The Czech Republic has adopted comprehensive consumer finance regulations, which provide the consumer with sufficient, though in some aspects excessive, protection. Czech consumer financing legislation is inspired by European regulation of consumer finance, which has displayed an increasing tendency to protect the consumer in recent years, in particular by strengthening the consumer’s position in consumer credit regulation.
2016 was a significant year for consumer finance in the Czech Republic, as new and stricter regulation was adopted; the new regulation imposes new requirements on consumer credit providers, in particular on non-bank entities, and shifts the supervision of such entities onto the Czech National Bank (CNB).
The CNB newly supervises the entire consumer finance market, which should ensure a higher level of consumer protection. Consumers may benefit not only from the new regulation establishing rules for entities and processes on the financial market but also from the possibility of alternative resolution of disputes with financial institutions.
II LEGISLATIVE AND REGULATORY FRAMEWORK
In the Czech Republic, a consumer’s position and its statutory protection are regulated and ensured by various legal acts containing both general consumer protection rules as well as specific rules for providing loans and other payment services to consumers.
The core legal regulations ensuring the protection of consumers include the following acts, which have been influenced by European legislation:
- a Act No. 257/2016 Coll. on Consumer Credit (the New CCA) implementing:
• Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC (CCD);
• Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immoveable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No. 1093/2010 (MCD) – replacing Act No. 145/2010 Coll. on Consumer Credit (the Old CCA), implementing the CCD;
- b Act No. 634/1992 Coll. on Consumer Protection (CPA) implementing:
• Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC and 2002/65/EC of the European Parliament and of the Council and Regulation (EC) No. 2006/2004 of the European Parliament and of the Council;
• Directive 2011/83/EU of the European Parliament and of the Council of 11 May 2005 on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC of the European Parliament and of the Council and repealing Council Directive 85/577/EEC and Directive 97/7/EC of the European Parliament and of the Council;
- c Act No. 284/2009 Coll. on the Payment System (PSA) implementing Directive 2007/64/EC of the European Parliament and of the Council of 13 November 2007 on payment services in the internal market amending Directives 97/7/EC, 2002/65/EC, 2005/60/EC and 2006/48/EC, and repealing Directive 97/5/EC;
- d Act No 216/1994 Coll. on Arbitration and the Enforceability of Arbitration Awards (the Arbitration Act);
- e Act No. 89/2012 Coll. Civil Code (the Civil Code); and
- f Act No. 374/2015 Coll. on Recovery and Resolution in the Financial Market (the FMRA) implementing Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms.
The Czech parliament adopts laws in the Czech Republic, but individual implementing regulations are generally issued by relevant authorities; for example, the CNB issues implementing regulations regarding the consumer financing market. The powers of the CNB have been recently broadened in connection with the implementation of the New CCA, which became effective on 1 December 2016. The CNB now supervises the consumer credit market instead of individual trade offices (which formerly granted trade licences to non-bank providers of consumer credit) and the Czech Trade Inspection Authority (CTIA) (which carried out inspections of non-bank providers). The CNB will now decide who will be entitled to operate on the market and will maintain a register of licensed persons in the area of consumer credits. It will also oversee the fulfilment and observation of the conditions stipulated by the New CCA and may impose sanctions for non-compliance with the New CCA.
After the expiry of the transitional period set down by the New CCA, during which the CTIA will supervise certain non-bank providers, the CNB will become the sole supervising authority within the consumer financing market.
In the event of any disputes, consumers may approach the Financial Arbitrator –the competent authority entitled to settle disputes between institutions and their clients regarding, for instance, provision of payment services, transfer of funds, use of electronic payment instruments, provision of credit, collective investment products, life insurance or foreign exchange transactions. In addition to this alternative dispute resolution method, a consumer may also file a claim with a competent court.
As of 1 December 2016, and pursuant to the New CCA and the Arbitration Act, it is no longer possible to agree on an arbitration clause in contracts with consumers.
Payment methods are regulated by the PSA, which establishes conditions under which payment service providers may provide their services. Consumer protection in this respect consists of, in particular, information obligations of the payment system providers towards the consumers and the setting of deadlines for the processing of payment transactions.
The PSA does not apply to direct cash transactions, which fall under general civil law regulation. The Act on the Restriction of Cash Payments sets forth certain cases where payment may only be made via a bank transfer (for instance a payment exceeding the amount of 270,000 koruna).
The Czech Republic is the leading country in the EU for contactless payments. The use of contactless payment cards has seen a sharp increase in the Czech Republic over the past few years, with all the major banks offering contactless payment cards. According to statistics from 2016,2 70 per cent of currently issued payment cards are contactless and 63 per cent of all card payments were contactless in 2015.
ii Recent developments
In 2016 the amendment to the PSA, which implemented Directive 2014/92/EU of the European Parliament and of the Council of 23 July 2014 on the comparability of fees related to payment accounts, payment account switching and access to payment accounts with basic features, was adopted and comes into force and effect as of 1 March 2017. This amendment will enable consumers to easily switch between payment accounts of different banks while preserving all their recurring payments settings. The amendment also requires that banks use uniform labelling of services provided in connection with payment accounts, which will provide consumers with a better opportunity to compare similar services provided by different banks and their prices.
The Ministry of Finance of the Czech Republic is currently preparing the implementation of Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No. 1093/2010, and repealing Directive 2007/64/EC, into the PSA.
The Act No. 297/2016 Coll., on Trust Services for Electronic Transactions (TSA) was adopted in 2016 and implemented Regulation (EU) No. 910/2014 of the European Parliament and of the Council of 23 July 2014 on electronic identification and trust services for electronic transactions in the internal market and repealing Directive 1999/93/EC. The TSA regulates only the aspects which the Regulation expressly determines are to be regulated at national level, such as certain practices of, and requirements imposed on, trust service providers and rules regarding electronic signatures, electronic seals and the preservation of documents using electronic time stamps. It further establishes the Ministry of Interior as the trust service providers’ supervising authority. The Act does not regulate electronic identification as this will be covered by a special act, which is currently being drafted by the Czech government.
IV DEPOSIT ACCOUNTS AND OVERDRAFTS
In order for a bank to be able to accept deposits from the public in the Czech Republic, the bank is required to hold a banking licence under the Act No. 21/1991 Coll. on Banks (the Act on Banks).
The guarantee of receivables from deposits is facilitated by a financial market guarantee system established under the FMRA; this guarantee system includes a fund which serves as deposit insurance. The assets in this fund comprise mainly of contributions from local banks and branches of banks from non-EU states, proceeds from investments, insolvencies and liquidations. The guarantee does not apply to deposits from certain persons such as banks, financial institutions, insurance companies or the state. The limit of deposit insurance under the guarantee system is €100,000 per one person with a deposit account in one bank.
ii Recent developments
At the end of 2015, the Czech Republic implemented (1) Directive 2014/49/EU of the European Parliament and of the Council of 16 April 2014 on deposit guarantee schemes and (2) Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms, into the Act on Banks and the FMRA. The implementation has led to the establishment of the financial market guarantee system, which administers the deposit insurance fund, and to new obligations for banks to provide their clients with information regarding the system of deposit insurance.
V REVOLVING CREDIT
The new regulation of consumer credit also applies to revolving loans and sets down certain additional information obligations and rules enabling the termination of these loans if they had been concluded for an indefinite period of time.
ii Recent developments
In 2016 one of the major Czech banks started offering a new alternative to the ‘payday loans’ aimed at clients without financial reserves who tend to seek out problematic loan companies when they face unexpected expenses. The loan in question is a small revolving consumer loan within the range of 5,000 to 50,000 koruna with an interest rate of 16.9 per cent p.a.
VI INSTALMENT CREDIT
Providing consumer loans in the Czech Republic requires obtaining a licence from the CNB – either a bank licence, a licence for a provider of certain payment services or a licence for a non-bank provider. A licence is required for all types of consumer loans, including consumer loans relating to residential immoveable property.
The rules for providing consumer loans are set out in the New CCA, which inter alia contains certain specific provisions for consumer loans relating to residential immoveable property (in accordance with Directive 2014/17/EU). Such loan may only be provided to a consumer if the consumer’s creditworthiness is proved to the lender before a consumer credit agreement is entered into or prior to any substantial increase in the total amount of consumer credit. Should the provider grant a consumer loan to a consumer in violation of the results of the creditworthiness assessment (i.e., also when there are reasonable doubts as to the consumer’s ability to repay the loan), the agreement will be deemed invalid. In such case, the consumer is obliged to return the principal of the consumer loan within a period corresponding to his or her options and capabilities.
A lender must provide a consumer with a set of pre-contractual information (including the annual percentage rate), which allows the consumer to assess the conditions offered and compare it to products of other providers. Certain information obligations must be complied with not only at the time the consumer loan agreement is being entered into but also throughout the course of the corresponding contractual relationship. Non-compliance with certain information obligations by the lender results in a decrease of the agreed lending interest rate to the repo-rate announced by the CNB.
The New CCA implements certain limits for payments, which the lender may require in the event that the consumer is in default, prepays the consumer loan or any part thereof or withdraws from the agreement within 14 days after it had been concluded.
Moreover, the lender must provide the consumer with an additional period of time before it accelerates the loan or enforces the mortgage. Security provided for consumer loans may not be obviously disproportionate to the amount of the secured receivable. It is also forbidden to use telephone lines with higher fees (premium-rate numbers) for the purpose of providing consumer loans or access to related services. Consumer loans must not be secured by a promissory note or a cheque.
ii Recent developments
The New CCA, in effect as of 1 December 2016, significantly changed existing consumer credit regulation. The goal of the New CCA was not only to implement the MCD but also to unify the regulation of ordinary consumer loans and mortgage-backed loans, to align such regulation with the principles of regulation in other sectors of the financial market, to improve the quality of services provided by the retail credit market and to reduce irresponsible lending.
Unlike the Old CCA, the New CCA covers all types of loans provided to consumers; previously, the Old CCA did not apply to loans lower than 5,000 koruna or higher than 1.88 million koruna or to loans provided for housing purposes.
As far as institutional regulation is concerned, the New CCA also places very strict requirements on non-bank providers of consumer credit. This measure, which goes beyond European legislation, aims to force unfair providers from the market and to reduce the number of non-bank providers of consumer loans. However, according to some experts and consumer protection organisations, the side effect of tightening legal requirements may be the expansion of the grey market where the legal rules will not be respected at all.
In order to obtain a licence from the CNB, the non-bank providers must now comply with strict requirements laid down in the New CCA; these include certain corporate requirements (such as a special form of legal entity, minimum amount of capital, origin of capital), personal requirements (the non-bank providers and persons representing them in providing loans must be credible and professionally qualified, i.e., have a certain level of education and pass a professional exam provided by an accredited entity) and requirements regarding internal procedures (including AML rules, remuneration policy, rules for creditworthiness assessment, rules for dealing with consumers’ complaints and claims, rules for addressing consumers in default, rules for enforcing receivables, rules for external and internal communication, rules for verifying and controlling the activities of persons representing the lender, etc.).
Non-bank entities who were allowed to provide consumer loans before 1 December 2016 on the basis of a trade licence may continue to do so until the CNB decides on their application for a licence for a non-bank provider, but not longer than 18 months after the New CCA became effective, provided that the application for the relevant licence is submitted within three months from the date on which the New CCA came into effect.
In connection with the New CCA, the CNB recently issued guidelines, benchmarks and other documents concerning the interpretation of the New CCA, the submission of the application for the licence and details of the CNB’s expectations on how the individual conditions set down by the New CCA should be met.
Banks in the Czech Republic are currently preparing a new service for payment cards. When paying with a card, the client will be able to decide whether to pay the purchase price straight away or whether to spread the payment across monthly instalments. This step is the banks’ reaction to the declining demand for credit cards. At first, this new option is expected to be available only in internet or mobile banking applications but there is the possibility that it will spread to card payments directly in shops.
VII OTHER AREAS
In connection with the implementation of the New CCA, intensive discussions were held as to whether a deferred payment agreement relating to the postponement of payments under an existing loan agreement or from an energy supply agreement (concluded either by the original creditor or with the assistance of a debt collection agency) fall within the scope of the New CCA. The definition of a consumer loan contained in the New CCA also includes deferred payment, but the New CCA does not apply to consumer loans provided free of charge. On 8 December 2016 the European Court of Justice (Case C127/15) decided that (1) a credit rescheduling agreement, which is concluded, following the consumer’s default, between that consumer and the lender through a debt collection agency, is not agreed as ‘free of charge’, where, by that agreement, the consumer undertakes to repay the total amount of that credit and to pay interest and costs that were not provided for by the initial contract under which that credit was granted; and (2) a debt collection agency that concludes, on behalf of a lender, a rescheduling agreement for unpaid credit, but which acts as a credit intermediary only in an ancillary capacity, which is for the referring court to determine, must be regarded as a ‘credit intermediary’. The combination of this decision together with Czech legal requirements regarding non-bank providers and intermediaries leads to the conclusion that a collection agency that agrees or intermediates a deferred payment agreement with a consumer containing payments in addition to those originally agreed, would be considered to be performing intermediation in the sense of the New CCA and would need to obtain the relevant licence from the CNB. The implications of such decision are more far-reaching, as the energy suppliers who conclude a deferred payment agreement containing additional payments with a consumer would theoretically need to obtain a licence for a non-bank provider and fulfil all the conditions set down by the New CCA. This could, as a consequence, be disadvantageous for the consumer as the suppliers would in the end directly enforce the due payments rather than enable the consumer to postpone the payments on the basis of a deferred payment agreement.
VIII UNFAIR PRACTICES
In recent years the topic of ad hoc arbitration clauses in consumer loan agreements has been widely discussed. The general conclusion is that if certain conditions have not been met, ad hoc arbitration clauses can cause an imbalance to the detriment of the consumer and including such arbitration clauses in consumer loan agreements is therefore considered to be an unfair practice. In terms of consumer protection, ad hoc arbitration can cause various problems with one of the most severe ones being the inability to have the arbitral award reviewed by a court on the facts of the case. In October 2013 the Supreme Court of the Czech Republic decided that an ad hoc arbitration clause meets the conditions of being an unfair contractual clause if (1) it had not been agreed upon individually, (2) the creditor could not have reasonably expected the consumer to agree with such clause upon individual discussion thereof, and (3) the arbitration clause creates a significant imbalance between the parties. According to the Supreme Court, ad hoc arbitration clauses in consumer loan agreements are only acceptable if the selection of the arbitrator is transparent and the consumer is guaranteed the same rights as in proceedings before ordinary courts. In a decision issued in July 2014 the Supreme Court also held that if the consumer is not given the opportunity to affect the content of the arbitration clause (i.e., the consumer has to, without any reservations, accept the conditions set out by the creditor in order to be granted a loan) such arbitration clause is contrary to the consumer protection rules. In order to protect consumers, ad hoc arbitration clauses that do not meet the aforementioned conditions have been deemed invalid, causing the relevant arbitration awards to be unenforceable.
In December 2016 the amendment of the Arbitration Act prohibited arbitration clauses in consumer loan agreements entirely (this applies to all consumer agreements in general), and disputes arising therefrom can now only be handled by ordinary courts.
IX RECENT CASES
i Enforcement actions
In 2014 the CTIA imposed fines on loan companies for wrongly calculating the annual percentage rate (APR) in consumer loan agreements. The disputes arising out of these decisions have led to a major decision of the Supreme Court of the Czech Republic (32 Cdo 4838/2015) regarding the effect of a wrongly calculated APR in consumer loan agreements. According to the Old CCA, the consumer loan agreement has to include certain information, including the APR. However, if the consumer loan agreement does not include all the required information and the consumer informs the creditor thereof, the consumer loan is deemed to have been granted with the interest rate in the amount of the annual discount rate published by the CNB (which has been within the range of 0.05 per cent to 2.5 per cent p.a. over the last decade)3 with effect as of the date of the relevant consumer loan agreement and any provisions on any other payments under the consumer loan agreement are invalid. Prior to the discussed decision, Czech courts have claimed that a wrongly calculated APR in a consumer loan agreement does not cause the aforementioned effect, because – as long as the agreement includes the APR (whether calculated correctly or incorrectly) – the information requirements set out by applicable legislation have been met. In July 2016, the Supreme Court, however, decided that if any of the information provided by a creditor is wrong, it constitutes a violation of the law causing the aforementioned effect on the interest rate and on the validity of any provisions regarding any other payments under the consumer loan agreement. The Supreme Court decision was issued only a few months before the enactment of the New CCA, which contains more specific rules to deal with this issue. The rules under the New CCA are as follows (1) if the consumer loan agreement does not include the APR at all, the interest rate is equal to the repo rate published by the Czech National Bank as of the date of the agreement, unless the originally agreed interest rate was lower (in which case that interest rate applies), (2) if the APR set out in the consumer loan agreement is lower than it actually is, the interest rate and the entire amount that the consumer is obliged to pay are lowered so that they correspond to the APR provided in the consumer loan agreement. As a result of this decision of the Supreme Court, the loan companies that had been wrongly calculating the APR under the old legislation may be ordered to return a vast majority of interest that they have received from consumer loans resulting in potential losses in the range of billions of koruna.
ii Disputes before the regulator
As of December 2016, the CNB has become the regulator and supervising authority for non-bank providers of consumer loans. Currently the main agenda of the CNB in this regard is the granting of licences to companies intending to provide or intermediate consumer loans. As the CNB has only been acting as the regulator in this area for a short period of time any significant disputes are yet to come.
In the Czech Republic the equivalent of an ombudsman in the area of consumer finance is the financial arbitrator. The financial arbitrator provides free resolution of disputes between consumers and financial institutions; the proceedings are commenced on the application of the consumer. In recent years the financial arbitrator has also been resolving disputes related to wrongly calculated APRs in consumer loan agreements. The financial arbitrator has repeatedly decided that one of the loan companies has been wrongly calculating the APR in its consumer loan agreements and has adhered to the opinion confirmed by the Supreme Court in July 2016 that a wrongly calculated APR means that the consumer loan is deemed to have been agreed with an interest rate in the amount of the annual discount rate published by the CNB. Prior to the discussed decision of the Supreme Court, however, some of the decisions of the financial arbitrator had been overturned by courts, which have been dealing with appeals against the decisions of the financial arbitrator.
In 2013 thousands of clients brought cases against banks claiming that the banks have been illegally charging loan account management fees. The clients claimed that the loan agreements included clauses regarding account management fees that were in violation of Section 56 of the Civil Code, which forbids certain unfair provisions in consumer contracts. These cases were inspired by a decision of the German Federal Court of Justice from July 2011, which found such fees to be illegal as the loan accounts exist mainly for the purposes of the bank’s accounting and not as a service to the client, thus charging fees for the management of such accounts to the client constitutes an unjustified transfer of the bank’s costs onto the client. In the Czech Republic, however, the vast majority of these disputes have ended with a decision in favour of the banks.
For the purposes of this chapter one particular case can be used as an example as it is the only one that has been reviewed by the Czech Constitutional Court. In this case the claimant had entered into a loan agreement with the bank, and the agreement contained a clause requiring the consumer to pay a loan account management fee in the amount of 150 koruna per month (‘the clause’). The claimant had been paying the fee for over five years without any objections before coming to the conclusion that the fees had been charged illegally and suing the bank to return the fees paid in the amount of 7,200 koruna on the grounds of unjust enrichment. The claimant argued that the bank had not specified what services were being provided for the account management fee and considering, therefore, that the clause is invalid due to being uncertain and incomprehensible. In addition, the claimant asserted that the clause was in violation of the prohibition to deviate from the law in detriment of the consumer as well as of good faith, resulting in a significant imbalance in the rights and obligations of the parties. The District Court in Prague 4 dismissed the action on the following grounds: (1) the clause was a sufficiently specific declaration of will and the subsequent behaviour of the parties indicates that both parties knew what the fee was being charged for as the claimant had been paying the fee for five years without any objections, (2) the clause did not constitute an invalid deviation from the law to the detriment of the consumer as the purpose of consumer protection is mainly to provide consumers with sufficient information enabling them to make free decisions on the market rather than limiting their contractual freedom to such an extent as to prevent them from undertaking obligations other than those specifically set out by law for certain types of contracts, (3) the clause specified the price for performance, therefore, according to Section 56(2) of the Civil Code, it is exempt from being reviewed by courts in terms of being unfair towards the consumer, and (4) charging fees related to the management of consumer loan accounts is a common practice in the banking world and is supported by legal regulations.
As the claim was only for the amount of 7,200 koruna the decision of the District Court in Prague 4 was final without the possibility of an ordinary appeal to be filed (which Czech law only allows for claims exceeding 10,000 koruna). The claimant therefore instead decided to file a constitutional complaint to the Constitutional Court, which consequently dismissed the complaint. One of the main arguments of the court was based on the assertion of a balance between consumer protection regulations and the principle of the autonomy of will, in respect of which the Constitutional Court stated that the principle of the autonomy of will and freedom of business activity cannot be replaced by paternalistic interferences of the state.
After the recent trend of decreasing interest rates in mortgages, which led to a dramatic increase in demand in this area, the interest rates are expected to go up. One of the main reasons for this change is the adoption of the New CCA, which increased the banks’ costs of providing mortgages by imposing stricter administrative requirements and giving consumers more options to make early repayments. The adoption of the New CCA is expected to cause a slight increase in the price of consumer loans in general. It is therefore expected that the demand for consumer loans will decrease in the near future. It remains to be seen whether the New CCA will become an effective instrument of consumer protection in the area of consumer loans.
Along with an increase in consumer loan interest rates the demand for loans could also drop due to constantly low interest rates in savings accounts, which could encourage consumers to use their savings before applying for a loan.
In respect of payments, we expect the continuation of the increasing trend of cashless and contactless payments along with the implementation of new technologies in financial services. Along with the implementation of Regulation (EU) No. 910/2014 of the European Parliament and of the Council of 23 July 2014 on electronic identification and trust services for electronic transactions in the internal market and repealing Directive 1999/93/EC, banks are expected to require their clients to use electronic IDs in order to log in to internet banking applications.
In August 2016 the Czech parliament adopted the Act on the Central Evidence of Accounts, which will come into effect in January 2018. This act implements a part of the European Commission’s anti-terrorism package and will enable the government to access information about individual clients of banks and their accounts.
1 Michaela Ericssonová is an attorney and Viktor Glatz is a legal assistant at PRK Partners s.r.o. advokátní kancelář.
2 www.bankovnikarty.cz/pages/czech/profil_statistiky.html accessed on 12 January 2017
Payments-Industry-Report-2016 accessed on 12 January 2017.