The Ultimate Guide to Banking Consumer Rights in Cyprus

Part I.

This guide starts with a warning - there are high risks of losing your property and other assets like cash deposits if you take a loan in Cyprus. This disclaimer won’t be seen on any loan agreement, but it should be there, in our opinion, given the complexity of the contracts.

The Cypriot banking system so far has not adapted well to European standards of handling debt during economic crises or downturns, leading to severe psychological and financial problems for borrowers in trouble.

The reason for this position lies in the many decisions issued against various banks by the Financial Ombudsman and courts which heavily impact the banking sector’s reputation and even in the 21st Century verge on causing a humanitarian crisis. This article was triggered by the extraordinary plight of debt hunger striker Maria Karaoli and a desire to help other debtors avoid her fate.

It’s clear that consumer rights must be boosted in order to balance the relationship and move towards a healthy banking sector and consumer sector with decent access to reasonably-priced financing.

Anything less is a damaging lack of a fair playing ground for both the consumer and the banking sector.

Fairness

After reading the introduction, you may be surprised to hear that the Central Bank of Cyprus (CBC) encourages fairness towards consumers.

By contrast, retail banks have strategies to push borrowers into the status of having non-performing loans by imposing high interest rates and compound interest with no recourse to stop the meter ticking, hidden charges, misleading information, unfair mortgage contracts and other predatory practices.

Once a loan is non-performing for 90 days, the borrower is completely vulnerable to all manner of abuse of their consumer rights - including foreclosure on properties worth far more than the actual debt or forced liquidation by court order.

It is an unfair aspect of the definition of non-performing loans that borrowers only have a pitiful 90 days but there’s nothing compelling the banks to move as quickly as possible to restructure. This means the bank can possibly take years to restructure a loan and that it is in the bank’s interest to draw out the arrears negotiation process.

It actually benefits the bank if your loan is non-performing, meaning those working in the system are encouraged to work to that end. In the worst case, personnel use a series of stonewalling and avoidance tactics to delay solutions to burdensome debt. In other cases, personnel do not have adequate training, sensitivity, social conscience or experience to manage arrears in a fair way.

Central Bank Directive on Arrears Management

It’s reassuring to see that the central bank offers a specific and wide-ranging set of solutions for debtors with arrears and non-performing loans. These can be seen in the directive published on the central bank’s website.

Read it for yourself here: https://bit.ly/2Xd58oD

Read on to learn from our guide below or read the flip book below. To receive the e-book by email, send inquiry to [email protected]

The directive is binding on the banking institutions.

The directive’s main purpose is fair, sustainable restructurings for borrowers in financial difficulties.

Central bank of cyprus

Institutions have to establish Arrears Management Units (AMUs) which have to be independent of the lending and other credit operations in the bank.

Each bank has to follow a Code of Conduct and establish an Appeals process for restructuring decisions.

“The banks must execute fair, adequate and sustainable debt restructurings…” CBC.

The directive has five pillars: the code of conduct; setting up a robust arrears management strategy; relevant, effective debt restructuring techniques and options; establishing a robust organisation and operative model to handle increasing arrears volumes; and monitoring of arrears management performance against key objectives while taking corrective measures.

The CBC makes a clear distinction between cooperative and non-cooperative borrowers with a focus on a consensual and voluntary restructuring approach.

Each institution must deal with borrowers in financial difficulties in a systematic, organised and professional manner and submit proposals to the CBC for assessment.

The management system has to be flexible and subject to regular review in order to adapt to changing economic conditions and arrears trends.

Risk segments are: very high; high; medium; and low.

Viability of borrowers is defined as: cooperative and viable; cooperative but non-viable; and non-cooperative.

Cooperation in this context means providing all requested financial and other information, according to the Code of Conduct on the Handling of Borrowers in Financial Difficulties.

Cooperation doesn’t mean feeling afraid, overwhelmed or intimidated into handing over all your assets.

Solutions and Options

There are many solutions and options the bank can offer you, according to Part 1.1 of the arrears management rules.

1. Combine traditional and non-traditional restructuring solutions. These could include debt-to-equity swaps and debt repurchases.

Out-of-court restructurings have the benefit of being less expensive and more quickly implemented than in-court restructurings. They also avoid increased disclosure obligations, public scrutiny and litigation risks from interested parties.

James Sprayregen, partner at international law firm Kirkland & Ellis LLP

2. Programmes for the sale of immovable property.

Credit institutions shall implement a fair and sustainable pricing policy with regard to restructured credit facilities. The objective of the pricing policy should be to minimise costs, fees and interest rates for borrowers…

Central Bank of Cyprus

Pricing policy

The pricing policy shall provide the charging of reasonable and fair interest rate on credit facilities in arrears.

Careful consideration must be given to the impact of the level of the interest rate compared to the borrower’s repayment ability.

Consideration must be given to the charging of the minimum possible charges, fees, duties and other expenses in the whole debt restructuring programme.

Living expenses

The CBC gives guidelines for assessing credit facilities in arrears, including establishing reasonable living expenses, early warning mechanisms, speedy communication with borrowers, and guidelines for the treatment of cooperative and non-cooperative borrowers. Flexible approaches to customers’ complaints have to be established.

A distinction is made between the Debt Recovery Unit (DRU) and Arrears Management Unit (AMU). The DRU is for debt recovery from non-viable or non-cooperative borrowers. Both must function as independent units.

The financial assessment must take into consideration the prevailing economic, social and legal particulars and must ensure fairness.

Restructuring must avoid excessive or unjustifiable lifestyles but allow the borrower to have an appropriate house and necessary equipment for survival.

The restructuring shall not lead to undue hardship and will respect the legal rights in addition to the psychological and social needs of troubled borrowers.

Restructurings must take into account the number of adults and dependents, the need for a car, childcare, child education, medical needs and disabilities.

Complicated cases

The CBC’s position is for borrowers to avoid bankruptcy, which has multiple negative effects on all creditors and on the economy. Instead, the central bank advises collaboration between the group of creditors and a standstill period similar to Chapter 11 in the United States, when a borrower is protected from creditors during a restructuring process.

More options

The bank can offer you different options which include:

• Out of court restructuring.
• Interest rate only payments.
• Reduced payment.
• Higher than interest payments.
• Lower than interest payments.
• Arrears and interest rate capitalisation - be wary of this as it could lead to compound interest - charging interest on interest, which is not in line with the policy of reasonable pricing.
• Grace period.
• Interest rate reduction.

On the topic of interest rates, the CBC says that credit facilities with high interest rates are one of the most common causes of financial distress.

The financial difficulties of the borrower may partly derive from the fact that interest rates are excessively high compared to the income of the borrower.

Central Bank of Cyprus

Changes in interest rates because of economic upturns and downturns can also catch borrowers by surprise and the bank must take this into consideration when restructuring loans.

Permanent solutions

Permanent solutions to arrears can include:

• Extending the loan maturity.
• Capture surplus cash at a later stage if assets are sold. Be wary that capturing surplus cash agreements are not a result of intimidation and overcharging by the bank.
• Additional security. Be wary you are not being intimidated into handing over additional securities like life insurance or other assets because you were overcharged by the bank.
• Assisted sale by agreement. This can free you of debt provided the conditions were fair to you from the beginning.
• Split mortgage in which part of the capital is set aside for future repayment.
• Trade-down mortgage where you purchase a lower-value property, giving the bank the higher-value property.
• Forebearance of penalties in which the bank forgives penalties on loans.
• Alteration of contract if burdensome.
• Rescheduling of payments.
• Strengthening of debt security.
• Rollover the debt to the maximum age of 70 years old.
• New credit facilities.
• Conversion of currency if the debt is in foreign currency.
• Debt-to-equity swaps.
• Debt consolidation - putting together multiple debts into one amount.
• Partial or total debt write-offs leading to a final and full settlement.

Another key element of effective restructuring is that the bank must communicate quickly and effectively with you to explain all the options available.

Other authorities

As we see above, the CBC emphasises fair, effective, low-cost restructuring policies which are flexible and reflect current economic realities. Other authorities echo this approach.

The European Banking Authority (EBA) urges banks to prioritise their reputation and protect consumer rights.

If a firm engages in practices which cause significant detriment to its customers this could ultimately backfire… eg. by paying compensation to complainants and causing reputational damage following sanctions from financial ombudsmen and other authorities.

European Banking Authority

The EBA warns against banks which push their customers to move away from mortgages which track and follow the European Central Bank’s interest rate movements.

This means that the bank needs to show you how the interest rate on your mortgage is related to the ECB’s rates.

The EBA also frowns on interest rates which are unaffordable given current economic circumstances.

If the interest rate in your mortgage contract is unfair under the current economic circumstances then by definition it can be disputed because unfair contracts are illegal in the EU.

If the contract is too complex and detailed, a borrower may miss important points in the small print, and this is also unfair. Contracts must be simple and easy to understand. Anything too complex means trouble.

The EBA encourages a traffic light system in which complex banking products are red-lighted and simpler products are green-lighted.

The EBA’s concerns are that excessive interest rates will lead to refunds, fines and reputational damage for credit institutions.

In other words, overcharging in the banking sector ultimately damages the banking sector as well as consumer rights.

If you have a complaint about your loan or bad treatment from the bank, you can register a complaint with the Consumer Protection Service and/or the Financial Ombudsman.

If your situation reaches an extreme and you have no other recourse, you can complain directly to the Central Bank of Cyprus, the banking sector’s regulatory authority.

Part II of our guide will be published shortly and will focus on interest rates.