The norm that defines the limits on the total costs of the credit to a consumer complies with Article 1 and Article 105 of the Satversme
On 12 February 2020, the Constitutional Court delivered the judgement in case No. 2019-05-01 “On Compliance of Section 1 (1) of the Law of 4 October 2018 “Amendments to the Consumer Rights Protection Law” with Article 1 and Article 105 of the Satversme of the Republic of Latvia”.
The Contested Norm
Section 1 (1) of the law of 4 October 2018 “Amendments to the Consumer Rights Protection Law” (hereafter – amendments to the Consumer Rights Protection Law), by which Part 23 of Section 8 of the Consumer Rights Protection Law is expressed in the following wording:
“(23) Such total costs of the credit to a consumer shall be considered not conforming to the requirements referred to in Para 22[1]of this Section, which exceed 0.07 per cent per day of the credit sum. Restriction to the total credit costs to a consumer shall not be applicable to such consumer credit contracts, upon entering into which an item is to be deposited as security in the creditor’s safe-keeping and according to which the liability of the consumer is limited only to that pledged item.”
The present case was initiated before Section 1 (1) of the Amendments to the Consumer Rights Protection Law entered in to force. It entered into force on 1 July 2019. Thus, the Constitutional Court reviewed the constitutionality of Section 8 (23) of the Consumer Rights Protection Law (hereafter – the contested norm). [15.]
The Norms of Higher Legal Force
Article 1 of the Satversme of the Republic of Latvia (hereinafter – the Satversme): “Latvia is an independent democratic republic.”
Article 105 of the Satversme: “Everyone has the right to own property. Property shall not be used contrary to the interests of the public. Property rights may be restricted only in accordance with law. Expropriation of property for public purposes shall be allowed only in exceptional cases on the basis of a specific law and in return for fair compensation.”
The Facts
On the basis of applications submitted by limited liability companies “ONDO” and “ExpressCredit”, two cases were initiated at the Constitutional Court regarding the compliance of the contested norms with the Satversme. The applications comprised identical claims and their legal reasoning was based on similar arguments. To facilitate comprehensive and swift adjudication of both cases, the Constitutional Court decided to join the cases.
The applicants are capital companies, which, on the basis of special licences issued for the indefinite period of time by the Consumer Rights Protection Centre, provide consumer credit services. It is maintained in the applications that the contested norm, in which the limits for the total cost of credit for the consumer will be set, would prohibit them from receiving due payment for the use of capital for the issued loans. Hence, because of the contested norm, they would no longer be able to engage in commercial activities in the chosen area, i.e., to issue short-term consumer credits.
The applicants express the opinion that the restriction on fundamental rights included in the contested norm had not been established by a law adopted in due procedure because the law had not been duly considered, moreover, it is said to be disproportional. Hence, it is maintained that the contested norm is incompatible with Article 105 of the Satversme and violates the principle of legal expectations that is derived from Article 1 of the Satversme.
The Court’s Findings
On reviewing the constitutionality of the contested norm
The Constitutional Court decided that the contested norm should be reviewed in the scope of the first, second and third sentence of Article 105 of the Satversme. Whereas the compliance of the contested norm with the principle of legal expectations, derived from the basic norm of a democratic state governed by the rule of law that falls within the scope of Article 1 of the Satversme, should be examined in interconnection with the alleged restriction on the right to property. [16.1., 16.2.]
On compliance of the contested norm with Article 1 and Article 105 of the Satversme
On the existence of a restriction on fundamental rights
The Constitutional Court recognised that the creditors’ rights, acquired on the basis of a licence, to engage in certain business activities fell within the scope of Article 105 of the Satversme. The contested norm envisages less favourable conditions for the creditors than previously, which they now have to take into account in planning their business activities in the area of consumer credit. Thus, the Constitutional Court found that the contested norm restricted the applicants’ rights envisaged in the first, the second and the third sentence of Article 105 of the Satversme. [17.1. –17.3.]
On whether the restriction on fundamental rights has been established by law and whether it has a legitimate aim
The Constitutional Court recognised that the restriction on fundamental rights that followed from the contested norm had been established by law. [19.–19.2.3.]
The aim of the restriction included in the contested norm is, in view of the existing economic situation in the state, to protect the consumer rights by defining the total credit costs that should be regarded as incommensurate and incompatible with fair transaction practice. This regulation is intended to ensure that the costs of the loan issued by the creditor are such that the consumer, in particular, a person with low income, would be able to repay the loan. Hence, the Constitutional Court held that the restriction included in the contested norm is one of the measures to be used to protect the rights and lawful interests of other persons, i.e., consumers. The stability, welfare and financial sustainability of Latvian households is important for the whole national economy. Thus, the Constitutional Court recognised that the protection of public welfare was the legitimate aim of the restriction on fundamental rights. [20., 20.1.–20.3.]
On whether the measure chosen by the legislator is appropriate for reaching the legitimate aim
The Constitutional Court noted that, in the current social and economic situation of the Latvian State, the restriction included in the contested norm was one of the measures that could ensure that the consumer was protected against high payments for the loan and, thus, facilitated stability, welfare and financial sustainability of households. Thus, the contested norm is an appropriate measure for protecting consumer rights and also for facilitating the welfare of society in general. [22.]
On whether the legitimate aims could be reached by other measures, less restrictive on a person’s rights and lawful interests
The Constitutional Court recognises: improvements to the current legal regulation that pertains to the process of assessing consumers’ creditworthiness cannot be deemed to be an alternative measure for reaching the legitimate aims. [23.1.]
The Constitutional Court also found that the legislator had examined, whether, in the particular case, there were alternative measures that would impose lesser restrictions on the creditors’ fundamental rights defined in the Satversme, and following this assessment chose the solution that also in the future the restriction should be defined not on the basis of the annual interest rate but on the total daily costs of credit for the consumer. Moreover, the legislator has concluded that, in view of the current situation in the field of consumer credit and the need to protect consumers’ rights and lawful interests as well as public welfare, the total costs of credit for a consumer should be limited to 0,07 per cent per day of the credit sum and that there were no alternative measures. [23.2.]
The Constitutional Court underscored: the legislator, in choosing one of the measures potentially suitable for reaching the legitimate aim, enjoyed margin of appreciation and discretion. If the legislator, exercising its discretion, has decided that the most appropriate solution is setting limits on the total costs of credit for a consumer then another, alternative interest rate cannot be recognised as being a more lenient measure, unless the measure chosen by the legislator is incompatible with the general legal principles and other norms of the Satversme. [23.2.]
On whether the benefit that society gains from the restriction on fundamental rights outweighs the harm inflicted on a person’s rights and lawful interests
The Constitutional Court found that the legal regulation that was in force before the contested norm entered into force allowed a situation, where it was difficult for many consumers to repay the loan within the set term. Therefore it was the legislator’s obligation to introduce measures for ensuring fair treatment of the consumer and to prevent situations, where the lender, using its economic advantages, could gain incommensurate financial benefits at the consumer’s expense. Consumer rights protection is a value of a democratic state governed by the rule of law, and it is important also with respect to sustainable social development. [24.1.]
The Constitutional Court noted that the licence for indefinite period of time issued to the lender could create protected legal expectations regarding possibilities to continue business activities in the area of consumer crediting. However, a merchant cannot develop protected legal expectancies that the legal regulation of the respective field would not be amended in a way that could have a negative impact on its commercial activities, by decreasing the possibility to gain the intended amount of profit. [24.2.]
The Constitutional Court took into account the fact that the contested norm had been adopted on 4 October 2018 but, in accordance with Section 3 of the Amendments to the Consumer Rights Protection Law, it entered into force only on 1 July 2019. Thus, the lenders had approximately nine months to adjust their business activities to the new regulation and ensure that the total costs of credit for a consumer fell within the limits set by the contested norm. The Constitutional Court held that this period was sufficient; thus, sufficiently lenient transition to the new legal regulation, complying with the principle of legal expectations, had been ensured. [24.2.]
The Constitutional Court noted that the licence granted to the lender the right to provide to a consumer any kind of credit services. The contested norm does not envisage annulling the licences issued to the lender and, per se, does not prohibit the lenders from providing consumer credit services on the basis of the issued licences. Hence, the Constitutional Court had no grounds to conclude that the respective restriction would have hindered the lender’s business activities to the extent that had made the issued licences meaningless. [24.3.]
The Constitutional Court found that the restriction was compatible with the principle of proportionality and, hence, the contested norm complied with Article 1 and Article 105 of the Satversme. [24.4.]
The Constitutional Court held:
to recognise Section 8 (23) of the Consumer Rights Protection Law as being compatible with Article 1 and Article 105 of the Satversme of Republic of Latvia.
The judgement by the Constitutional Court is final and not subject to appeal. The judgement will be published in the official journal “Latvijas Vēstnesis” within the term set in Section 33 (1) of the Constitutional Court Law.
The text of the judgement in Latvian is available on the homepage of the Constitutional Court: https://www.satv.tiesa.gov.lv/web/viewer.html?file=/wp-content/uploads/2019/03/2019-05-01_Spriedums.pdf#search=
[1] Section 8 (22) of the Consumer Rights Protection law provides that the costs of a consumer credit contract must be commensurate and corresponding to fair transaction practice. The total costs of the credit for a consumer must be calculated in accordance with the procedures laid down in the laws and regulations regarding consumer credit.
Linked case: 2019-05-01