The wide usage of benchmark rates and their key role in the financial system requires that they be reliable and defiant to any manipulation. To ensure this, the EU undertook to reform the benchmark rate determination process and improve market confidence in them, resulting in the adoption of the EU Benchmarks Regulation (the BMR).
The most widely-used European benchmark rates are EONIA and EURIBOR. The latter is widely used in Slovenia, while EONIA is not as popular. According to the data from the European Securities and Markets Authority and Bank of Slovenia, as of May 31, 2018, 99.7% of all contracts were tied to EURIBOR and only 0.3% of the contracts to EONIA. Both EONIA and EURIBOR are being reformed to meet the requirements of BMR. While EONIA will be replaced with the new benchmark €STR on October 2, 2019, a new (hybrid) calculation methodology will be implemented for EURIBOR, and it is not yet clear whether EURIBOR will be re-authorized under the BMR.
The reference rate transition will be challenging for financial institutions as both time-consuming and costly. Slovenian financial institutions are already taking steps to include fallback clauses in both legacy and new contracts to secure an alternate base rate in the event of a permanent cessation of the relevant benchmark or pre-cessation trigger - i.e., when the relevant benchmark is no longer representative. Fallback clauses used in legacy agreements are generally triggered only by the temporary unavailability of benchmark rates due to temporary disruption and are thus an unsuitable solution for permanent cessation. When drafting a new fallback clause, local laws will have to be thoroughly analyzed and strictly respected to minimize litigation, regulatory, and reputational risks.
The Slovenian Consumer Credit Act provides that the values of the reference interest rate in consumer loans have to be clear, accessible, objective, and verifiable at all times. Reference rates have to be published on the creditor’s website and visible in its business premises. The interest rate cannot be changed to the detriment of the consumer if the loan agreement does not stipulate the conditions under which the interest rate can be changed. Such provisions will have to be considered when drafting the fallback clause - which should not contain the possibility of unilateral changes by the bank in consumer loans, since such a clause may be considered an unfair contractual provision.
Because consumers benefit from stringent consumer protection regulations, even when an adequate fallback clause is drafted, its implementation in legacy loan agreements will likely be a cumbersome task. Since, in accordance with the Consumer Credit Act, the loan interest rate and the conditions for its applicability and amendment have to be explicitly stated in the loan agreement, the bank cannot change the loan interest rate unilaterally, and an amendment to the loan agreement must be concluded with the consumer. If the consumer does not agree to the proposed change, the bank has no leverage to unilaterally change the terms of the agreement, and the parties may have different interpretations as to which interest rate should be applied.
The implementation of the fallback clause in legacy corporate loan contracts appears to be a tough nut to crack. While some legacy contracts provide for an obligation of the debtor to conclude an amendment to the loan agreement, giving the bank the right to accelerate the loan or temporarily terminate or cancel the debtor’s right to utilize the loan if the debtor does not conclude an amendment within the set deadline, the question of how to convince the debtor to conclude an amendment where the legacy contract does not include such an obligation remains to unanswered.
Unilateral changes of the interest rates by the banks will likely result in litigation, with the outcome of the validity of the interest rate provision or the entire agreement likely to depend on the general contract law rules applied by the court.
Security documents should also be amended, and where required by law these changes should be entered in the relevant pledge registers. The question of who will bear the cost of such changes will depend on the existing contractual provisions, as the Consumer Credit Act provides that consumers shall not bear costs which are not clearly set out in the contract
Marko Ketler, Partner and Independent Attorney at Law, and Ermina Delic Kamencic, Independent Attorney, in cooperation with Karanovic & Partners