The creditors’ cartel case that gradually developed into a decade-long proceeding since its outset in 2011, landing first before the Hungarian Competition Authority, then the Budapest Metropolitan Courts, eventually to be addressed at the European Court of Justice for preliminary ruling, seems to come to an end with the July 2020 decision of the Metropolitan Tribunal of Budapest. Yet this case which gravely affected both the private debtors and stakeholders of the Hungarian banking sector still leaves us several implications to consider. What, if any, message does the early repayment cartel case convey to the Hungarian legislation, to stakeholders of the banking sector or for that matter to private debtors?
This article is to provide an insight into the implications of the case that began in 2011 when the Hungarian Competition Authority (HCA) initiated antitrust proceedings against thirteen credit banks for a suspected cartel. The cartel would aim to limit the prospective loss from early repayments that were facilitated by measures of the Hungarian government in response to the exchange rate fluctuations that impacted private mortgage debtors in the aftermath of the 2009 economic crisis.
Hungarian Banking Association: State intervention gone astray
The underlying story began on 19 September 2011 when the Hungarian parliament adopted the Act CXXI of 2011 on early credit-repayment (Early Repayment Act), which would allow private debtors to issue repayments at a fixed currency rate, cutting off the impact of exchange rate fluctuations. To prevent the advancing social crisis caused by ever increasing mortgages the government intervention aimed to save debtors from potential eviction from their homes. In September 2011, however, the Hungarian Banking Association submitted a motion to the Constitutional Court to request the revocation of the Early Repayment Act, arguing that the expedited promulgation of the act infringed, in multiple points, the Act on Legislation, primarily because it did not leave sufficient time for stakeholders to prepare for consequences of the changing legal environment and because the responsible committees failed to carry out any appropriate impact assessment of the economic consequences.
Exchange rate changes and the increasing, massive number of simultaneously submitted credit requests placed direct and enormous financial pressure on banks. Several faced liquidity problems and had to resort to layoffs, to organizational changes, some enterprises were considering an exit from the Hungarian market. By December 2011, soon after the Early Repayment Act took effect, nearly one hundred and twenty-thousand debtors submitted early credit repayment requests. In its belated response the Constitutional Court eventually rejected the Association’s motion in 2013.
In the meantime, just a couple of days before the Act took effect thirteen stakeholders of the banking sector, including chief executives, risk management specialists and other delegates held a number of retail risk breakfasts as a forum for informal discussion of the prospective steps to be taken. The talks centered on early repayment risks and ideas to cut the prospective, attributed loss. The first meeting, held on 15 September was followed by two subsequent rounds on 29 September and 31 October, where participants already discussed lending limits to cut massive credit refinance loans, and also considered to raise loan interest rates.
Competition Authority: 9.5 billion penalty for creditors’ cartel
The retail risk breakfasts’ purpose and subject were reported by multiple sources to the Competition Authority on the grounds that the meetings raised antitrust concerns, and the Authority initiated competition proceedings against the participant banks in November. The Competition Authority closed its two-year proceeding in 2013 with its decision, imposing a penalty of HUF 9.5 billion on cartel participants, based on the Hungarian Competition Act and the HCA’s Penalty Notice (the authority’s methodology applied to determine a numerical value for specific types of infringements, based on gravity, alleviating factors and other aspects). The decision concluded that the retail risk breakfast participants shared common intention to adopt a comprehensive plan to limit early credit repayments, which they intended to carry out by a concerted action to cut back refinance loans, for instance, by serial raise of loan interest rates. According to the decision the retail risk breakfasts provided a forum for participants to concert their market actions by sharing business secrets and strategic information, and four participating banks continued the arrangements by attending bilateral consultations. The HCA decision highlighted that among the banks subject to the proceeding, 8 banks implemented the planned action to cut back early repayment by limiting their participation in issuing repayment loans during the period between 2011-2012 that was assigned by the government to settle the early repayment requests.
At any rate, the HUF 9.5 billion penalty imposed eventually on 8 banks still came unexpected, because the banks (at least in their standpoint) did not intend to discuss specific, comprehensive and concerted plans for action, furthermore, the HCA’s proceeding eventually did not prove factual market effects of the cartel (that would have resulted in factual limitation of the competition between credit offers). The banks’ legal counsel also highlighted that the HCA, in its earlier proceedings and practice did not qualify the type of informal discussions that took place in 2011-2012 as a hardcore cartel (i.e. the gravest form of antitrust law infringements). Out of the 8 banks obliged to pay penalty, 6 banks initiated administrative lawsuit against the HCA, in their claim they contested that the retail risk breakfasts at all qualify as competition law infringement, and they argued that the HCA failed to provide justification of the calculation of penalties for each involved bank.
Curia: Procedural errors of the HCA do not compare to the gravity of cartel damage caused by banks
A decision in favor of private debtors was foreseeable—the economic crisis, the protection of private debtors, the burden of public opinion and legal policy did not spare the courts and justice either. The claimant banks lost the lawsuit they initiated in 2013 against the HCA both at the first and second instance. The claimants submitted a judiciary review claim in 2014 to the Curia (Supreme Court) against the decision of second instance issued by the Metropolitan Tribunal, arguing that the HCA committed several competition proceeding infringements, violated fundamental rights of the claimants, and provided a faulty market competition impact assessment. The Curia, in scope of the evaluation of aggravating circumstances, with regards to the interpretation and qualification of repeated infringement, submitted a request for preliminary ruling to the European Court of Justice. In its decision the Curia eventually obliged the HCA to repeat the proceeding, due to faulty calculation and the omission of justification of the penalty calculation method. At the same time, the Curia also confirmed that the participant banks’ action qualified as infringement and as such, it exhausts the criteria of a hardcore cartel.
The repeated HCA proceeding and 2020 July decision of the Metropolitan Tribunal
In the repeated proceeding the HCA halved the total penalty for the 6 banks, but it applied a new Penalty Notice (method of calculation) and—contrary to the banks’ expectations—it did not reduce each penalty proportionately, so the banks, dissatisfied with the decision once again filed claims for administrative lawsuit against the HCA’s decision. At this phase of the proceeding, however, the claimants could no longer contest the HCA’s declaration on the infringement and the existence of the cartel, the scope of the claim was limited to assess the justification of the method used for the calculation of the penalty. The claimant banks argued that the HCA erroneously applied calculations relevant to specify the sum of the penalty, in that the HCA took into consideration 1 and only relevant product market despite the fact that there were two different product markets relevant from the aspect of the limitation of market competition. That is credit refinance loans qualified as 2 different products because they were issued for two different purposes, mortgage repayment and untied repayment. Furthermore, the banks argued that the HCA failed to deduce from the sum of relevant turnover all tax payments and statutory payments made to consumers for the banks’ unfair commercial practices, so the HCA faultily based the calculation of penalties on wider product market and higher turnover.
Eventually, the Tribunal evaluated the claimant banks’ statements on the HCA proceeding ungrounded, in its final decision the Tribunal highlighted that minor procedural errors of the HCA do not render the decision void and will not compare in gravity and consequences to the cartel conduct and liability for competition law infringement of the claimant banks.
How to proceed: the case’s impact on legislation
The Tribunal’s decision therefore obliged the six banks to pay a record sum of penalty (even after substantial reduction). So, at first glance it seems that the outcome of the nine year-long proceeding does not substantially differ from the result of the HCA’s (repeated) proceeding. What is sure, the decision serves as a precedent with an impact reaching beyond judiciary practice, shaping the aspects of legislation, and guiding continued operations of the stakeholders of the banking sector. The purpose of the questions and claims that were raised during the years of extended proceedings and that received substantial media coverage was to drive legislators and bankers at more efficient and proactive cooperation or at least, collaboration. Such collaboration, for that matter, the consideration of proposals of the Hungarian Banking Association along with justified interests of private debtors would possibly prevent hastily made legislative steps and economic setbacks.
Message of the Constitutional Court: the foreign currency acts and the 2020 repayment moratorium
During the nine-year proceeding, the Constitutional Court issued several decisions in relation to the early repayment case. During the summers of 2014 and 2015, in consideration of the two acts on foreign currency conversion, new constitutional complaints were filed to the Court against legislation on credit repayment. Most recently, in the Spring of 2020, the credit-repayment moratorium, introduced by the government as a compensation against the economic setbacks of the Covid-19 pandemic raised similar concerns.
In 2013 the Constitutional Court rejected the complaint of the Hungarian Banking Association issued in 2011 for the infringement of the act on legislation, in which banks were opposed to the early repayment act’s expedited promulgation. The Association highlighted that the legislation, omitting the impact assessment to evaluate potential adverse effects of the repayment on economy, simply disregarded the most deeply affected sector’s capacities, resources as well as directly involved stakeholders’ justified interests. Despite these facts, the Constitutional Court gave priority to the Early Repayment Act’s legal and social-political purpose, not contesting the lawfulness of intervention that was aimed to prevent an advancing social and economic crisis in an unprecedented emergency. So it rejected the Hungarian Banking Association’s complaint. The Constitutional Court highlighted that the decision is a singular instrument of the economic crisis management.
In later cases of similar nature, in 2014 and 2015 the Court considered aspects of the operation of banking sector and rejected private debtors’ complaints on new legislative acts about the fixing of foreign currency exchange rates. According to the justification of the Constitutional Court individual repayment cases of foreign currency credit debtors cannot be considered as an equivalent of the 2011 economic crisis situation that demanded the introduction of special instruments to facilitate credit repayment of mortgage debtors to save homes from prospective evictions.
Along with the decisions of the Constitutional Court, the final decision of the Metropolitan Tribunal issued in July in the 2011 early-repayment cartel case also led Hungarian legislation to act with more circumspection in situations that may necessitate intervention to the flow of economy. Such instrument, applied to compensate the economic setback of COVID-19 pandemic, includes the credit repayment moratorium that would offer debtors the option to delay repayments until the end of year at the same time allowing banks to raise interests rates if necessary. The message to private debtors, both from the Constitutional Court and the moratorium conditions is to plan private loans and repayment with more financial awareness, one gain among multiple losses that ensued from the 2011 early repayment case.