The Banking Litigation Law Review: Portugal
After a period of significant increase of litigation disputes connected with the banking sector, due to the impacts that the Troika intervention in Portugal had in debt restructuring of companies, as well as to the application of resolution measures to two credit institutions – BES and Banif (whose judicial liquidation procedures are currently on going), in the recent past a trend of stabilisation, or even decrease of litigation, was expected to be observed.
The covid-19 pandemic caused an unpredictable and irreversible change of the course of events. Indeed, the judicial system was almost completed shut-down by the covid-related legal emergency measures adopted in Portugal at a procedural level, which imposed a stay on most ongoing disputes.
The subsequent measures continuously implemented aimed to protect the economy, companies and citizens (such as the creation of a temporary public moratorium regime, which allows for the suspension of capital and interest payments in certain credit agreements, and the access to credit lines with personal state guarantees to support corporate liquidity), impacted – even if not directly – disputes related to the banking sector. Such a situation is a consequence of the stoppage of effects of situations that, under normal circumstances, would constitute a contractual breach and would lead to an increase of litigation.
These measures are merely temporary, and therefore their revocation will most likely ultimately result in a significant increase of disputes in 2021.
Taking this context into account, debt restructuring procedures will regain particular importance, notably the special procedure of revitalisation of companies. This may lead to an intervention of the legislator in order to ease the access to, and employment of, this regime.
This flexibility may be achieved through the transposal of Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 (on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt), which shall be completed on 17 July 2021.
Significant recent cases
Most judicial proceedings initiated against financial institutions in recent years concern mis-selling claims in the context of investments in financial instruments. These proceedings were mainly initiated in the aftermath of the financial crisis of 2008, and triggered by resolution measures the Bank of Portugal (BP) applied to Portuguese banks.
Although the exceptional measures adopted in Portugal to mitigate the effects of the covid-19 pandemic – notably standstills and moratoria on loans, court recesses, suspension of legal proceedings and procedural deadlines – naturally caused a decline in the number of this year's significant case-law, some relevant cases must still be mentioned.
The resolution measure applied to Banco Espírito Santo and to Banif continues to be a topic of discussion and disputes, either involving said banks or the BP and their clients, or both.
Indeed, several stakeholders of Banco Espírito Santo requested the declaration of invalidity of the resolution measure applied to it by the BP on the grounds that it breached the Portuguese Constitution general principles of Portuguese Law, and European Law. The Administrative Court of the District of Lisbon Central dismissed the claim. Following an appeal filed to the Supreme Administrative Court, in 23 January 2020 it admitted a request for a preliminary ruling to the Court of Justice of the European Union.
Moreover, several claims against Banco Espírito Santo and Banif, for breach of duties of financial intermediaries regarding the information to be provided to investors, the obligation to assess the adequacy of some transactions, and the prohibition of conflict of interests were brought before Portuguese courts. In this regard, courts tend to protect unqualified investors and to adopt stringent approach towards financial intermediaries. Indeed, courts frequently hold financial intermediaries liable for damages caused to their clients when they fail to prove diligence in providing complete, up-to-date and reliable information necessary to raise awareness about the risks involved in the investments, for an informed and reasoned decision making by the investor is to be made to the credit institution. The claimant must, however, demonstrate that the other requirements for civil liability, (e.g., the casual link between the breach of duties and the damages) are verifiable.
Recent case law regarding investments in complex financial instruments consider that the financial intermediary is responsible for considering the client's profile (i.e., 'know your client') and for providing information adequate to his knowledge. Indeed, on 28 January 2020,2 the Supreme Court of Justice ruled that a bank that informs a client without any financial experience that commercial paper is similar to a fixed-term deposit, with guaranteed capital, is not complying with the duty to provide complete, true and objective information regarding the risks inherent to the investment. The Court considered that said conduct infringes the principle of good faith, particularly in terms of loyalty, and that this liability could be incurred with reference to acts executed in the phases preparatory to the transaction. Similarly, on 8 October 2020, the Lisbon Court of Appeal3 held that a bank omitting information to the investor on the specific differences between bank deposits and subordinated bonds was in infringement of the financial intermediary's duty to provide information.
A decision in the opposite direction was rendered in 8 October 2020 by the Court of Appeal of Guimarães.4 This court ruled that the duty to provide information does not extend to the obligation on the financial intermediary to follow up on the insolvency proceedings of the issuer of bonds.
In addition to the duties of information, a recent decision of the Supreme Court of 19 May 20205 refers to the bank's duty of custody regarding safe-deposit boxes. The Court considered that banks must guarantee the vigilance necessary to prevent an individual, other than the user, from accessing the safe and are accountable for their integrity. Consequently, theft or robbery, through burglary, does not constitute grounds for exemption from liability by the bank. The Court considered that the burden of proof of the absence of fault lies with the bank.
In a decision rendered in 29 September 2020, the Lisbon Court of Appeal6 confirmed that failure to integrate a customer in the special Out-of-court Proceeding for the Regularisation of Default (PERSI) in consumer credit agreements constitutes a dilatory exception, to be acknowledged by the court suo motu, that may prevent enforcement proceedings for the collection of the owed amounts from carrying on. Nonetheless, the court underlined that the credits subject to enforcement were assigned to a securitisation company (not subject to the PERSI regime) prior to the default of the customer. As the securitisation legal regime (Decree Law No. 453/99) provides that the debtors of the assigned credits can only oppose to the assignee those objections deriving from facts that precede the assignment, the exception was ruled to be unfounded. This decision shows that a bank's customer situation may, under certain circumstances, be negatively affected (in this case, the default could not lead to a PERSI proceeding) as a consequence of a credit assignment.
Finally, it is worth noticing that, in 2019, the Portuguese Competition Authority fined 14 banks in the total amount of €225 million euros for concerted practice of exchanging sensitive commercial data, during 2002 and 2013. Twelve banks presented an appeal to the competent court. This decision may trigger damages claims, which are expected. Deco – the Portuguese Association for Consumer Protection – is evaluating the possibility of taking collective action, on behalf of consumers, against the banks, so that clients can be compensated for their losses.
Recent legislative developments
i Covid-19 related legislative developments
The past year was dominated by the covid-19 pandemic, which required both national and supra-national entities to adopt measures to contain the pandemic harmful systemic economic effects. Some of these measures affect the Portuguese banking sector significantly in their everyday operations and may be sources of litigation between these entities and their clients, their employees, their shareholders or the relevant regulatory authorities, or both – especially the European Central Bank (ECB) and BP.
Regulation (EU) 2020/873 amending Regulations (EU) No. 575/2013 and (EU) 2019/876 as regards adjustments in response to the covid-19 pandemic
To maximise the banks' capacity to lend money, this Regulation:
- extended by two years the transitional measures concerning the implementation of IFRS 9 to face a likely increase in provisions for expected credit losses;
- changed the calculation of the levered ration and delayed the introduction of the leverage ratio buffer to January 2023; and
- introduced capital relief measure for certain loans granted to SMEs or backed by pensions or salaries.
This is in line with the position adopted by the European Commission regarding accounting norms (shared by ESMA) and prudential rules.
EBA statement on consumer protection and payment-related measures and guidelines on moratoria on loan-payments
EBA calls on financial institutions to act in the interest of the consumer, particularly in the context of the adoption of temporary measures for consumer and mortgage loans concerning, inter alia, charges and costs, in compliance with the applicable EU (namely, with information, transparency and clarity requirements). Additionally, EBA promotes the careful consideration of new and additional charges specifically introduced in relation to contingency measures, designed to alleviate the pressure on consumers and businesses, and cross selling of products to consumers, form a legal and reputational standpoint. EBA also notes that where temporary measures do not automatically lead to loan reclassification from a prudential perspective, their acceptance should not automatically and negatively impact the consumer's credit rating.
In terms of payment services, EBA urges providers – including banks – to facilitate payments that not require physical contact, namely by establishing the maximum threshold allowed for contactless payments (€50 per transaction). Finally, EBA removed the obligation of National Competent Authorities – the BP – to report by 31 March 2020 on payment services providers' readiness to meet strong costumer authentication requirements for e-commerce card-based transactions. It is unclear whether this exemption will continue to apply.
Additionally, EBA has issued guidelines clarifying that the application of a legal or contractual moratorium adopted as a result of the pandemic, broadly applied to a range of debtors, under the same conditions and only scheduling payments, may not lead to a reclassification under the definition of forbearance; that is, cases where credit institutions grant a concession due to financial difficulties experienced by a borrower.
Decree-Law No. 10-J/2020, of 26 March 2020, establishing a legislative moratorium
Credit operations engaged in by credit institutions, where the counterparty is a non-financial undertaking, a sole proprietorship, a private charity institution or other social economy related entity operating or with headquarters, or both, in Portugal are subject to exceptional measures designed to protect these entities from the harmful effects of the covid-19 pandemic. Individuals who entered into housing loan agreements may also benefit from such measures.
The support measures include:
- a ban on the possibility of cancellation of the credit granted;
- prorogation of the credits to be reimbursed at the term of the agreement;
- suspension of the payments of capital, rents and interests made by instalments; and
- inapplicability of default and early termination clauses to situations covered by (b) and (c), where interest continues to accrue during the prorogation period and are to be capitalised. Security and guarantees remain effective and its validity is correspondently extended. All these measures are applicable while the Decree-Law is in force.
These measures are not automatic as they require the beneficiaries to submit an application to the credit institution together with evidence that their tax and social security situation is regularised.
BP Macroprudential Recommendation on new credit agreements for consumers
The BP established that personal credits with maturities of up to two years, duly identified as intended to mitigate households' temporary liquidity shortage situations, are exempted from compliance with a DSTI (debt service-to-income) ratio limit and from observing the recommendation concerning regular principal and interest payments.
ii Sustainable finance
Within its mandate to promote the relation between sustainability and finance, the European Commission is implementing the strategy set out in the action plan on financing sustainable growth.
As a result, Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020, on the establishment of a framework to facilitate sustainable investment, entered into force on 12 July 2020.
The Regulation establishes an EU uniformised classification system, or 'taxonom', which determines the criteria to identify whether an economic activity is environmentally sustainable. The harmonisation achieved by the Regulation is expected to remove barriers to the collection of funds to sustainable projects within the internal market, enhance investor confidence and awareness of the environmental impact of the financial products (including corporate green bonds) and to address the concerns with 'greenwashing' (i.e., gaining an unfair competitive advantage by marketing a financial product as environmentally friendly, when environmental standards have not been met).
The Regulation applies to financial market participants that make available financial products, as banks frequently do. Particularly noticeable are the transparency requirements in non-financial statements, as well as in pre-contractual disclosures and periodic reports, concerning financial products connected with sustainable economic activities, made under Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector, which must take into account the criteria established in the Regulation.
iii Protection of consumers – limitations to bank fees
Law No. 53/2020, of 26 August 2020 prohibits payment service providers from charging fees to consumer payer or payees in payment transactions performed by third parties, notably withdrawal of funds, payment of services or transfers, provided a certain threshold is not exceeded (€30 per transaction, €150 during a month or 25 transfers). Where these thresholds are exceeded, payment service providers are also limited in the amounts that they may charge to their customers.
Law 57/2020, of 28 August 2020 prohibits credit institutions from charging certain fees in connection with consumer credit agreements and credit agreements for consumers relating to residential immovable property that, until now, were commonly included in the Portuguese credit institutions' price lists. Examples include fees relating to the analysis and renegotiation of credits, payment processing fees (if the processing is conducted by the creditor) or issuance of documents for the extinction of in rem guarantees.
These new provisions shed some light on the content of a general provision that was already contained in Law No. 66/2015 requiring all fees charged by credit institutions to correspond to a service effectively rendered. Moreover, they clarify that fees must be reasonable and proportionate to the costs borne by the credit institution.
Changes to court procedure
Court procedure rules did not suffer major changes during 2020.
Notwithstanding, Law 117/2019 of 26 July 2019, which came into force on 1 January 2020 and amended the Portuguese Civil Procedure Code (CPC),7 introduced the following pertinent modifications:
- extension of the grounds of the extraordinary appeal of review (decisions that became res judicata) and of opposition to enforcement proceedings, in particular in cases where the defendant did not intervene in the previous declarative proceeding, and it is evidenced that (1) there was a lack or nullity of service, (2) the defendant was unaware of service without fault, and (3) the defendant was unable to file his defence by reason of force majeure;
- limitations on the seizure of property used by the defendant for personal and permanent residence, established to increase the legal protection of the family homes; and
- where enforcement proceedings concern credits emerging from contracts containing general contractual terms, the contract and terms must be filed with the proceeding's initial application.
Moreover, Decree-Law 97/2019 of 26 July, which amended the electronic processing of judicial proceedings, introduced the formula 'digital by definition', meaning that judicial proceedings – (including most procedural acts) are now entirely electronic. These changes are expected to introduce greater agility, flexibility and efficiency in judicial proceedings.
Privilege and professional secrecy
Under the Portuguese Bar Association Conduct Rules, all the information obtained in the course of the work of a lawyer is covered by professional secrecy.
Notwithstanding, lawyers are required to report to the Bar where there is a suspicion that certain operations are related to anti-money laundering or terrorism financing. The breach of this duty of professional secrecy is, as a rule, a punishable criminal offence.
Information covered by secrecy may not constitute mean of proof or be considered by the court while deciding a case, unless the secrecy duty was waived by the Bar or a court. This may occur where divulgation is essential to preserve the legal rights or legitimate interests of the lawyer or a client. It is important to note that the Bar adopts a more conservative approach than the courts in allowing for these waivers.
Sources of litigation
Recent case law concerns most frequently breaches of duties of financial intermediaries regarding the information to be provided to investors, the obligation to assess the adequacy of some transactions, and the prohibition of conflict of interests and prohibition of inducements.
The resolution measures BP applied to Banco Espírito Santo and Banif are also relevant sources of litigation. Claimants request the declaration of the invalidity of said measures and ask for compensation for the damages caused by them.
1 Manuel Magalhães, Mafalda Ferreira Santos and Francisco Boavida Salavessa are partners and Maria José Lourenço is a senior associate at Sérvulo & Associados.
2 Proceedings No. 2142/16.1T8STR.E1.S1.
3 Proceedings No. 13636/18.4T8LSB.L1-6.
4 Proceedings No. 1953/19.0T8GMR.G1.
5 Proceedings No. 3039/15.8T8PNF.P2.S1.
6 Proceedings No. 1827/18.2T8ALM-B.L1-7.
7 The Portuguese Civil Procedure Code was approved by Law No. 41/2013 of 26 June 2013, with all the amendments introduced up to and including the Law No. 117/2019 of 13 September 2019.
8 Article 21 of Decree-Law No. 149/95 of 24 June 1995, with all the amendments introduced up to and including the Decree-Law No. 30/2008, of 25 February 2008.
9 See, for reference, proceeding 877/12.7TVLSB.L1-A. S1 before the Supreme Court, from 11 February 2015; Proceeding 540/14.4TVLSB.S1 before the Supreme Court, from 26 January 2016.
10 Article 23 of the Law on General Contractual Terms.
11 Article 4 of Regulation 593/2008.