48.3. Quantitative data

On 11 September 2019, the CJEU judgment in case C-383/18 was published. In its ruling, the CJEU stated that Article 16(1) of Directive 2008/48/EC of the European Parliament and of the Council of 23 April 2008 on credit agreements for consumers and repealing Council Directive 87/102/EEC should be interpreted as meaning that the consumer’s right to reduce the total cost of credit in the event of an early repayment includes all costs that have been imposed on the consumer

Based on the legal interpretations in its possession, for the settlement of credit costs with borrowers the PZU Group applied the linear formula whereby a pro rata approach is adopted based on the period between the actual loan repayment date and the repayment date specified in the loan agreement and requires that any non-recurring cost be broken down on a pro rata basis across all payment periods.

In the case of early repayments of consumer and mortgage loans made before the date of the CJEU judgment, the PZU Group estimates the amount of expected disbursements pursuant to IAS 37 and recognizes a provision for this purpose which is charged to other operating expenses.

In 2022, PLN 48 million of the provision was utilized and its amount as at 31 December 2022 was PLN 127 million (as at 31 December 2021: PLN 120 million). Its value is the best possible estimate based on the historically observed trend of the amount of loan cost refunds arising from reported complaints and takes into account the scenario of a possible evolution of market practice or the regulator’s views. The estimates required the adoption of expert assumptions and are affected by uncertainty.

For this reason, the provision amount will be subject to updates in the next periods, depending on the number of complaints and amounts to be refunded.

Significant assumptions applied for the estimation of the provision include the change in the rate of decline in the refunded amounts.

On 3 October 2019, CJEU issued a ruling regarding the effects of possible abusiveness of the provisions of an individual agreement on a CHF-indexed loan granted by one of the banks. CJEU interpreted the provisions of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts in the context of the Swiss franc-indexed loan agreement. CJEU specified the effects of declaring the possible abusiveness of the conversion clauses by the national court, without analyzing at all the possible abusiveness of the contractual provisions. CJEU did not rule that if the national court deems a clause abusive, then it should automatically declare the entire agreement invalid. An assessment in this respect is up to the national court, however CJEU did not rule out the possibility of supplementing the gap resulting from the abusiveness of the conversion clauses using national supplementary provisions.

The CJEU ruling provides general guidance for Polish ordinary courts. The ultimate resolutions made by Polish courts will be based on EU regulations interpreted in accordance with the CJEU judgment, taking into consideration the national laws and analysis of the individual circumstances of each case. The line of rulings in cases involving mortgage loans in Swiss francs has formed in an unfavorable way, resulting in judgments by the courts establishing the invalidity of loan agreements and ordering borrowers to repay the benefits they have fulfilled. So far, there has been no resolution of the full panel of the Civil Chamber of the Supreme Court addressing the issues covered by the request of the First President of the Supreme Court, in particular the following aspects:

•  can abusive provisions regarding the method of determining the exchange rate of the currency in a indexed or denominated loan agreement be replaced by the provisions of civil or common law;
•  if it is impossible to determine a binding exchange rate of a foreign currency in a denominated loan agreement, can the agreement bind the parties to the remaining extent;
•  if it is impossible to determine a binding exchange rate of a foreign currency in a loan agreement, can the agreement bind the parties to the remaining extent;
•  if a loan agreement is invalidated will the theory of balance or the theory of two conditions apply;
•  what is the moment determining the start of the statute of limitations period if the bank makes a claim against the borrower for refund of the disbursed loan;
•  is it possible for banks and borrowers to receive remuneration for the use of funds.

In the opinion of the PZU Group, the Supreme Court’s ruling on the above issues may have a significant impact on the further development of the line of judicial rulings in the context of the last three issues, as the remaining issues have been prejudged by preliminary rulings issued by the CJEU. It should also be noted that it is uncertain if and when the Civil Chamber in its full composition will adopt a resolution on the aforementioned legal questions.

An important ruling on Swiss franc mortgages is the CJEU’s September 8, 2022 judgment in the combined cases C-80/21 to C82/21, in which the CJEU answered the requests for a preliminary ruling questions made by the Warsaw-Śródmieście District Court in Warsaw. The CJEU stated:

•  a national court may not declare unfair not the entirety of a contract term, but only its element that make it unfair, if such removal would amount to a change of the content of the term that would affect its essence. This means that, in principle, the national court is limited to determining the unfairness of the entire contract term;
•  if the national court determines that a contract term is unfair, which in a given case results in the possibility of continuing to maintain the validity of the entire contract despite the exclusion of the unfair terms, the national court may not replace these terms with a supplementary provision of national law. This means that in such a case the national court cannot apply the provisions of the Civil Code on converting installments using the average exchange rate of the National Bank of Poland;
• he national court, having found a contract term to be unfair, is not authorized to change the content of the term in order to maintain the validity of the contract, which cannot remain in force after the removal of the term, if the consumer in question has been informed of the consequences of the invalidity of the contract and has agreed to the consequences thereof. This means that if the consumer has agreed to the consequences of the invalidity of the contract (having been informed of them), the national court by a ruling cannot change the content of such a term, but must declare it invalid;
• the running of the 10-year statute of limitations for a consumer’s claim for repayment of paid installments cannot begin from the time of delivery of each performance under the contract (repayment of each installment), even if the consumer was not able to assess the unfairness of the contract term on his own or did not become aware of the unfairness of the term, and without taking into account that the loan agreement provided for a much longer (30-year) repayment period. This means that the running of the 10-year statute of limitations for a consumer’s claim for repayment of installments does not start from the date of repayment of each installment. In practice, it should be assumed that no consumer’s claims for refund of paid
  installments are time-barred.

The CJEU, however, still has not ruled on the requests for preliminary rulings concerning the statute of limitations for the bank’s claim against the consumer (for the return of the paid out principal, or for remuneration, if any, for the use of the principal), as well as whether the bank is entitled to a claim for remuneration for the use of principal at all. The CJEU will probably not rule on these issues before the middle of 2023 at the earliest.

On 16 February 2023, the Advocate General of the CJEU issued an opinion under Article 252 of the Treaty on the Functioning of the European Union in case C-520/21 in proceedings in which the Warsaw-Śródmieście District Court, 1st Civil Division, submitted a request for a preliminary ruling from the CJEU, in which the CJEU would take a position on the question, whether, where a loan
agreement concluded by a bank and a client is invalid from the outset due to the inclusion in it of unfair contractual terms, the parties, in addition to the return of the money paid in performance of the agreement (the bank – the loan principal, the client – the installments, fees, commissions and insurance premiums) and statutory interest for delay from the time of the demand for payment, may also claim any other benefits.

In the above opinion, the Advocate General of the CJEU concluded that Articles 6(1) and 7(1) of Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts should be interpreted as follows:

•  the aforementioned provisions do not preclude the judicial interpretation of national law, according to which, if a loan agreement concluded by a client and a bank is deemed to be invalid from the outset due to the inclusion in it of unfair contractual terms, the client, in addition to the return of the money paid on the basis of the agreement and the payment of statutory interest for delay from the time of the demand for payment, may, following such recognition, also demand additional benefits from the bank. In doing so, it is up to the national court to determine, in light of national law, whether
  clients have the right to assert such claims and, if so, to rule on their merits;
•  the aforementioned provisions preclude the judicial interpretation of national law, according to which, if a loan agreement concluded by a client and a bank is deemed to be invalid from the outset due to the inclusion in it of unfair contractual terms, the bank, in addition to the return of the money paid under the agreement and the payment of statutory interest for late payment from the time of the demand for payment, may, following such recognition, also demand additional benefits from the consumer.

By 31 December 2022, there were 2,989 individual lawsuits against the PZU Group relating to foreign currency mortgage loans (including 2,539 cases for contracts active at the time of filing the lawsuit) that were granted in previous years with the total litigation value of PLN 998 million (as of 31 December 2021: 1,623 cases, with the litigation value of PLN 470 million). The main cause of the litigation specified by plaintiffs pertains to challenging the provisions of the loan agreement as regards the application by the PZU Group of the exchange rates and results in claims to declare the loan agreements partially or fully invalid.

In 2022, the PZU Group received 580 unfavorable court judgments in cases filed by borrowers, including 97 final judgments, and 24 favorable judgments, including 5 final judgments (in 2021: 125 unfavorable court judgments, including 20 final judgments, and 11 favorable judgments, including 4 final judgments).

The calculation of the provision carried out as of 31 December 2022 was based on an estimate of the expected loss resulting from the possible materialization of legal risks. The estimate conducted includes the following key elements:

•  total number of litigation cases – the PZU Group updated its forecasts of the expected number of future lawsuits using statistical methods and taking into account the observed upward trend in both the number of incoming lawsuits and the issuance of loan repayment history certificates (which have the character of a leading indicator for future lawsuits). The PZU Group estimates that the total number of lawsuits that have been, or will be, filed could be about 12,000, and the
  phenomenon of new lawsuits could be significant by the end of 2028. According to an external law firm, for index-linked loans originally granted by Pekao, the PZU Group assesses the likelihood of the contractual provisions being deemed abusive as negligible, since the indexation clause used was based on the average exchange rate of the National Bank of Poland, not Pekao’s exchange rate table. As a result, no influx of lawsuits is expected for such contracts in the future, and no individual provision is made for existing lawsuits (5 units). At the same time, for contracts paid off 10 years ago or earlier (i.e., inactive at the end of 2012), the PZU Group accepts the possibility of successfully raising objections resulting in the dismissal of the claim, and also does not expect an influx of lawsuits for such contracts in the future. This is borne out by past practice: the scale of litigation involving the rest of the loan population is negligible. As a result, the entire forecast of future lawsuits relates to denominated loans active or fully repaid in the last 10 years;
• probability of losing a court case – according to the opinion of an external law firm, for denominated loans acquired by Pekao as a result of the acquisition (spin-off) of Bank BPH, the PZU Group estimates the probability of recognizing contractual provisions as abusive at a minimum of 95% (vs. a minimum of 90% at the end of 2021);
•  possible financial implications – PZU Group accepts the following possible resolutions:
  •  invalidating the entire foreign currency mortgage loan agreement as a result of recognizing the indexation clause as abusive – this outcome is considered the most likely (above 95%);
  •  recognizing the clauses contained in the loan agreement as abusive clauses resulting in determining the loan balance in PLN and leaving the loan interest rate based on the SARON/LIBOR rate (the so-called currency conversion of a CHF loanagreement);
  •  recognizing the indexation clause as abusive and replacing the bank’s exchange rate table in it with the average NBP exchange rate;
  •  dismissing the statement of claim.

The PZU Group has updated its expectations including the probability distribution of possible outcomes and the expected financial impact of losing the litigation, taking into account the statistics for the litigation cases currently pending. In particular, the share of invalidations of loan agreements in possible resolution scenarios exceeded 95% (versus 80% at the end of 2021). In addition, the PZU Group assumes the possibility of concluding out-of-court settlements with borrowers, resulting in theconversion of the loan to PLN. According to the approach taken, the settlement offer will be presented to borrowers with activecontracts and in dispute with the PZU Group, and may include the option of recalculating the loan as if it had originally beengranted in PLN (as proposed by the KNF Office’s Chairman). The estimate of financial impact takes into account the expectedpropensity of borrowers to use settlements, depending on the ratio of the benefits of settlement to the potential benefit ofcontinued litigation

Although the legal risk related to the foreign currency mortgage portfolio has been one of the key topics in the banking sector in recent years, the history of data regarding the scale of lawsuits (in particular in terms of final judgments) is not sufficient. All of the above means that the process of determining the level of the provision requires a number of expert assumptions based on professional judgment each time.

New rulings and the possible sectoral solutions which will appear in the Polish market for mortgage loans may have impact on the amount of the provision established by the PZU Group and necessitate a change of individual assumptions adopted in the calculations. In connection with this uncertainty it is possible that the provision amount will change in the future.

The tables below present the amounts of the provisions for individual court cases in which the PZU Group is a party and a portfolio provision for the remaining FX mortgage loans which are exposed to legal risk associated with the nature of these agreements.

The main reasons for the increase in the level of the provision as of 31 December 2022 relative to 31 December 2021 are:

• an update of the expected number of litigation cases, rooted in the observed continuation of the growing trends of incoming litigation cases and issued certificates on loan repayment history, and taking into account the possible impact of changes in the legal environment, including the opinion of the CJEU Ombudsman General, on the propensity of borrowers to enter litigation, and
• an increase in the likelihood of possible negative dispute settlements, resulting from a more unfavorable line of case law for banks, in which the dominant and growing share of overall settlements is the cancellation of the loan agreement.

The PZU Group carried out a sensitivity analysis for the major assumptions of provision calculations, where a change of the level of individual parameters would have the following impact on the provision amount for the legal risk of foreign currency mortgage loans.

The provision was established in connection with the entry into force of the Act of 5 August 2022 amending the Act on Mortgage Loan and Supervision of Mortgage Loan Intermediaries and Agents and the Act amending the Act on Personal Income Tax, the Act on Corporate Income Tax and Certain Other Acts.

This item includes provisions recognized by banks for the potential loss of economic benefits resulting from off-balance sheet exposures (e.g. granted guarantees or credit exposures).

The amount of 28 million pertains to a penalty returned by the Office of Competition and Consumer Protection to Pekao. Due to the potential risk of outflow of resources in connection with this case, the PZU Group maintains a provision to cover this risk.

The amount of PLN 11 million pertains to the penalty imposed by the President of the Office of Competition and Consumer Protection as a result of the decision in which he deemed that s clause used by Pekao in annexes to agreements on the rules for setting foreign exchange rates is an impermissible contractual clause. Pekao appealed the decision of the UOKiK President to the Court of Competition and Consumer Protection and received a response from the UOKiK President, in which he requested that the appeal be dismissed in its entirety.