After it collapsed, Banco Popular was discovered to have 55,000 complaints against it.
Following a succession of consumer-friendly rulings, bank customers in Spain are increasingly taking their banks to court. And many of them are winning. Last year an unprecedented wave of litigation against banks forced the Ministry of Justice to set up dozens of courts specialized in mortgage matters to prevent the collapse of the rest of the national judicial system.
The Bank of Spain, according to its own figures, received 29,957 complaints from financial consumers between January and September 2017 — already double that of the previous year and by far the highest number of complaints registered since 2013, a record year when investors and customers were desperately trying to claw back the money they’d lost in the preferred shares that issuing banks had pushed on their own customers as savings products.
In 2017, eight out of 10 complaints related to one key product: mortgages, and in particular the so-called “floor clauses” contained within them.
These floor clauses set a minimum interest rate — typically of between 3% and 4.5% — for variable-rate mortgages, even if the Euribor dropped far below that figure. This, in and of itself, was not illegal. The problem is that most banks failed to properly inform their customers that the mortgage contract included such a clause. Those that did, often told their customers that the clause was an extreme precautionary measure and would almost certainly never be activated. After all, they argued, what are the chances of the Euribor ever dropping below 3.5% for any length of time?
At the time (early 2009), Europe’s benchmark rate was hovering around the 5% mark. Within a year it had crashed below 1% and has been languishing at or below zero ever since. As a result, most Spanish banks were able to enjoy all the benefits of virtually free money while avoiding one of the biggest drawbacks: having to offer customers dirt-cheap interest rates on their variable-rate mortgages.
But all that came to a crashing halt in May 2013 when Spain’s Supreme Court ruled that the floor clauses were abusive and that the banks must reimburse all the funds they’d overcharged their mortgage customers — but only from the date of the ruling! Then, on December 21, 2016, the European Court of Justice (ECJ) delivered a further hammer blow when it acknowledged the right of homeowners affected by “floor clauses” to be reimbursed money dating back to when the mortgage contract was first signed. Since the ECJ ruling, law firms are now so confident of winning floor-clause cases that they’re even offering no win, no-fee deals.
The total cost of the ECJ ruling for the 40 (out of 42) Spanish banks implicated in the floor clause scandal is estimated to be in the order of €6 billion. One of the banks most exposed to the financial fallout, Banco Popular, collapsed in June 2017, though to what extent the “floor clause” payouts played a role is still not clear. What is clear is that when Grupo Santander took over the toxic debt laden bank for the princely sum of €1, its accountants discovered that 55,000 customer complaints concerning floor clauses had been “put completely on hold,” in direct contravention of the ECB ruling.
Now, Spanish banks face the prospect of a fresh wave of customer complaints and lawsuits, over two unrelated issues, with potentially even bigger financial ramifications than the floor clauses:
Overdraft Fees. In the last six months of last year, at least thirty courts and provincial hearings ruled against a number of banksfor applying these fees (not to be confused with the interest that banks charge on overdrafts). The fees are an easy source of profits for banks but according to the judges behind the rulings, they are also abusive. Judges have also pointed out that a fee is normally charged for a service provided by the bank, but in this case no such service is provided, and any fee charged by a bank must be previously agreed upon with the customer.
Stamp Duty. This is where the financial pain could really be felt. The banks’ troubles date back in December 2015 when Spain’s Supreme Court, prompted by an earlier ECJ ruling, established that lenders ought to pay for all or at least part of the fees associated with taking out a home loan, which typically represent between 2.5% and 3% of the home loan. Once again, the law’s effects are retroactive and apply to anybody who is currently paying a mortgage or who paid it off after December 2011. But there’s still a huge amount of doubt over how the law should apply to Stamp Duty (or AJD tax) whose payment could also become the responsibility of the banks. If banks are made to reimburse customers the full amount paid for Stamp Duty, the total bill could run as high as €18.3 billion, three times the total cost of the floor clause ruling.
For the moment everything is in limbo. Since the 2015 Supreme Court ruling over mortgage set-up fees, various trial courts and appellate courts have handed down decisions both in favor and against borrowers. In the interim, at least six banks – Santander, BBVA, CaixaBank, Bankia, Sabadell and Ibercaja – have changed their clauses so that they now cover around 30% of these associated fees, in a bid to prevent further lawsuits. But it may not be enough.
The ultimate decision is scheduled to be made by the Supreme Court in the coming days. As happened with its initial floor clause ruling, the judges will probably try to minimize the financial pain for the banks but that could merely prompt consumer groups to appeal the decision at the ECJ.
If Spain’s Supreme Court does rule that the banks are indeed liable for Stamp Duty and, as such, must reimburse customers the full costs of the tax with retroactive effect, Spanish banks could end up facing an even larger — and more costly — avalanche of lawsuits than they did in 2017. For some banks, already under concerted pressure from weak credit demand, lingering bad loans and low interest rates, the balance sheet impact could be brutal.