October 2011 Butterworths Journal of International Banking and Financial Law
A new legal framework on consumer credit has recently been enacted in Spain by means of Law 16/2011 of 24 June (“Law 16/2011” or the “Law”), which has derogated the previous legal regime (dating back to 1995) and has transposed Directive 2008/48 of 23 April on credit agreements for consumers (the “Directive”) into Spanish law.
The aim of the Directive is to establish (i) a harmonised legal framework which allows and encourages cross-border contracting in the European Union and, as a consequence, increases competition among consumer credit offerors and thus benefits consumers, and (ii) a higher level of protection of consumers through the strengthening of the disclosure duties imposed on the market operators. Law 16/2011 basically reproduces the provisions of the Directive and, from that point of view, it can be concluded that the new framework fulfils the main objectives pursued at a European Union level. Furthermore, where the Directive has failed to include specific provisions, the old regime has been maintained or even extended to new scenarios, with the aim of increasing the protection granted to Spanish consumers.
Scope of application
Law 16/2011 governs the agreements whereby the creditor grants or undertakes to grant credit in the form of deferred payment, loan, credit facility or any other equivalent way of financing in favour of a consumer. Thus, this new regime applies to a wide range of consumer credit agreements, except for the cases expressly established in the Law.
In line with the Directive, the Law regulates the role of credit agents (intermediarios de crédito) and, in particular, imposes certain obligations on them. Finance agents are individuals or entities which are not creditors and that, in the context of their commercial or professional activity and in exchange for economic consideration, introduce or offer credit agreements, assist consumers in pre-contracting processes or enter into credit agreements with consumers on behalf of the creditor.
Law 16/2011 expressly sets out that consumer protection measures contained therein apply not only when the financing agreement is subject to Spanish law but also when the parties have chosen a different governing law, provided that the agreement has a close link (as defined in Law 16/2011) to a country within the Economic European Area.
Pre-contracting process: disclosure obligations and solvency checks
One of the basic pillars of both the Directive and Law 16/2011 is the development of the regulation on the pre-contracting process; that is, the steps prior to the creditor and the consumer entering into the consumer credit agreement.
On the one hand, Law 16/2011 regulates the basic content of the publicity and the marketing materials used by the creditors in this market, and reinforces the pre-contracting information duties on the creditors and credit agents, which breach would render consumer credit agreement voidable by the consumer. That extensive pre-contracting information (which differs depending on the nature of the contract to be entered into) must allow the consumer to assess the different offers and take an informed decision on the formalisation of a consumer credit agreement. In order for consumers to be in a better position to compare the different offers (regardless of whether the creditor is domiciled in Spain or in another Member State), Law 16/2011 establishes the obligation of creditors to provide an informational document in a specific format, which is intended to coincide on the whole with that used in all other countries in which the Directive has been transposed.
On the other hand, the creditor must, prior to entering into the agreement, assess the solvency of the relevant consumer, on the basis of, among other instruments, the information provided by the customer and the review of the solvency and credit record of the consumer in accordance with the Spanish personal data protection regulations. This new formal obligation imposed on the creditors is expected to contribute towards increasing the control of the credit market and avoiding over-leveraged consumers.
Once the above is fulfilled at the creditor’s satisfaction, the creditor is obliged to deliver to the consumer a document containing all the terms and conditions of the proposed agreement, which will qualify as a binding offer of the creditor for 14 calendar days (as opposed to the 10 day period of the previous legislation).
Right and obligations under the consumer credit agreements
Law 16/2011 includes a number of rights for consumers and obligations for the creditor, which are compulsory and therefore cannot be derogated by mutual agreement between the parties. Although some of them are not a novelty as they were applicable under the previous legal framework, a summary of some of the most important rights and obligations is provided below:
- Early termination of indefinite consumer credit agreements. Consumers will be entitled to unilaterally terminate consumer credit agreements of an indefinite term at no cost for them and without any prior notice, unless otherwise set out in the agreement (and provided that the prior notice does not exceed one month). In this regard, at least two months’ prior notice must be provided by the creditor.
- Consumer withdrawal rights. The consumer is entitled to withdraw from the credit agreement within a specific period, not being obliged to justify the termination and at no cost for him/her (except for the interest accrued where applicable, which shall be reimbursed together with the principal within 30 days as from the withdrawal notice). Under Law 16/2011, the withdrawal period is 14 days as from the date of execution of the agreement or the receipt of the terms and conditions thereof, if this occurs later, while the withdrawal period under the Spanish general consumer protection regulations is 7 working days, unless a longer period is agreed between the company and the consumer.
- Compensation in the event of voluntary early repayment. Creditors are allowed to charge compensation in the event that the consumer voluntarily repays all or part of the principal before due, provided that the credit has been granted at a fixed (i.e., not variable) rate, and that the compensation represents fair and objective costs incurred by the creditor as a result of the early repayment and does not exceed 0.5% of the repaid amount (if the period until maturity is less than one year as from repayment date) or 1% (if it exceeds one year). Compensation in excess of the maximum amount envisaged above or below the compensation contractually provided within the legal limits can be claimed by the creditor and the consumer, respectively, if it is adequately evidenced that actual costs borne by the creditor are higher or lower (as the case may be).
- Linked consumer contracts (contratos de consumo vinculados). Where the parties to a consumer contract have agreed that the payment of a price for goods or services is conditional upon the total or partial financing of this price by means of a consumer credit agreement:
- the effectiveness of the consumer contract will be conditional upon the consumer obtaining the financing;
- the ineffectiveness of the consumer contract will also render the consumer credit agreement ineffective;
- where both consumer and credit agreements can be construed as a single commercial transaction from an objective point of view, (i) withdrawal from the consumer agreement would automatically involve termination of the credit agreement at no cost for the consumer, and (ii) redress actions can be initiated vis-à-vis the creditor where the relevant goods or services have not been delivered pursuant to the consumer agreement and the consumer has previously initiated court or out-of-court actions against the provider.
Although the Spanish legal system has traditionally been very protective of consumer rights and already had in place specific consumer credit regulations, Law 16/2011 is a step further towards the harmonisation of the legal framework applicable to the finance markets of the European Union Member States.
That said, the Spanish legislator has maintained most of the rights granted to consumers under the previous legal regime although these were not foreseen in the Directive, which must be assessed by consumer credit providers and may have an effect on the offer of this type of products to Spanish consumers.