EU banking ruling restricts German consumer compensation rights

Distance loan agreements are loans agreed between lenders and consumer borrowers over the internet or through another non-face-to-face channel. Specific EU laws govern distance marketing of consumer financial services and provide consumers with certain rights to withdraw from distance selling arrangements they have signed up to, including when lenders fail to provide the consumer with certain information – including around their right to withdraw.

When consumers withdraw from a distance loan agreement the law requires both consumers and lenders to return certain funds to one another. In general, consumers must repay the principal sum they borrowed and typically any interest charged on that loan. The lender must return the loan repayments it has received.

However, under German legislation in force until 2014, consumers were also entitled to compensation for the benefit of use of funds repaid prior to exercising a right to withdraw from and revoke the distance loan agreement.

However, the Court of Justice of the EU (CJEU) has now said that this right to compensation in Germany goes further than what the EU's directive on distance marketing of consumer financial services requires.

The CJEU was ruling on the issue after the Regional Court of Bonn asked it to help it clarify the extent of the rights that apply to consumers exercising their right to withdraw from distance loan agreements under EU law. The Bonn court is considering an underlying dispute between a lender and consumer borrower in relation to the compensation issue.

According to the CJEU, where a consumer exercises his or her right to revoke a distance loan agreement concluded with a bank, EU law only provides the consumer with a right to claim the principal repaid and the interest paid under that agreement, but not the right to receive compensation for the benefit of use of the payments previously made to the bank.

Christian Schmidt of Pinsent Masons, the law firm behind Out-Law, said the judgment applies only to distance loan agreements and is limited in scope to such agreements concluded before 13 June 2014. That is the date on which German law was updated to align the national law with the requirements of the EU's directive on distance marketing of consumer financial services..

"Nevertheless, the decision is good news for the financial services industry," Schmidt said. "Taking into account the volume of distance loan agreements potentially affected by its scope, the judgment may still have a considerable positive impact on the litigation risks faced by the affected financial institutions. The denial of any claims for benefits of use might also discourage consumers from a late exercise of their revocation rights as, from an economic point of view, this option may turn out to be less attractive."

"However, as this judgment has no binding effect on any cases other than the individual case subject to the CJEU's decision, it remains to be seen how German courts, and in particular the German Federal Court of Justice, will respond to this new development. In this context, it is worth noting that the relevant German law – in deviation from the EU directive – expressly provided for claims for benefits of use in favour of the consumer," Schmidt said.

"In a similar context, the German Federal Court of Justice has just recently made clear that the German national courts' duty to interpret German law in favour of the relevant EU directives cannot overrule provisions of national law whose wording does not leave any space for interpretation. Thus, financial institutions operating within the German market should keep closely monitoring further case law and developments," he said.