“Floor clauses” (cláusulas suelo) contravened European law and was unfair to customers.

The European Court of Justice (ECJ) on December 2016 ruled that a Spanish Supreme Court decision capping lenders’ liability for so-called “floor clauses” (cláusulas suelo) contravened European law and was unfair to customers.

These clauses set a “floor” or minimum interest rate that clients have to pay the bank, even if the benchmark rate – normally the Euribor – drops below that rate. However, with the Euribor rate dropping to historical lows in late 2008, customers with these loans failed to benefit. There is possibly 2.5 million mortgages with so-called “floor clauses” in Spain. In other words, in this case, the mortgage cannot benefit from a low interest rate and from the successive drops that may occur, as the minimum interest rate is “shielded” and any interest rate set below the one established in the “floor clause” cannot be applied. For several years, the Euribor rate has been very low and these clauses have represented considerable losses for many customers.

Spain’s banking industry has been on tenterhooks in the lead-up to Tuesday’s decision as it waited to learn if refunds would only date to 2013, or whether the refunds would be applied retroactively to 2009 on, the year in which the banks began to apply floor clauses. With some 2.5 million mortgages with floor clauses in Spain, the difference is huge: estimated at between €3 billion and €5 billion.

In its ruling, which cannot be appealed, the ECJ said the Spanish Supreme Court’s 2013 decision to limit refunds to the period from May 2013 on – a ruling made to protect a debt-ridden Spanish banking sector still reeling from the bank bailout – “failed to provide complete protection” to consumers” and “did not constitute an adequate and efficient means of an end to abusive clauses.”

In July, an EU Advocate General praised the Supreme Court’s role in protecting the banking sector under exceptional circumstances, a statement which gave lenders hope for a favorable decision.