Background
In any French financing transaction, the lender is obliged to inform the borrower about the overall cost of the financing (outlining ancillary costs as well as the interest rate applicable to the deal). This is required by the Taux Effective Global (TEG), which is part of French public policy (ordre publique) and cannot be waived by the contracting parties. Consequently, it applies to all financings, including those involving foreign lenders and French borrowers.
Enabling law
Law 2018-727 of 10 August 2018 granted powers to the Government to amend those provisions of the Monetary and Financial Code and the Consumer Code which owe their provenance to the TEG. This enabling law gave the government a dual mission:
- to remove the obligation to set out all financing costs in all floating rate interest credit agreements involving corporate borrowers, and
- to clarify and standardise the civil penalties applicable in the event of error or failure to comply with the informational requirement under the TEG, in order to ensure that these civil penalties are proportionate to the damage suffered by borrowers; and to meet the requirements of European law in this area.
The outcome
The first objective seems to have been abandoned by the government following the consultation of small and medium sized companies, which lobbied for this obligation concerning financial information to remain. Unfortunately, lenders of variable interest rate loans to corporates must therefore continue to calculate and set out full financing costs.
In connection with the second objective, the government has reformed the civil penalties applicable in the event of a failure to comply with the TEG by issuing the ordinance dated 17 July 2019 (the Ordinance). Penalties will apply, both at the pre-contractual stage and at the time of conclusion of the contract. The reform modifies the provisions of the Consumer Code and the Monetary and Financial Code. These Codes now provide that the lender may be deprived of the right to interest in a proportion determined by the court, which will have regard to the damage suffered by the borrower.
This reform is reminiscent of certain solutions adopted by the courts in the real estate arena, in the event of an erroneous TEG having been included, or a failure to include details in their entirety. In addition to the harmonisation of penalties, the Government indicates in the report accompanying the Ordinance that the new penalty is more proportionate, which until now provided for the total forfeiture of the right to interest, from the execution of the contract onwards, or the substitution of the legal interest rate as quoted by the French Government for the purposes of calculating interest.
Although the Ordinance entered into force on the date of its publication, it has yet to be ratified (a ratification bill was tabled on 2 October 2019 in the National Assembly).
