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Foreign currency loans and mortgages embed a considerable risk due to exchange rate fluctuations which may increase the cost of borrowing.  Loans and mortgages in Swiss Francs became popular in Cyprus after 2006 as the cost of borrowing in Swiss Francs was relatively law. Particularly, within the period 2006-2009, thousands of investors and consumers took out loans in Swiss Francs. However, the sudden appreciation of the Swiss Franc towards the Euro worsened the position of those who had taken loans in Swiss Francs and caused considerable losses to borrowers and financial institutions. In addition to this, the restructuring of non-performing loans became more challenging.

The main issue is that financial and banking institutions should shape their decisions by considering the exchange rate fluctuations. Banks are obliged to inform their customers about the risks of foreign currency loans and mortgages. Before granting a foreign currency loan, banks should take into consideration the ability of their customers to assess the potential emerging risks, especially the risk of exchange rate fluctuations. The financial institutions must have a transparent approach towards foreign currency loans and warn their customers accordingly.

Cyprus banking and financial institutions failed to estimate the complex nature of foreign currency loans and mortgages. Furthermore, they based their decisions on the available information they had at a particular time. In many cases, banks urged their customers to obtain a loan in Swiss Francs without providing them with the necessary information. Banks did not take into consideration the ability of their customers to assess and comprehend the embedded risks of foreign currency loans.

Recent Court Decisions:

Borrowers have been affected by the sudden appreciation of Swiss Franc towards Euro. Nevertheless, the increase of repayment cost and losses are correlated with the transparency of Cyprus banking and financial institutions regarding the provision of detailed information about the embedded risks of foreign currency loans and mortgages.

The European Court of Justice tends to rule in favour of the borrowers regarding cases related to foreign currency loans. The objective of the European Court of Justice is to protect consumers and investors against non-transparent selling practices. Specifically, the decision of the European Court of Justice in the case C-26/13, Árpád Kásler and Hajnalka Káslerné Rábai versus OTP Jelzálogbank Zrt[1] was based on the Directive 93/13/EEC (unfair terms in consumer practices).

The article 4(2) of Directive 93/13/EEC[2] underlines that the contract must be drafted in plain and intelligible language. In other words, the customer must comprehend the terms and conditions of the loan contract he/she is going to sign with the bank. Furthermore, the bank is obliged to provide the necessary clarifications. Article 5 of the aforementioned Directive highlights that if ‘there is a doubt about the meaning of a term, the interpretation most favourable to the consumer shall prevail’.

The District Court of Nicosia issued two interim orders, following a lawsuit submitted by the borrower and the guarantor against the bank[3]. According to the evidence, the bank did not provide the necessary information regarding the risk of exchange rate fluctuations. Furthermore, the employees of the bank did not have the necessary skills and knowledge to assess potential emerging risks caused by exchange rate fluctuations.

The Court examined all the available evidence and judged that the calculation of the interest rate was not clear in the loan agreement. As a result, the Court issued the following two interim orders:

  1. The first interim order ‘’freezes’’ the monthly repayment of a mortgage loan in Swiss Francs;
  2. The second interim order disables the bank to sell up two life insurance contracts;

How can we help you?

Foreign currency loans and mortgages require proper risk assessment and detailed information. Given the complexity of this topic, banks should take into consideration the ability of their customer to assess all the embedded risks. In addition, banks should inform their customers about all the emerging risks and assist them to make wise investment decisions. In case you have taken out a foreign currency loan without having the necessary information and support then you should seek professional legal advice.

Our experienced team of Cyprus lawyers is able to advise you on all aspects of banking and finance. Michael Chambers and his team will examine together with you all the facts provided by you and provide the best possible representation. The legal team of Michael Chambers & Co. LLC will guide you all the way and assist you to succeed in your claims. If you wish to speak to one of our lawyers, in absolute confidence, then please contact us: info@chambers.law