The Ultimate Guide to Banking Consumer Rights in Cyprus Part III - Contracts

“In the European Union, the Unfair Terms in Consumer Contracts Directive 93/13/EEC considers a term unfair if it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer.”

World Bank

The last part of our guide to banking consumer rights in Cyprus starts with a question: when you signed your loan contract, did you read the small print?

And a second question. Did you know that according to the World Bank’s best practices for Financial Consumer Protection, there should be no small print in your loan contract? Each word should be clear and equally importantly, the contract should contain no clauses which would be against your interests.

The World Bank’s best practices include the below:

a. Any advertisement, sales material, or other form of communication or disclosure by a financial service provider to a consumer (whether written, oral, or visual) should be in plain and easily understandable terms, not misleading, and should use at least the language that is prevalent in the geographic area in question.

b. Any written communication (including in electronic formats) should use a font size, spacing, and placement of content that makes the communication easy to read for the average person.

c. Key documents such as consumer agreements, forms, receipts, and statements (including those provided in electronic format) should be provided in a written form that can be kept or saved by the consumer.

d. Written, oral, and visual communications should contain and highlight key features of a given product or service.

e. The regulatory framework should establish the timing of key disclosures to the consumer, particularly during the shopping, precontractual, and contractual stages.

f. Standard indicators for total cost and total net return, and standard methodologies for the calculation of such indicators, should be established by the authority in order to ensure consistency across providers and enable consumers to compare products properly.

g. Adaptations to regulatory requirements should be considered to allow for innovation in product design and delivery with respect to digital financial services, while mitigating potential risks to consumers due to disclosures that may be less comprehensive, more difficult to read, and harder to store.

h. In addition to key product features, communication materials should, whenever possible, disclose:
i. The regulatory status of the financial service provider;
ii. The contact information for the internal complaints handling mechanism of the financial service
provider; and
iii. The contact for the relevant external dispute resolution mechanism, if any.

There are many negative consequences of loan contracts which are weighted against consumers and the truth is that you could face bankruptcy, loss of assets and psychological difficulties.

In the case of big debtors, there are huge risks because if there is an economic downturn, the bank can bring in all manner of court actions and put a company or individual into administration. From there, the administrator will sell off the assets to cover the debt. The problem is that during economic downturns, asset prices can fall, meaning that the income might not cover the debt, which can often be dramatically over-inflated by excess interest charges.

One famous case was businessman Christos Orphanides, who owned Orphanides supermarkets. The group had a net debt exposure of 225 million Euros and assets worth 340 million Euros with the now-defunct Marfin Laiki Bank. During the insolvency, the assets were sold off at such low prices that there wasn’t enough to cover outstanding cheques and debts to suppliers and Orphanides went to prison for 14 months.

In this example, other than the obvious management problems we can see that there are big problems and holes in the system when it comes to winding down large companies and managing insolvencies well. There is also a high economic cost because jobs are lost, assets are undervalued and there’s a negative impact on business sentiment.

Caveat Emptor - Buyer Beware

The most abused consumer contracts tend to be household mortgages and property loans for businesses.

The Consumer Protection Service (CPS) fined the island’s biggest banks over and over again for unfair mortgage contract.

In on case, the CPS fined Bank of Cyprus 170,000 Euros for tricky and unfair mortgage practices and other infringements of consumer rights. The state-owned bank was investigated by the agency on its own initiative, it said in a statement. It was ordered to cease and desist the practices.

The problems included:

• Using evasive or unclear contracts allowing the bank to unilaterally change the interest rate and charges borne by the consumer.

• Imposing charges and other costs without presenting the consumer with accurate and easily understandable analysis.

• The contract conditions were unclear and incomplete, especially about the total repayment amount of the loan.

• The loan was connected with an insurance contract and dependent on paying premiums. This is a common practice with insurance companies owned by the banks. The consumer is pressured into signing an insurance contract or they don’t get the loan.

Be prepared

It’s rare for a consumer to enter into a clear cut mortgage agreement without hidden costs. The problems doubled after the 2013 financial crisis that was caused by the banks’ lack of risk management and the state’s over-spending.

The banks moved to restructure their non-performing loans, but even this has proven to be problematic, with reports of some loans going back to their original amounts, even with many payments made over the years.

Charges like late payment charges and running interest fees serve to bring the capital up until it feels like the money is going into a black hole. The interest rates were reduced by necessity, but in fact consumers are paying double the rates because the capital is increased to almost the original amount.

Reporting these kinds of consumer rights abuses is important. If you feel you have been unfairly taken advantage of by a bank, contact the Consumer Protection Service here: Consumer Protection Service

Courts and legal action

In spite of all the consumer protection decisions against the banks, if your bank does not change its ways and offer you a better deal your case may end up in the courts. Before that happens, it’s wise to make your complaints to the CPS or Financial Ombudsman and have them on record.

In this situation, you need sound and independent legal advice - ask your lawyer if their offices have any conflicts of interests. An example could be that the lawyer does legal work for the bank, in which case the lawyer would not be motivated to fully protect your interests.

The same goes for a court-appointed administrator in the case of bankruptcy or insolvency. Ask the administrator if they have a conflict of interest, ie. they get paid to work for the bank. If they do, they should be replaced with someone neutral, this is the only fair way forward to ensure that assets are not sold off at way below market value.

To buy the entire guide, see below.