheque has obvious alterations or when it does not match with the serial numbers of the account holder’s chequebook. Further, payment of lost or stolen cheques will be suspended upon immediate notification to the bank and of the account holder.
Account holders who write cheques without funds in their current account may commit a serious criminal offence on the grounds of fraudulent issuing of cheques.
This method refers to any money transaction performed by electronic devices (e.g., PCs, mobile phones). It is mostly regulated by the UDR.8 The Protection of Consumer Rights Act makes clear that consumers may make electronic transfers to any bank and that banking institutions may not restrict this right.
Banks must provide a system that ensures privacy to account holders and back up all the information of transactions. Further, banks must develop systems to identify fraud.
ii Recent developments
Almost all institutions of the Chilean banking system have mobile apps that can be operated 24 hours a day and run from electronic devices. The SBIF is continuously developing new rules applicable to electronic devices.
IV DEPOSIT ACCOUNTS AND OVERDRAFTS
Deposit accounts are jointly regulated by the Compendium of Financial Rules of the Chilean Central Bank9 and the UDR.10 Deposit accounts may be opened by both natural or legal persons (even by residents abroad), and shall always be operated in Chilean pesos.
Banks may charge fees for account management. The UDR establishes that customers must be kept informed of the amount of the fees in periodical account statements, and inside the bank premises. Additionally, banks must inform to general public the percentage of interest that is paid for the amounts kept on the accounts.
State guarantee of deposits
The General Banking Act established that deposits of natural persons are subject to a regime of state guarantee. This guarantee covers 90 per cent of the amount kept on the account, with the threshold of 120 unidades de fomento per calendar year. This state guarantee may be triggered if the financial institution is declared bankrupt and may be made effective by an executive order of the SBIF.
Bank customers can agree on overdraft lines of credit. Banks allowing overdrafts must notify clients about the maximum overdraft amount, the rate of interest, guarantees of the operation and date and term of the overdraft.11
According to the Compendium of Financial Rules of the Chilean Central Bank,12 banks may also grant overdrafts without previous stipulation. The UDR provide that an overdraft shall be treated neither as a banking product nor a contractual right, but as an exceptional situation.13
V REVOLVING CREDIT
Chilean law regulates revolving credit with regard to credit cards. According to the regulation in force, card issuers must inform customers whether or not the line of credit is revolving.14 Besides, card issuers must inform periodically, and in simple terms, the monthly interest rate of the revolving credit. The rate of the revolving credit reported in the statement of account will apply for the following period.
If the card issuer applies the maximum interest rate allowed by law, said issuer must inform the SBIF on the operation, identifying dates of the operation, amount of the credit, monthly interest rate, contractual term and other charges.15
ii Recent developments
Maximum interest rates have been substantially reduced in the last years through a new calculation formula (see Section VII, infra).
VI INSTALMENT CREDIT
Instalment credit as opposed to revolving credit is the general rule in Chile. The Protection of Consumer Rights Act regulates some rights debtors will always have. This rights are as follows:
- a Advance repayment: consumers can repay in advance all or part of the amount due, and the provider cannot limit this possibility to a specific period.
- b Privacy of data: defaulters can figure in special registers, but these may only show data related to the unpaid debt.
- c Removal from defaulters’ registers: after the credit is paid, the provider must erase the information of the consumer.
- d Basic services: debts related to basic services cannot figure in defaulters’ registers.
- e Right of information: the credit institution must provide all the requested information about debts and charges.
- f Extrajudicial collection proceedings: these cannot impact or affect the personal home, nor the consumers’ employment situation.
- g Confidentiality: banks may not inform family members or other related persons of the consumer’s debt.
- a Mortgages: the main regulations about mortgages are contained in the Civil Code. The mortgage grantor (who will not necessarily be the mortgagor) will always have the right to dispose of the asset.16 Also, mortgage grantors can limit their liability to a determined sum. The Protection of Consumer Rights Act prohibits the execution of loan agreements, including mortgages, that guarantee credits other than the one agreed, without the prior written request of the debtor.17
• Specific mortgages (mortgages in guarantee of one specific contract): the credit provider must provide, and pay the cost of, the public deed declaring the release of the guarantee, and also to notify the Land Registry within 45 days of the debt being discharged.
• General mortgages (mortgages constituted to guarantee all the obligations between the institution and the debtor): the credit provider must inform the debtor within 20 days of the debt being discharged. If the provider does not inform, the debtor may request the mortgage’s cancellation. After this communication, the debtor must request the public deed of cancellation and its registration, costs for which will be borne by the credit provider.
b Car financing: Notwithstanding that there are not specific rules for this kind of credits, SERNAC made a statement about these contracts in 2014, pointing out that customers were suffering abuses by paying excessive amounts.18
- c Student loans: In Chile, there are three main alternatives available for higher education financing through specific student loans, regulated by special laws:
• Solidarity Fund credit: This is a credit directly granted by any of the 25 state-run or traditional universities that are members of the Council of Chilean University Rectors, for the 80 per cent poorest Chilean university students. It has an annual interest rate of 2 per cent. The payment of the credit starts two years after the end of the studies, paying a fee equivalent to 5 per cent of the annual incomes of the consumer.
• State guaranteed credit: This is a credit granted by financial institutions, with a maximum annual interest rate of 2 per cent. The state guarantees up to 90 per cent of the credit. The repayment of the credit starts 18 months after the ending of the studies. Consumers can request to pay fees equal to or lower than the 10 per cent of their income. It is possible to request the suspension of the repayment of the credit, in case of unemployment or postgraduate studies abroad.
• CORFO credit for degree students: CORFO (Corporación de Fomento a la Producción, the Chilean agency for development of industry) maintains a financial line for banks to give credit to students in more favourable conditions than those available to other consumers (annual interest rate between 6.5 per cent and 8 per cent, approximately).
VII OTHER AREAS
The Consumer Finance Act
Prior to 2011, SERNAC had insufficient powers to supervise or sanction financial institutions for violations of financial consumer rights. Mostly prompted by major consumer scandals in recent years, consumer legislation was strengthened setting out special rules on consumer financial law. The Consumer Finance Act specifically introduced a list of rights for financial consumers, such as being informed of the total cost of the financial product and the objective conditions set by the financial institution, or the timely release of guarantees on financial products.
Standardised summary sheet
The Consumer Finance Act was aimed to correct inequalities in the access of information available in the market and to strengthen duties of information in the financial consumer contractual relationship. For that purpose, the Act established a new duty for financial institutions to give consumers a standardised summary sheet of main clauses of the contract, in order to facilitate their comparison.
At the request of financial institutions, SERNAC shall grant adhesion contracts a special ‘SERNAC Seal’ that demonstrates their conformity with consumer law (i.e., no abusive clauses) and the existence of a customer service to resolve consumer complaints and queries. Arbitrators and mediators resolve complaints submitted by consumers. Arbitration and mediation is free of charge for consumers.
Equivalent annual cost (CAE)
The Consumer Finance Act compels financial institutions to notify customers of the total annual cost of their products in every advertisement for credit operations, for comparison purposes. This shows a percentage that reveals the real cost of a credit in an annual period, including the capital, interests and all expenses and costs of the credit, whatever the term agreed for the payment of the obligation.
Maximum conventional interest rate
Act No. 18,010 establishes a new formula to calculate the maximum rate of interest that financial institutions may charge on money credit operations to customers19 (maximum conventional interest rate). It is forbidden to set an interest rate that exceeds the multiplication between the amount of the respective capital and the greater of 1.5 times the current interest rate20 at the time of the agreement, as determined by the SBIF for each type of credit operation, and the current interest rate at the time of the agreement increased by 2 percentage points per year, whether fixed or variable rate. As a result of this new calculation formula, the maximum conventional interest rate for non-adjustable, 90-day operations below 200 unidades de fomento (in Chilean pesos), plunged from 55 per cent in 2013 to 35 per cent in 2016.
Use of personal data
Act No. 20,575 established the principle of finality in the usage and treatment in financial operations. This new legislation was aimed to protect due confidentiality of financial consumers’ data for evaluations on commercial risks, particularly, the consolidated record of debt defaults. It is forbidden for financial institutions to share or use this information for the purposes of applications for schools, emergency medical care, job selection and application to public employments.21 Data banks should observe the principles of legitimacy, access and opposition, information, data quality, purpose, proportionality, transparency, non-discrimination, limitation of use and security in the processing of personal data.22
VIII UNFAIR PRACTICES
The Protection of Consumer Rights Act established an exhaustive list of abusive clauses on adhesion contracts that are deemed to be unfair practices. The list of abusive clauses is as follows:
- a granting a party the right to suspend performance of, or to modify, the contract, notwithstanding legal exceptions;
- b establishing price increases for services, accessories, financing or surcharges, unless such increases correspond to additional benefits that the consumer can accept or reject in each case;
- c making consumers liable for omissions or deficiencies that are not imputable to them;
- d reversing the burden of proof so that it falls on the consumer;
- e containing absolute limitations of liability that may deprive consumers of the right to compensation;
- f clauses contrary to good faith; and
- g including blank spaces that have not been filled or unused.23
IX RECENT CASES
SERNAC v. Cencosud Retail 24
In February 2006, major retailer Cencosud Retail raised fees for credit card management by invoking abusive clauses that enabled the retailer to make unilateral modifications of the contract and to give broad and ambiguous powers of attorney on behalf of consumers, without their consent. The consumer authority estimated that more than 608,000 consumers along the country were affected. In 2013, the Chilean Supreme Court confirmed the ruling of the 10th Civil Court of Santiago, compelling Cencosud Retail to compensate affected consumers restituting undue charges. The total amount of the compensation to which Cencosud Retail was ordered to pay amounted to approximately 26.4 billion Chilean pesos.
SERNAC v. Beneficios Chile and Solución25
In 2012, SERNAC filed a class action against two issuers of credit cards on contracts that contained several abusive provisions, such as enabling the card issuer to modify or suspend the contract unilaterally, restraining the amount available in the line of credit if the income of consumers varied. In 2013, the parties reached a settlement where the card issuers agreed to restitute 100 per cent of the amounts overcharged and to pay as compensation for costs of the claim 0.1 unidades tributarias mensuales to each consumer affected. Beneficios Chile and Solución were also fined.
SERNAC v. Banco Santander-Chile26
SERNAC filed a class action against Banco Santander-Chile on the grounds of breach of information duties imposed by the Protection of Consumer Rights Act. In particular, the consumer authority claimed that Santander omitted information about the costs of the credit operation (such as taxes and insurance). In 2013, both parties reached a judicial settlement subject to a condition subsequent. In the settlement, Santander promised to perform an internal audit of its customer service: in the case that, according to the internal audit results, the level of customer satisfaction was to be below 74 per cent and over 50 per cent, the bank would give its customer service staff further training. If the level of consumer satisfaction did not meet the threshold of 50 per cent, the judicial procedure would be resumed. In November 2014, Santander submitted a compliance survey that showed that 83 per cent of the customers were satisfied with the service provided by the banking institution. Since SERNAC disagrees with such survey, the procedure could resume.
SERNAC v. Banco Consorcio27
SERNAC filed a lawsuit against Banco Consorcio, a major Chilean banking institution, for including abusive clauses in mortgage loans that enabled the bank to charge default interest from the first day of each month in which the debt would be collectable, and broad and ambiguous powers of attorney on behalf of consumers, without their consent. In 2015, both parties reached an agreement to restitute to consumers the amounts paid for of undue default interest, to compensate affected consumers a total of 982.48 unidades de fomento and to pay each affected consumer 0.1 unidades tributarias mensuales for costs of the claim.
SERNAC v. Financiera La Elegante SAC Limitada28
In 2011, SERNAC filed a class action against Financiera La Elegante, a financial institution that issued and operated credit cards for a retailer. The consumer authority alleged that several clauses in La Elegante’s contracts enabled the financial institution to fix or modify charges to customers unilaterally and to interpret silence of the consumers as acceptance, and established broad and ambiguous powers of attorney that allowed the company to contract services on behalf of the consumer, such as insurance, without giving any account. In 2015, a civil court in Coquimbo ruled against La Elegante, but denied compensation for losses since it was not demonstrated during the trial that the company ultimately applied abusive clauses, even though the court declared the existence of abusive clauses and imposed a fine to La Elegante. Currently, there is an appeal against the ruling, pending at the Court of Appeals of La Serena.
Pending SERNAC class actions
SERNAC has also filed several class actions against Chilean banks and financial institutions on the grounds of abusive clauses and broad and ambiguous powers of attorney.29
Some of the most relevant and noteworthy lawsuits directed by SERNAC against financial institutions are still pending final ruling. These decisions will provide useful guidance as to the interpretation of the recently enacted Consumer Finance Act. Along with SERNAC, consumer organisations will certainly increase their role in consumer dispute resolution. Further, new bills of law now in discussion in the National Congress can consolidate the trend of empowering the consumer authority and restricting contractual freedom for financial institutions.
1 León Larraín A is a partner and Gustavo Delgado B is an associate at Baker McKenzie.
2 The main chapters for consumer law in the UDR are Chapter 1-6 on minimal conditions of banking premises; Chapter 1-7 on electronic transfers; Chapter 1-8 on working hours of the banking system; Chapter 1-10 on backup of documents; Chapter 1-16 on operations with politically relevant customers; Chapter 2-1 on catchment; Chapter 2-4 on savings accounts; Chapter 2-5 on savings accounts for housing; Chapter 2-6 on deposits accounts; Chapter 2-9 on term deposits; Chapter 2-15 on debit cards; Chapter 8-1 on overdrafts on current accounts; Chapter 8-3 on credit cards; Chapter 16-4 on people who cannot sign documents; Chapter 18-8 on state guarantee of deposits; Chapter 18-9 on information available to public in bank offices; and Chapter 20-1 on exhibition of Chilean ID Card.
3 UDR, Chapter 8.
4 Article 2, General Banking Act.
5 Act No. 20,009.
6 UDR, Chapter 2-15.
7 DFL No. 707, Article 10.
8 UDR, Chapter 1-7.
9 Compendium of Financial Rules of the Chilean Central Bank, chapter III E.2.
10 UDR, Chapters 2-4, and 2-6.
11 UDR, Chapter 8-1.
12 Compendium of Financial Rules, Chapter III.G.3.
13 UDR, Chapter 8-1.
14 Article 3, No. 13, Decree 44 of 2012, of the Ministry of Economy, on information to consumer on credit cards.
15 SBIF (2014), Circular No. 1.
16 Civil Code, Article 2415.
17 The Protection of Consumer Rights Act, Article 17 D.
18 SERNAC (2014): Boletín Crédito de consumo automotor. http://www.sernac.cl/wp-content/uploads/2014/08/Boletin-Credito-Automotor-Agosto-2014.pdf.
19 Exceptions to this rule are those that are agreed with customers who are institutions or banking or financial companies, foreign or international, those agreed in foreign currency on foreign trade operations, operations made by the Central Bank of Chile with financial institutions and those operations where a bank or a financial institution is the debtor.
20 According to Act No. 18,010, ‘current interest rate’ is the weighted average of the amounts charged by the banks established in Chile, in the operations carried out in the country (Article 6).
21 Act No. 20,575, Article 1
22 Act No. 20,575, Article 3.
23 The Protection of Consumer Rights Act, Article 16.
24 10th Civil Court of Santiago, file No. 1391-2012. Court of Appeals of Santiago, file No. 976-2011. Supreme Court, file No. 12355-2011.
25 Third Civil Court of Coquimbo, docket No. 2820-2011; appeal on Court of Appeal of La Serena, docket No. 669-2016, still pending.
26 14th Civil Court of Santiago, docket No. 2820-2011.
27 25th Civil Court of Santiago, docket No. 1553-2015.
28 Third Civil Court of Coquimbo, docket No. 2820-2011.
29 These lawsuits can be followed online: http://www.sernac.cl/proteccion-al-consumidor/juicios-colectivos/iniciados-por-sernac-2/#bancosyfinancieras.