A court case is currently running in France that is of relevance to more than the French.
During two weeks to 29 November, Banque Nationale de Paris Paribas is being sued in the Tribunal correctionnel of Paris (a mid-level criminal court) by lawyers representing borrowers of loans denominated in foreign currency.
The issue is of broad relevance because Eastern European countries are bogged down in a quagmire of the stuff. Millions of naïve customers were sold loans in foreign currencies to finance housing, auto loans, etc. Welcome to the freedoms of the West. It was a bomb waiting to explode. Explode it has, with victim activists pressuring for acknowledgement of wrongdoing and compensation, and litigation in national courts and in the European Court of Justice. Media coverage outside of Eastern Europe of this financial catastrophe has been deplorable.
All this is déja vu in the antipodes. In a rush of blood immediately following financial deregulation in the early 1980s, Australian banks (replicated in New Zealand) flogged foreign currency loans to unsuspecting small businesspeople and family farmers. The Australian dollar plummeted in 1985 (it had only been floated in December 1983) – a disaster for the borrowers. Much litigation ensued, with only a small number of borrowers benefiting from favourable court judgments or out-of-court settlements. The ensuing conflict and litigation was well reported in the local media for over a decade but the news doesn’t appear to have travelled above the equator.
In March 2008. The French banking giant BNP Paribas (via its subsidiary Personal Finance) initiated the offering of housing loans in Swiss francs (CHF). The loan product, designated ‘Helvet Immo’ (immobilier, or real estate), was ultimately sold to over 4,600 borrowers until December 2009. The loans were sold through property consultant firms as advisory intermediaries.
The formal attraction to borrowers, as with foreign currency loans in general, was a lower interest rate than that available in the domestic currency. There was another reputed advantage. The loans were pushed for the purchase of rental properties to be constructed to add to the country’s ‘patrimony, and thus to be eligible for reduction of the borrower’s tax liability. They were pushed as the ideal safe investment for one’s retirement.
However, the monthly payments for these loans were to be in euros, as was ultimate repayment of the principal.
Apart from being rooted in a culture of consummate spivery, BNP’s introduction of Helvet Immo in early 2008 constituted very bad timing. During and after the GFC, the CHF climbed significantly against the euro. That the euro should suffer was in large part due to the excesses of European banks, not least BNP itself, that brought the GFC to the Continent.
When the initial borrowers subscribed to this facility, the euro bought 1.6 – 1.7 CHF. In the initial phase of the GFC, the Swiss Central Bank (BNS) allowed only a small revaluation. But when general banking debt was converted into a sovereign debt blowout in 2010 following governments’ support for the crippled banking sector, the BNS let the CHF float. After the float, the CHF rose to about 1.2 until the BNS stepped in again in September 2011. In January 2015, the BNS again floated the CHF, following which it soon rose to near parity with the euro (it has since retreated marginally to 1.1).
Euro / CHF 2003-2019. Source: fxtop.com
The euro thus experienced a long-term degradation vis-à-vis the CHF. As elsewhere, the borrowers faced a massive hike in their repayment of principal and a comparable hike in their monthly payments in euros.
Journalist Dan Israel, of French online journal Mediapart, covered the early BNP loan disclosures.1 In 2015 Israel reported that one couple had borrowed €120,000 and had already paid more than €60,000 in monthly payments but found themselves at that stage owing more than €140,000. Another client had borrowed more than €330,000, had paid €160,000 but remained indebted at €450,000.
Distressed BNP borrowers began taking BNP to court after 2011. Procedures have been in place in both civil and criminal (pénal) jurisdictions, but the wheels of justice turn excruciatingly slowly in France. The lawyers are seeking judgment and compensation for ‘misleading representation’ (practique commercial trompeuse).
The perennial question is whether the borrowers were given sufficient warning as to the embodied risk due to potential variation in debt principal linked to exchange rate variation – crucial as to the attribution of accountability for the subsequent losses.
BNP chose to market the product only through intermediaries, potentially reducing its responsibility at law. Discovered documents highlight that the bank knowingly minimised the risk to its intermediaries and thus to its borrowers. An early marketing document had a warning of exchange rate variation that disappeared in subsequent versions. Marketing documents consistently emphasised that the product offered ‘security’ and was ‘without risk’.
One Normandy couple was told, as part of their advisor’s aggressive spiel, that BNP was ‘the most powerful bank in Europe’ – ergo, the epitome of trustworthiness (competence, integrity, etc.).
In spite of this evidence, many individual cases heard in civil jurisdiction have been decided in favour of the bank (some on appeal), for reasons unclear. Of those decided for the borrower, compensation awarded has been feeble. There is more optimism emanating from the criminal court, and the bulk of borrower cases in the civil court have been deferred pending the outcome there.
In April 2013, the judge Claire Thépaut, after long studying the dossier, determined that BNP should be put under examination for potential misrepresentation. This was a first stage, not implying culpability. It involved two questions – was the information provided sufficient, and was it deceptive. On 16 April 2015, after questioning the then CEO of BNP PF, Thépaut indicted BNP for misleading representation.
The decisive evidence comes from a whistleblower. On 17 September 2015, Nathalie Chevallier was auditioned in the criminal court. Chevallier was then regional director of BNP PF in Paris. BNP PF was then stagnating and the CHF housing loan was suggested as a means of reviving the subsidiary’s revenue. She was put into a workgroup to work out details. She realised immediately that the proposed facility was dangerous. She wanted ‘crash tests’. She noted that even minor exchange rate variations would be disadvantageous for clients.
But Chevallier was rebuked by her superiors. Her superiors retorted (paraphrasing): ‘Do you think you’re smarter than those who developed this product? You have 15 days to change your mind, or we’ll have to think about your job’.
On 29 March 2017, the Cour de cassation (France’s highest court in commercial matters) ruled that BNP could have prevented the issuing of a dangerous facility. It also ruled that the civil courts of appeal could have examined, on their own initiative, the contract for misleading representation even if the borrowers had not so demanded.
The Cour de cassation also determined that the typical loan contract contained ‘unfair contract terms’ which strategically (and unconscionably) advantaged the bank lender. This ruling is consistent with (indeed mandated by) European Union consumer law – law that the Eastern European victims are hoping to leverage for their own pursuit of justice.
In early April 2017, BNP PF was belatedly arraigned before the Tribunal correctionnel for criminal prosecution. Two and a half years later …
Thus on the first day of the current hearing, 12 November, the courtroom was packed to the gills with borrowers and their legal representatives. On the other side, BNP masked its solitariness with its battalion of lawyers, etc.
BNP’s lawyers still insist that the FCL facility was a casualty of the CHF surge following the 2010 sovereign debt blowout, which was ‘unforeseeable.’ Buyer beware! In any case, claim the lawyers, BNP offered the borrowers conversion options.
Tell that to Guiseppe and Sonia, retirees from running a restaurant in Nice. Guiseppe has been recently reported as claiming, ‘We were deceived … When I asked what difference there was between borrowing in swiss francs or in euros, the financial advisor replied – there’s no difference’. They are in the same predicament as those cases cited above. They borrowed €115,000 in 2008, they have been paying off €745 a month over 10 years, but their debt stands at €145,000. In short, a nightmare.
One couple notes the humiliation associated with their loss. From the hope of being able to assist their children they are now dependent on them.
But back to 1980s Australia for a telling vignette. BNP then operated a subsidiary in Australia, promoting itself as a high class entity amongst local banking yokels. It cynically offered a FCL to small-scale property developers who were directed to BNP for informed advice. BNP proffered to the know-nothings sophisticated skills to handle this unique facility. Not atypically in small business Australia, the country having experienced a massive wave of immigrants from post-1945 Southern Europe, the borrowers were semi-literate in English and totally oblivious of the nuances of cowboy financial intermediation.
The borrowers took BNP to court. The judge (Foti v BNP, South Australian Supreme Court, 1989) granted negligence, duty of care on the part of the bank and causation (i.e., customer avoidable loss due to bank failure to advise). BNP, as did the Australian banks, abused its reputation as a reputedly trustworthy institution and its asymmetric power in the entrapment of financially ignorant customers.
Fortunately for BNP, the loss at litigation was only partial. The point here is that BNP was party to an environment in which the intrinsic technical flaw in FCL loans became transparent. The losses to thousands of hapless unsophisticated played out in the Australian courts, the media and public inquiries over fifteen years. In its extensive foray into lending in CHF in 2008, BNP chose to forget this previous experience and to hide the dysfunctionality of such a facility for borrowers.
The decisions of the criminal court to date and of the Cour de cassation represent a seismic shift in the balance between bank and borrowers – they constrain the civil courts in their determinations. The determinations of the Cour de cassation effectively damn intrinsically the foreign currency character of the Helvet Immo facility.
Two factors make the French litigation regarding this facility unique. The first is that the media consistently refer to such loans as ‘toxic’ – that is, not fit for purpose. It appears that the Cour de cassation confirms the accuracy of the appellation. The second is that litigation is proceeding in a criminal jurisdiction, in my understanding an unprecedented development.
Apart from the 4,600 French casualties of BNP’s chicanery, millions of Eastern European FCL borrowers will be awaiting expectantly the French court’s deliberations.
- Dan Israel, “Prêts toxiques de la BNP: un témoin clé veut parler [BNP’s toxic loans: a key witness ready to speak],” Mediapart, 17 September 2015.