Code of Conduct for Banks: The first 3 years of its implementation and the involvement of the judiciary in the resolution of banking disputes

Legal Insight

December 2017

George Psarakis LL.M. (mult.), PgCert

Summary: The Code of Conduct for Banks applies from 31/12/2014 and concerns the out-of-court settlement of loan obligations of businesses/households to all financial institutions in Greece, even those in liquidation, including leasing companies. Almost three years have passed since its implementation and it is interesting to examine (a) what practical changes it has brought about in the relationship between the borrower and the credit institution and (b) what is the position of our courts on the various issues that arise during its implementation. 

The Code of Conduct for Banks applies from 31/12/2014 and concerns the out-of-court settlement of loan obligations of businesses/households to all financial institutions in Greece, even those in liquidation, including leasing companies. Almost three years have passed since its implementation and it is interesting to examine (a) what practical changes it has brought about in the relationship between the borrower and the credit institution and (b) what is the position of our courts on the various issues that arise during its implementation. 

The Code provides for regulations that describe in detail all the negotiation steps - the so-called "Delay Resolution Procedure" - that must take place when a debt becomes overdue for more than 60 days, as well as when a borrower of a contract terminated before 1.1.2015 applies on his/her own to join, while submitting the necessary documents to assess his/her ability to repay the debt.

This procedure starts with the financial institution's informative letter to the borrower, continues with the submission of the latter's financial data and any face-to-face meetings with bank representatives, and ends with the exchange of written proposals for settlement (within predetermined time limits, in a specific order and with mandatory content) and the reaching or not of a settlement agreement. After the borrower has submitted the financial data, the bank is obliged to submit a written proposal for a settlement, which must include at least certain details (interest rate, repayment period, number of instalments, etc.), while the borrower has the option of either accepting it or proposing his own position. The bank then either agrees with the borrower's counter-proposal or submits its second and final proposal in writing, a proposal on which it must await the borrower's agreement or disagreement. As stated in a relevant 2017 court decision (Athens Court of First Instance): 'In particular, for each category of borrower and guarantor, indicative elements such as the borrower's financial situation, the total amount and nature of his debts, his current ability to repay his debts, his history of financial behaviour and his projected ability to repay the debts are assessed. If, in particular, the borrower or guarantor is an enterprise, elements such as the business plan submitted shall also be assessed, irrespective of the legal form of the enterprise. Throughout the assessment stage, the institution must make every reasonable effort to cooperate with the borrower in order to accurately determine the borrower's ability to repay the debt, with a view to arriving at an appropriate solution'.

According to the Code, when the borrower is cooperative, the bank cannot terminate the loan before all the above steps have been faithfully completed. As stated in a relevant 2017 court decision (Athens Court of First Instance), "It follows from the above that the Code requires institutions bound by it to comply, inter alia, with the five stages of the ICR of the Code before the institution proceeds to terminate the relevant contract and initiate legal actions to enforce collection of the overdue debt". In other words, the bank cannot unilaterally judge, by assessing the borrower's financial data, that there is no scope for negotiation, i.e. that there is no point of convergence, and therefore take the decision on its own to terminate the talks and terminate the loan before even making a written proposal for a settlement or a final proposal for a settlement. Such a termination would be invalid, not only as abusive but also as contrary to a prohibitive provision of law. Also, the bank cannot make unsubstantiated proposals or unreasonably refuse viable counter-proposals from the borrower because in this case too, the resulting termination of the loan could be held invalid as abusive. 

The crucial question, however, is how to protect the borrower who, while responding in good faith to the Code's procedure by providing all the financial information requested, is faced with the termination of his contract by the credit institution which either disregards the application of all the stages of the Code or formally complies with it but has renounced the spirit of its provisions. The Code of Conduct has not explicitly provided for ways and conditions for the involvement of the judiciary, so that the protection of the borrower from any abusive/unlawful actions by banks is predetermined and clear. Therefore, it is left to the individual borrower to deal with these issues through the exercise of the "judicial" power of our courts, which have the final say on the illegality or otherwise of the termination and on the correctness or otherwise of the Code. Of course, it should be pointed out that the legislature's purpose was not to resort to the courts but to resolve the dispute out of court. But it could never be possible to resolve a dispute out of court between two parties who are in a totally unequal position if we did not accept the possibility of the weaker party having recourse to the assistance of the judiciary.

 In banking practice and within the offices of the arrears departments of the mainly systemic banks, we have often seen a formalistic application of the Code, simply because compliance with it has been imposed by their competent legal departments. The proposals made are often not aimed at a viable resolution of the dispute, but at obtaining as much security (collateral and collateral security) as possible and securing the bank's position with as few concessions as possible. In particular, moreover, in cases where the value of the collateral exceeds the amount of the debt, the bank prefers to terminate the contract and immediately liquidate the assets through auctions, etc. rather than settle the debt by refusing to submit settlement proposals under the Code.

In the above cases of violation of the Code, the borrower has only one escape: recourse to the courts. Any complaint to the Bank of Greece, in its capacity as the supervisory body of credit institutions, will have little effect since, according to the Code, "... the Bank of Greece accepts complaints, which it investigates exclusively for the purpose of assessing the degree of compliance of institutions with the actions required by this Code, without, however, dealing with individual disputes arising between creditors and debtors which result from the application of the Code of Conduct, whether they concern the substance of the arrangement or the procedure followed to achieve it'. 

At the judicial level, therefore, because of the recent adoption of the Code, a large number of court decisions have not yet been handed down to settle our jurisprudence on the disputed points of the Code. The main issue that is disputed and is the "bone of contention" for the opposing parties in the courtrooms is whether or not the failure to comply or properly comply with the Code prior to the termination of a loan results in the invalidity of the termination and therefore the invalidity of all subsequent enforcement actions. On this issue, there are already rulings in favour of the view that failure to comply with the Code has only supervisory consequences for the bank, i.e. sanctions by the Bank of Greece, and no other consequences as regards the validity of the termination. For example, in a relevant court decision of 2017 (Heraklion Court of First Instance) the following is mentioned: "In particular, for the assessment of the appropriateness of any solution, the need for the institution to comply with the applicable supervisory requirements, as well as the more specific guidelines for the management of arrears which the BoE has set out in its PEE 42/30.5. 2014 to the institutions supervised by it for the design and assessment of viable types of arrangement [... ] First of all, it does not follow from any provision of the Code that its protective purpose includes the control of the validity of the attempted (contractually provided) complaints, the content of which, moreover, is not disapproved by the law, on the contrary, the purpose of the (Code) is to select the 'most appropriate' solution in each case to the ever-increasing number of overdue loans, after taking into account the institutions' obligation to comply with the applicable supervisory requirements and the guidelines of the Bank of Greece ('BAG'). [...] In view of the above, it follows from the purpose and the text of the Code that any breach of the rules constituting the ICR entails only sanctions of a supervisory nature and, therefore, the failure of the institutions subject to the ICR to comply with the ICR does not render the complaint lodged null and void'; or in another decision of a court of first instance to the same effect: "Consequently, it is also clear from the letter of the Code that the non-compliance with the ICR by an obligated institution constitutes a breach of a supervisory obligation, giving the CBC, as the supervisory authority, the possibility to require the non-compliant institution to take the necessary measures and to impose sanctions, without it being clear that Law no. 4224/2013 or the Code also aims at inducing nullity in cases where the complaint has been made without compliance with the CPC'.

These judicial decisions, however, are based on a mistaken reasoning that the Code is solely aimed at protecting the banking system. The truth is that the provisions of the Code serve a dual purpose: (a) to speed up the recapitalisation of banks and (b) to protect and more fully inform borrowers. The fact that the Code in question was also intended to protect private interests, and in particular the interests of borrowers, is most evident from the explanatory report of the law under which the Bank of Greece was authorised to issue the Code (Law 4224/2013). The following passage is typical: "With the submission of the present draft law to the Parliament for enactment, the Government is implementing an important commitment in order to establish a permanent mechanism for the support and management of private debt, so that, in conjunction with the existing legal framework and the improvements made by the Government, it will constitute a permanent pillar of protection for indebted citizens to make a new start. [...] Indeed, the Government's objective through the permanent mechanism for the protection of the citizen in matters of private debt arrears is to establish a relationship of trust between the credit institution and the borrower, to provide customers/borrowers with effective information, to deal with each case on a case-by-case basis and to provide alternative debt restructuring with solutions that correspond to the economic reality of each case'.

These are therefore provisions that protect both the public interest, such as the proper functioning of banks, and the private interest, such as the protection of over-indebted borrowers, by setting out a specific framework for the behaviour of credit institutions in cases of late or no payment of their claims, and by specifying the general principles of good faith and good commercial practice. In this respect, the Athens Court of First Instance ruled the following in 2017: "The above provisions are aimed at serving both the public interest, such as the sound and orderly operation of banks, and the individual interests of borrowers, in order to ensure that those of them who face repayment difficulties are guaranteed the cooperation of the credit institution in order to formulate a viable solution for the servicing of the loan. In these circumstances, the rules provided for by the Code constitute mandatory law, both because they are laid down pursuant to Article 1 of Law No. 4224/2013, as well as because they are a specification of good faith and commercial morals (281 CC), which govern every legal relationship under private law. Therefore, in the event that the bank does not comply with its obligations in this respect and terminates the loan agreement before the conclusion of the Default Resolution Procedure, this termination will be null and void (174, 180 CC)'.

Another issue worth mentioning is the protection of the borrower before the bank, in breach of the Code, has had time to terminate the credit agreement. In this case, the borrower may, if he proves that termination is imminent, apply to the competent court, by means of an injunction procedure, to prohibit the termination of the contract until the Code has been complied with and all stages of the procedure have been completed. For the sake of clarity, we cite the actual context of a relevant court decision:

In a company which had overdue debts of more than 60 days (non-repayment of 2 monthly loan instalments), the bank initiated the Code as it was due, to the provisions of which the company responded with complete sincerity and cooperation (submission of the financial data requested, face-to-face meetings with its representatives, preparation of its proposed proposal for an arrangement to facilitate the bank). However, the bank considered, according to a telephone call from one of its employees, that there was no possibility of convergence and would therefore terminate the loan. The company immediately took legal action by filing an application for injunctive relief. This application was granted, bringing the bank back to the negotiating table, which made it clear to the bank that it cannot take unilateral action and that it must negotiate in good faith within the framework of the Code with the real objective of reaching a viable settlement solution. In particular, the operative part of the judgment of the Athens Court of First Instance was as follows: "The first of the defendants is prohibited from terminating the agreement no. ... loan agreement until the conclusion of the Arrears Resolution Procedure and in particular until a period of 15 working days has elapsed since the submission of a written proposal by the first defendant. [...] It threatens the first defendant with a penalty of one hundred thousand (EUR 100 000) if it terminates the loan agreement before the conclusion of the Default Resolution Procedure as set out above and of five thousand (EUR 5 000) for each case of non-acceptance by the applicant of payment of the monthly instalment fixed above. It threatens the second of the defendants with a personal detention of one month in the event of termination of the contract before the conclusion of the Delayed Action Procedure. 

To sum up: the Greek legislator, borrowing from the procedures followed in other EU countries, has precisely defined, through the Code of Conduct for Banks, the framework within which negotiations between financial institutions and borrowers must now be conducted. However, the borrower cannot rely solely on the expectation of a good faith attitude on the part of the bank, whose old habits often lead to the circumvention of these rules. The final judge of the legality of the conduct of both parties involved is the judiciary. Neither can borrowers abuse procedures put in place for the purpose of regulating non-performing loans (NPLs), but neither can credit institutions obey the legislative framework of the Code in a sham manner, closing the door to reasonable and feasible proposals on behalf of borrowers by pursuing maximalist strategies. 

(for more see here and here)