Consumer loans in the Czech Republic: another defeat for adamant lenders in the fight for who pays the costs of early repayment!

Background and issue

Early repayment charges in consumer lending in the Czech Republic have been a source of conflicting interpretation since the enactment of the Consumer Credit Act (Act No 257/2016 Coll.) in 2016 (the Consumer Credit Act). Under one of its controversial provisions, the Consumer Credit Act states: “in the event of early repayment of a consumer loan, the lender is entitled to reimbursement of reasonable costs incurred in connection with the early repayment”. The issue, discussed in this article, is which costs will fall within "reasonable costs" and who is winning in the war on who pays them.

What constitutes "reasonable costs"?

The law has provided very limited guidance on what constitutes "reasonable costs". As a result, numerous financial institutions have argued that such costs should comprise not only administrative costs, but also commission, loss of profit and other costs. The costs sought by lenders for early repayment of consumer loans have often been sizeable.

Czech National Bank Opinion

In order to limit differences in how this provision is interpreted and to attempt to unite market practice on this, the Czech National Bank issued an interpretative opinion in 2019, firmly supporting consumers. In this opinion, the Czech National Bank limited "reasonable costs" to “objectively necessary costs associated with early termination of the agreement, the amount of which is justifiable”.

Lenders' response to the Czech National Bank Opinion

The vast majority of lenders quickly adapted to the position of the Czech National Bank and indeed advocated corresponding changes in legislation. However, some financial institutions opposed this approach and continued their previous practice, implying that the impact of the Czech National Bank Opinion should not be overstated, given its "soft law" nature.

Approach of the Czech Regulator

The Czech Regulator however took a firm stance and initiated administrative proceedings for violation of the Consumer Credit Act against those financial institutions that decided not to fall in line. The outcome? So far, the Czech National Bank has imposed sanctions on certain financial institutions, amounting to several million CZK. The majority of these fines have been upheld by the Bank Board; the appellate body of the Czech National Bank.

Approach of the Financial Arbiter

The Financial Arbiter also concurred with the Czech National Bank, resolving that the costs charged by financial institutions to their clients in connection with early repayment should be limited to administrative costs. Examples given by the Financial Arbiter were administrative fees, postage, printing and copying costs, telephone charges and office supplies. In terms of figures, it was suggested as a guide that in practice the costs would typically amount to several hundred CZK and would rarely exceed several thousand CZK.

How have lenders responded?

While the majority of the sanctioned lenders have acknowledged the verdict, some have indicated they intend to challenge the Czech National Bank's resolution and imposition of sanctions at the administrative courts.

Breaking the civil courts’ silence with a landmark case!

In addition to the proceedings discussed above, financial institutions have faced pressure from numerous consumers who have taken the initiative and brought civil lawsuits against them, seeking damages for excessive early repayment costs.

The majority of such proceedings settled, rendering mute dissenting voices, until very recently! In August 2022, in a landmark case, the District Court for Prague 2 ruled in favour of a consumer who sought the return of costs for early repayment in the sum of almost 50,000 CZK. This sum clearly exceeds justifiable costs according to the Czech National Bank opinion.

Effect of the decision of the District Court

This is the first instance in which the controversial provisions of the Consumer Credit Act have been interpreted by an independent authority, other than the Financial Arbiter. It may inspire further consumers to file compensation claims against adamant financial institutions. We wait to see if the lender in this landmark case will appeal the resolution.

The war rages on

Despite the District Court's recent decision, it is clear that the war for costs for early repayment is far from over. We keenly await the approach of the administrative courts to see whether they will uphold the approach of the Czech National Bank.

It is possible that this issue could be resolved via an amendment of the Consumer Credit Act to clarify the scope of "reasonable costs". A proposal to clarify the scope was discussed within parliament in 2021, however this did not result in any such amendment.

Given that discussions are growing within parliament on windfall taxes and their potential application to financial institutions, it appears unlikely that financial institutions will turn the tide in their favour on this particular battlefield.