After it collapsed, Banco Popular was discovered to have 55,000 complaints against it.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
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. By Don Quijones.
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I’m sorry, please accept my apology. – Brenda Lee
But I thought the rain in Spain stays mainly in the plain. – Loewe & Lerner
I guess it rains on the Spanish banks too. – Joan of Arc
This situation should be a boost to euro GDP just to account for the increased demand for printing machines. Banks win again.
I guess about half if the banks if Spain are gonna fall in this year and the next at this rate
It will be interesting to see who ends up owning these banks. The really big players don’t put up with this protecting the public crap. But they will use it to cannabalize these banks down to a bargain. Amazing that these banks don’t have enough psychopathogy on their team to just threaten to close down for a month until these decisions get reversed. If they just refused to allow ATM/debit card access to foreign accounts for a month, they could bring the government and the courts to their knees. The Spanish should enjoy this populist power while it lasts. Because they are setting themselves up for some really hard b*stards to come in and “save” these banks.
One must wonder if those rulings will migrate from Spain to the whole of the EU.
Maybe to the US also?
Why doesn’t Spain just abandon the Rule of Law as the USA has?
Problem solved.
Because they Eurozone won’t let them.
Every clod has a silver lining.
The issues in the article should prompt some more long overdue consolidation in Spanish Banking.
Why would the banks be forced to pay the stamp duty?
Is that some sort of hidden “surprise!” tax that consumers aren’t informed about until after they’ve purchased the house already and its sprung upon them from out of nowhere?!?
I really don’t understand this reasoning.
What is it and what’s the justification for forcing the banks to pay stamp duty?
Hi Julian,
It’s a good question, and a very complex answer, even if you’re an expert in Spanish law (which unfortunately I’m not). As far as I understand the situation, since the ruling in December 2015 that the full set-up costs for mortgages should be borne by the banks (and not borrowers), a lot of uncertainty has resulted about whether or not that should include stamp duty. Obviously the banks and their legal representatives would rather it didn’t.
According to Spanish law, it’s the “beneficiary” of the mortgage contract that should be liable for the tax, just as it’s the beneficiary of a contract that should pay the notary fees. Some judges have ruled that it’s the banks themselves that are ultimately the major beneficiary of a mortgage contract since a) they benefit financially from the transaction and b) they are given the house as collateral. Other judges beg to disagree.
Right now, everything is in limbo, but in the coming days or weeks the Supreme Court should provide some much needed clarity. The court could end up ruling that the costs should be shared between both parties, but even in that case it would end up costing the banks billions of euros since roughly eight million mortgages will be affected.
..and a publicly traded bank, with shareholders in the public domain, gets ‘gifted’ for 1 euro to another…? without any bankruptcy proceedings and sale of assets t pay creditors/shareholders???
sounds like a re-write of bankruptcy law.
That wasn’t a free gift at all. Santander agreed to take Banco Popular’s deposits, which are liabilities (a debt owed bank customers, not cash). The amount of those deposits was the amount it PAID to get the iffy assets (bank loans owed by customers to the bank) from Banco Popular.
Whether or not this was a good deal for Santander will be revealed over the next few years as the acquired loan portfolio matures.
We are cursed with the presence of those, who do not know the Basics of the topic’s they pontificate about. Along with their Partisan desires to strike at the others and those with something more than them.
Just goes to show how this can happen and all the financial & legal ,courts etc did or say nothing in regard to what was happening
Amazing takes so long to get to the bottom and as well destroying and then realizing what’s going on
Some system of Watch dog in the dark
The 3 monkeys see hear say nothing then when the suit hits the fan the wolves are out big fees ( stupid people really
“That wasn’t a free gift at all. Santander agreed to take Banco Popular’s deposits, which are liabilities (a debt owed bank customers, not cash).”
…but that’s not bankruptcy procedure… that’s a court doing the dividing… or some kind of limited auction. This increases the risk profile of all Spanish equity holdings. Why would you ever buy a Spanish equity again?
Or more realistically… why would anyone, ever, but a share in a Spanish bank… seeing as you could be left 100% out. That’s a unique position for an equity investor…no equity, even in liquidation… even if its 6 cents on the dollar.
Banks are usually “resolved.” And that’s what happens.
In standard bankruptcies not involving banks, equity holders normally lose all their investment which is handed to creditors. That’s what bankruptcy usually means, a court-determined change in ownership from equity holders to creditors.
Yes, good question, why would anyone want to own shares in smaller Spanish banks.
“Yes, good question, why would anyone want to own shares in smaller Spanish banks.”
Why would anybody Sane want to hold shares in any Club-Med or almost any European Bank (Not including most Swiss Bank’s (NO UBS)).
The chances of a Club-Med State along with the ECB deciding that your solvent Bank (Are there really any truly solvent Club-Med Bank’s), absorb insolvent bank Z for I Eur or more with its liabilities, making your bank investment far less valuable or attractive, without warning, are too high.
Club-Med has hundreds of Bank’s it simply no longer needs in the modern banking System. Many of them Particularly In Italy are simply vessels for multiple fraud’s.