Consumer finance has been one of the business areas most affected in Spain by the economic downturn following the financial crisis. Unemployment increased by over 4 million in Spain, eroding the net wealth of the country and triggering a surge in non-performing loans. The length and the severity of the downturn and the uncovering of cases of malpractice among financial institutions have led to the government introducing new legislation to protect the most vulnerable segments of society.
The balance sheet problems of the Spanish financial institutions also contributed to the reduction in credit availability in the system. However, since 2013, the trends have slowly been reversing. Non-performing loans are gradually coming down from their peak levels in early 2014, while new loan production has been picking up.
Since then, credit entities have activated growth strategies in the consumer lending segment in particular, which has benefited from an increase in household spending on consumer goods, in particular the motor sector, with vehicle registrations up 24 per cent in 2015, according to the Ministry of Interior.
Consumer lending excluding credit cards is the fastest-growing segment in household lending, and is up almost 30 per cent between January and November 2016 according to Bank of Spain data. A total of €23 billion in loans has been granted to Spanish households by financial institutions over that period. New loans in this segment grew by 18 per cent in 2015 and 20 per cent in 2014. With economic growth expected by most observers to be above 2 per cent in 2017/18, growth in this segment should continue. In addition, new entrants in the financial technology space will likely necessitate ongoing reviews of legislation.
II LEGISLATIVE AND REGULATORY FRAMEWORK
Broadly speaking, Spanish consumer finance regulations follow the European rules, and are built on the general consumer law regime.
A number of provisions apply to consumer payment, deposit and lending services. Below is a brief overview of the most significant regulations applicable to the consumer finance industry in Spain, in order of relevance.
- a Law 16/2011, of 24 June, on Consumer Credit (LCC) regulating the granting of credit to consumers, has incorporated Directive 2008/48/EC, of 23 April 2008, on credit agreements for consumers into the domestic legal system. The LCC applies to the loans and credit granted by an entity, as part of its commercial or business activity, to a consumer (defined as a natural person who, in the contractual relationships covered by the LCC, is acting for purposes outside his or her trade, business or profession). Certain contracts are excluded from the scope of the LCC, namely contracts with a value of less than €200; and credit agreements secured by mortgages, leasing agreements, etc. The LCC provides for various matters related to consumer credit, such as pre-contractual information to be provided, rights of the consumer, the credit agreement and the calculation of the annual percentage rate.The special consumer protection covered by the LCC focuses on: (1) the information and actions to be taken prior to entering the credit agreement – including publicity; (2) the information provided to consumers; (3) the content, form and events or circumstances under which the agreements would become null and void; (4) the right of withdrawal; and (5) the delimitation of terms, such as the total cost of the credit and the annual percentage rate, specifying the circumstances under which the total cost of the credit may be modified and stipulating the conditions in which the agreement must be amended. In relation to the agreements entered into by consumers expressly linked to credit financing, failure to provide the credit results in the ineffectiveness of the agreement, preserving the consumers’ rights, both against the supplier of the goods and services, and against the lender.
- b Law 2/2009, of 31 March, on the contracting of mortgage loans and credits with consumers and the brokering for the execution of loans and credits, which regulates the granting to consumers of real-property-backed loans and the rendering of brokerage services for the granting of consumer loans. Under this regulation, entities (other than credit entities or financing credit establishments) granting real estate loans or rendering brokerage services for the granting of real property loans to consumers must be registered with the public registry in the region where they maintain their corporate address. Foreign entities must be registered with the national registry maintained by the National Consumers’ Institution in accordance with Royal Decree 106/2011, of 28 January.
- c Legislative Royal Decree 1/2007, of 16 November, containing the restated text of the act for the protection of consumers and other ancillary provisions (as amended by Law 3/2014, of 27 March), which regulates the general terms and conditions that must apply to the relationship between companies (including credit entities) and consumers (i.e., the rights of consumers, contracts executed with consumers, the right of withdrawal, clauses deemed abusive and the liability of the vendor).
- d Law 16/2009, of 13 November, on payment services (the Law on Payment Services), developed by Royal Decree 712/2010, of 28 May, on the legal regime regarding payment services and payment entities (the RD on Payment Services), which contains certain provisions protecting consumers. The Law on Payment Services strictly follows the provisions contained in the Payment Services Directive 2007/64/EC.
- e Law 7/1998, of 13 April, governing the contracting with consumers through the adherence to general terms in contracts (the Law on General Terms in Contracts), which regulates standard terms of contracts.
- f Law 22/2007, of 11 July, on distance marketing of consumer financial services, which applies to the contracts regarding financial services entered into by regulated entities (such as credit entities and branches of credit entities in Spain) and consumers, when the services are rendered and the contract has been formalised over distance. It contains a set of rules that govern the provision of pre-contractual information, communications, rights of withdrawal, payment and unsolicited services and communications.
- g Law 10/2014, of 26 June, on organisation, supervision and solvency of credit institutions and its related Order EHA/2899/2011, of 28 October, on transparency and protection of financial services to customers and Circular 5/2012 of the Bank of Spain, of 27 June, addressed to credit entities and payment services providers, on transparency of banking services and lending responsibility.
- h Law 5/2015, of 27 April, on promoting corporate financing (Law 5/2015), which deals with the activity of crowdfunding for the first time in Spain and lays out the requirements that the platforms providing these services must comply with.
All these regulations aim at protecting consumers and impose several obligations on the lenders contracting with them, including exhaustive duties of information and transparency. In addition, both Law 7/1998, of 13 April, and Law 22/2007, of 11 July, contain provisions whereby abusive clauses or misleading or obscure provisions that are detrimental to consumers should be considered void.
Apart from the aforementioned general regulations, certain regional provisions also apply.2
Finally, attention should be drawn to Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No. 1093/2010. The purpose of this Directive is to harmonise the regulations on consumer protection in relation to the procurement of mortgage loans. Although many of the information obligations provided thereunder are already set forth in Spanish regulations, Spain has not yet implemented the Directive into its national legislation.
The Bank of Spain is the main body in charge of implementing and enforcing regulation of consumer finance services in Spain.
In addition to the execution in Spain of the directions and instructions on the Eurosystem’s monetary policy, the Bank of Spain promotes the general economic policy of the Spanish government and the stability of the financial system. To execute these functions, the Bank of Spain also has legislative powers and may issue circulars.
Order ECC/2502/2012, of 16 November, regulates the procedure for the filing of claims before the Bank of Spain’s Complaints Service, among others. In particular, this Order sets forth: (1) financial services users’ right to submit complaints and enquiries, (2) the medium and content of such complaints or enquiries, (3) other procedural aspects such as the need to file a prior complaint or claim with the customer service of the credit entity or, where applicable, with the consumer ombudsman, (4) the filing of collective complaints, (5) the scenarios and the procedure for the rejection of complaints, and (6) the handling of complaints.
Notwithstanding the above, consumers may raise their complaints and submit suggestions through a filing with the Spanish regional consumer associations. Once the form has been filed, the Complaints and Suggestions Unit will inform the consumer of the actions to be taken within the following 20 business days. In the absence of a reply, the consumer may address his or her complaint to the General Services Inspectorate of the Ministry of Health, Equality and Social Policy. Because of the regional government structure, there are 17 different consumer protection bodies in Spain, one per region. In addition some municipalities and cities have created their own bodies.3
All clauses considered abusive by a court ruling are filed in the General Terms in Contracts Registry in Spain, created by the Law on General Terms in Contracts. Citizens may check this Registry to verify whether the clauses included in their contracts are abusive.
As mentioned in Section II.i, supra, payment services are regulated in the Law on Payment Services, the RD on Payment Services and Order EHA/1608/2010, of 14 June, on transparency and payment services. These regulations govern the performance of payment transactions by any means (among others, issues such as the consent and withdrawal of consent in payment transactions, limitations on payment methods, information to be provided to the payer and to the beneficiary of a payment transaction, authentication, expenses derived from payment transactions, and notification procedure of unauthorised transactions), and the provision of services framework agreement (content, amendment and termination).
The payment industry has evolved substantially over the past decades, from the traditional channels using cash and cheques to a much greater use of digital channels such as online banking or mobile payments. Payment services can be defined as activities regarding payment transactions (fund movements from one account to another) made through payment methods other than cash: wire transfer, direct debit and payment cards. With new entrants into the payment services industry from large technology companies to specialised start-ups, the legislation will require adaptation.
Fintech continues to evolve, however, and more areas will need to be addressed by regulation in the future. An example of this is the use of blockchain technology more widely in the banking system. This is still in its infancy, but it could be used for shared databases with an application in international payments and securities settlements, which could raise consumer protection and data privacy issues.
ii Recent developments
New payment technologies, including both contactless cards and new mobile payments are increasingly present in Spanish purchasing processes. These payment methods have certain advantages for consumers, such as their convenience and the intended increase in the security of daily transactions.
Although fintech and mobile payments are not yet regulated in Spain, final guidelines on the security of online payments, published by the European Banking Authority on 19 December 2014, were approved by the executive committee of the Bank of Spain on 24 March 2015.
Limits on cash payments
A limitation of cash payments to prevent tax fraud came into force in 2012 in Spain when the Spanish government passed Law 7/2012, of 29 October. Under this regulation, no cash payments of €2,500 or more can be effected in transactions where at least one of the parties involved is a company or professional. This Law has significant implications for citizens who are sometimes obliged to use other means of payment.
Currently, the Spanish government is considering reducing this limitation to €1,000.
The use of big data
Another aspect of fintech is the use of big data (often focusing on spending and payment patterns) for the purposes of credit scoring and the provision of other financial services or cross-selling. This is not yet regulated specifically, although the European Banking Authority launched a public consultation on 19 December 2016 about the potential benefits and risks of big data for consumers and financial firms, to determine whether any further regulatory or supervisory actions may be needed.
IV DEPOSIT ACCOUNTS AND OVERDRAFTS
i Deposit guarantee
The objective of a deposit guarantee fund is to guarantee depositors the recovery of their money, in the event that an entity that is a member of the fund becomes insolvent or has any other problem that prevents it from meeting its payments and complying with its obligations. The guaranteed amount has a limit of €100,000 per depositor.
Membership of the Deposit Guarantee Fund of Credit Institutions is mandatory for all Spanish banking institutions recorded in the Bank of Spain’s Special Registry, and the branches of banking institutions authorised in a country that is not a member of the European Union, in the event that the guaranteed deposits and securities held by the branch are not covered by a guarantee system in the country of origin, or if the coverage is insufficient. The membership of branches of financial institutions authorised in another country member of the European Union is voluntary, because deposits and securities are already covered in the country of origin.
In the case of overdrafts, the law specifies that the client must pay back the amount immediately, pay interest on the amount of the overdraft and pay the corresponding banking fees. The cost of the overdraft (interest and fees) is limited by law in the case of consumers. The annual percentage rate of the overdraft in current accounts cannot be higher than 2.5 times the legal interest rate at any point in time. For 2016, this limit has been set at 7.5 per cent.
According to Article 20 of the LCC, if overdrafts are accepted implicitly, the consumer must be informed individually, in a timely manner and in a due form, about the rate of the overdraft, the reference rates used if applicable, as well as of any potential modifications. If the overdraft lasts for more than one month, the bank will inform the consumer in the same way about the overdraft and its amount, the rate applied, and the penalties, expenses or late payment interest applied.
V REVOLVING CREDIT
The use of credit cards in Spain is not particularly widespread. The amount credited is usually paid at the end of the month, and instalments rarely last beyond three months. The latest amount of outstanding credit card balances according to Bank of Spain data amounts to €10.6 billion (as of November 2016), only 0.1 per cent of GDP.
Credit lines for consumers are being introduced by some financial institutions and this is taking the commercial name of revolving credit. The difference with the credit card is that the client is given a maximum spending amount over a certain period, which the individual can choose when to pay down.
ii Recent developments
The Bank of Spain publishes the interchange and discount fees received by payment companies from the use of cards in point of sale terminals (PoS) situated in Spain, when both the payment servicer and the beneficiary are located in Spain. Publication of this information is in accordance with Article 13 of Law 18/2014, of 15 October, on urgent measures for growth, competitiveness and employment, and Circulars of the Bank of Spain 1/2015, of 24 March, and 1/2016, of 29 January, which expand upon it. The Law specifies that the information will be available on the websites of both the Bank of Spain and the payment servicer.
In 2014, the European Parliament established a new maximum on fees to be charged to consumers in card payments, which was enacted into Spanish legislation in Royal Decree 8/2014, of 4 July and reiterated in Law 18/2014. The new law establishes a maximum 0.3 per cent fee for credit cards and 0.2 per cent for debit cards (with a maximum of €0.07 per transaction). For amounts below €20, the maximum fee is 0.2 per cent for credit and 0.1 per cent for debit.
VI INSTALMENT CREDIT
Conditions of mortgage loans vary depending on the type of asset that will be mortgaged: primary residence, secondary residence, etc. In general, financial institutions offer better terms for primary residences. Virtually all the mortgages in Spain are amortising mortgages with variable rates with a fixed spread over 12 month EURIBOR, although more recently fixed-rate mortgages have gained in popularity. The maximum term allowed is 30 years, and the loan to value of the loan can only be above 80 per cent in certain exceptions.
In the event of default, the repossession of the asset can be executed through court proceedings or an out-of-court agreement (with the intervention of a notary) depending on what is agreed in the contract.
This is one of the most popular consumer finance products, which has seen a strong increase post-crisis.
According to Law 10/2014, of 26 June, on organisation, supervision and solvency of credit institutions, contracts will be considered operating leases when they have as an exclusive purpose to loan the use of an asset, acquired for that purpose with the specifications of the future beneficiary, in exchange for compensation consisting in the payment of periodic instalments, but, when there is a call option, the price should be the market price.
This type of financing has traditionally been easier to obtain, given the higher remuneration of the loan and the relatively shorter duration compared to a mortgage loan, for example. The financial institution will study the repayment capacity of the client, and will not normally require any specific guarantee, but the individual will be liable for the debt with his or her present and future assets.
There are different ways to pay back a personal loan. The modality depends on the frequency of the instalments (normally monthly) and how the amounts change over time (constant, increasing or decreasing). Another possibility is to establish an initial period with no payment of principal. However the most common practice is for financial entities to extend personal loans with a repayment schedule consisting in periodic instalments of equal amounts which include both interest and the repayment of principal.
ii Recent developments
Royal Decree 6/2012, of 9 March, promulgated urgent measures for the protection of mortgagors without resources. The regulation is aimed at offering protection to families that, because of the long duration of the crisis, cannot meet their mortgage obligations. This Royal Decree: (1) defines the target population to be protected; (2) stabilises a limit of late payment interest charged to that population; (3) includes a code of good practice in its annex (regulated in Law 1/2013, of 14 May), which financial institutions can comply with to facilitate the renegotiation of loans to the target population and, if this is not possible, to introduce payment in kind in favour of the lending institution (in practice, eliminating the full recourse nature of the loan); (4) establishes certain fiscal measures to support these mechanisms; and (5) introduces some flexibility in out-of-court repossessions of the mortgage collateral.
VII OTHER AREAS
As stated in Section II.i, supra, Law 5/2015 regulates crowdfunding, which was previously unregulated under Spanish law.
Law 5/2015 addresses crowdfunding from three perspectives: (1) the legal framework governing crowdfunding platforms; (2) the authorisation, registration and reservation of activity in favour of the platforms; and (3) the regulations applicable for each of the three sides involved in the financing channel (the project owner that required financing, the investors interested in participating financially and the platform through which the project owner can announce the project and raise funds), including restrictions on permitted activities and rules to protect non-qualified investors, as defined in Law 5/2015.
Specific restrictions apply to how the platforms can raise financing (i.e., only through the issuance of shares in public limited companies, bonds or other equity securities; the issuance of shares in limited companies; and loans, pursuant to Law 5/2015). The use of the funds is also regulated (which may only be for the ends of entrepreneurialism, education or consumption) as are the services that can be rendered by the platforms (primarily marketing and communication services and not investment services or activities reserved for credit institutions).
The activities of crowdfunding platforms are subject to authorisation from the National Securities Market Commission (CNMV) and registration in the CNMV’s registry in accordance with the procedures established in Law 5/2015. The CNMV, in collaboration with the Bank of Spain, is in charge of the supervision, inspection and penalisation of the platforms and any other natural or legal persons violating Law 5/2015 regarding crowdfunding.
In relation to the protection of investors, Law 5/2015 refers to qualified and non-qualified investors, differentiating them primarily on the basis of proven economic capacity and, in some cases, on whether the investor has expressly applied to be considered a qualified investor. In the latter case, if a natural person, the crowdfunding platform must analyse the request case by case. Non-qualified investors may not invest more than €3,000 per project, or more than €10,000 within any 12-month period, in projects published through a single crowdfunding platform. Moreover, the platform must warn investors of specific risks associated with the investment.
Finally, subject to specific particularities, regulations on the protection of consumers and end users apply to relationships between project owners and investors as well as relationships between platforms and project owners, in the event the project owner is considered a consumer.
VII UNFAIR PRACTICES AND LITIGATION
Apart from the aforementioned practices and the regulation of usury, we would highlight the following unfair practices that have recently drawn attention:
i The limitation of late payment interest
In consumer loans, a maximum rate of 2 per cent applies over the interest rate agreed on the loan, and for mortgages a maximum rate of three times the legal interest rate applies for late payments.4
ii Mortgage interest rate floors declared unfair due to a lack of transparency
Mortgage loan agreements in Spain in recent years have often included floor clauses, which provide that, if the interest rate falls below a certain threshold, the client must continue to pay a minimum interest equal to that threshold. There has been a great deal of discussion on whether these clauses are unfair to consumers, and, consequently, many individuals have initiated judicial proceedings seeking a court ruling declaring that floor clauses are unfair and not binding. In this regard, the Supreme Court, in its ruling of 9 May 2013,5 declared some floor clauses void (i.e., those which establish a minimum interest rate for mortgages of a variable nature) for lack of transparency.
The Supreme Court also imposed the obligation on financial institutions to pay back all the overcharged amounts to clients as from May 2013 (the date of the ruling) due to considerations on financial stability and the public interest.
Several Spanish courts have asked the European Court of Justice about whether the limitation of the effects of the invalidity from the date of the judgment of the Supreme Court is compatible with Council Directive 93/13/EEC, of 5 April, on unfair terms in consumer contracts, given that, according to that Directive, such clauses are not binding on consumers.
In its judgment of 21 December 2016,6 the European Court of Justice ruled against the limitation on retroactivity and the overcharged amounts will have to be returned not only from May 2013, but also as from the time of their origination. More recently, the Spanish government has announced its intention to pass a Royal Decree in the near future, setting out the terms for the return by the credit entities of the overpaid amounts in relation to floor clauses, and providing consumers with an extrajudicial process that is speedier and less costly than court proceedings.
IX RECENT CASES
In 2015, the Complaints Department of the Bank of Spain dealt with 59,223 new cases filed by users of financial services. Claims peaked in 2013 and, since then, have gradually come down but have still remained above pre-crisis levels. Forty-six per cent of claims received in 2015 were related to mortgage-floor disputes; 20 per cent referred to other forms of lending; and 15 per cent related to deposits.
According to the Bank of Spain’s Claim Report 2015,7 the number of decisions issued in favour of the claimant, in claims excluding mortgage-floor disputes, remains extremely high, underlining the inadequate attention given to customer service by credit entities in the settlement of claims, since in 60.8 per cent of cases, the Complaints Department of the Bank of Spain upheld the claims, which, as stated before, had already been filed with the corresponding bank entity in the first instance.
In relation to claims on mortgage floors, of the number of decisions issued by the Complaints Department of the Bank of Spain, 66.6 per cent were issued in favour of the claimant. This reveals a weaker performance by the customer services of the credit entities in this kind of complaint.
Finally, the corrections carried out by the corresponding credit entities as a result of the decisions issued in favour of the claimant amount to 40 per cent in the case of claims excluding mortgage floors, and 35.4 per cent in the case of claims on mortgage floors, on average.
The economic outlook and the need to address the aftermath of the real estate bubble suggests that consumer lending will continue to be the fastest-growing type of loan, at least in the medium term in Spain.
The digital economy, however, is transforming the traditional consumer lending space, with new channels such as crowdfunding, new entrants into the payment segment and even the creation of virtual currencies.
The new entrants are largely unregulated entities from the technology sector, which often already have a well-known consumer brand. They are targeting the consumer lending segment because of its relatively high profitability and healthy growth prospects, and because without the legacy and the capital requirements of the banks, new entrants can be more competitive in pricing, offering lower rates, and can also be faster to market.
This will result in a higher degree of disintermediation in the future. That the new entrants are largely unregulated entities from the fintech sector means that as they play a bigger role in the consumer sector, with either payments or lending, more legislation will be needed.
1 Laura Machuca Menéndez is an associate at Uría Menéndez Abogados, SLP.
2 For instance, Law 20/2014, of 29 December, modifying Law 22/2010, of 20 July, of the Consumer Code of Catalonia, aimed at improving consumer protection in relation to mortgage loans and credits, financial vulnerability and consumer relations.
3 A list of the different consumer bodies currently existing in Spain is available here:
4 Supreme Court case of 3 June 2016, available at http://www.poderjudicial.es/search/doAction?action=contentpdf&databasematch=TS&reference=7693401&links=28079119912016100009&optimize=20160608&publicinterface=true.
5 Supreme Court Case of 9 May 2013, available at: http://www.poderjudicial.es/search/doAction?action=contentpdf&databasematch=TS&reference=6703660&links=28079119912013100009&optimize=20130510&publicinterface=true.
6 Judgment of the European Court of Justice of 21 December 2016, joined cases C-154/15, C-307/15 and C-308/15, available at: http://curia.europa.eu/juris/document/document.jsf?text=&docid=186483&pageIndex=0&doclang=EN&mode=req&dir=&occ=first&part=1&cid=561464.
7 Bank of Spain’s Claim Report 2015 available at: http://www.bde.es/f/webbde/Secciones/Publicaciones/PublicacionesAnuales/MemoriaServicioReclamaciones/15/MR2015_Documento_Completo.pdf.