Landsbankinn hf. - Company Announcement

Landsbankinn hf.: Advisory opinion of the EFTA Court on the inflation indexing provision of a bond

Today the EFTA Court handed down its advisory opinion on the interpretation of
provisions in Directive 87/102/EEC on consumer credit, and Directive 93/13/EEC
on unfair terms in consumer contracts. The opinion was requested by the
Reykjavík District Court in connection with a case brought by Mr. Sævar Jón
Gunnarsson against Landsbankinn. The case centres on the legality of the
inflation indexation provision in a bond Mr. Gunnarsson issued to the Bank in
2008. 

As regards Directive 87/102/EEC on consumer credit, the EFTA Court finds that
the when a credit agreement is linked to a consumer price index (CPI), it is
not compatible with the Directive to calculate the total cost of the credit and
the annual percentage rate of charge on the basis of 0% inflation if the known
rate of inflation at the time of the credit agreement is not 0%. It is for the
national court to assess, taking account of all the circumstances of the case,
the legal consequences of and the remedies for such incorrect information,
provided that the level of protection established by the Directive, as
interpreted by the Court, is not compromised. 

As regards Directive 93/13/EEC on unfair terms in consumer contracts, the EFTA
Court, inter alia, finds that the Directive does not generally prohibit
contractual terms on the indexation of loans in contracts between a lender and
a consumer. It is for the national court to assess whether the term at issue is
unfair. The Directive does not limit the discretion of an EEA State to
determine in legislation or administrative regulation the factors that may
cause changes in a pre-determined index, such as the Icelandic CPI, as well as
the methods for measuring those changes, provided that they are explicitly
described in the contract. It is for the national court to establish whether a
particular contract term has been negotiated individually in the understanding
of the Directive. It is for the national court to establish whether a contract
term relating to the indexation of repayment instalments of a loan must be
regarded as having been explicitly and comprehensibly described to the
consumer. Moreover, the EFTA Court finds that where a national court considers
that a given term is unfair within the meaning of that Directive, the national
court must ensure that such a clause is not binding on the consumer provided
that the contract is capable of continuing in existence without the unfair
term, in so far as such continuity of the contract is legally possible under
the rules of domestic law. 

The Reykjavík District Court will now consider the EFTA Court's advisory
opinion and establish, based on Icelandic law, whether and to what extent it
impacts judgement in the aforementioned case. It is not possible, at this
stage, to determine the final conclusions of the Court in the case. 

The Act on Interest and Price Indexation, No. 38/2001, clearly authorises the
price indexation of loans. Landsbankinn is of the opinion that the inflation
indexation provisions of loans in its portfolio comply with that Act and other
rules of law that apply to the indexation of loans. The Bank further considers
information provided in connection with the granting of indexed loans to have
been in compliance with Icelandic laws on consumer credit. At the time when the
loan disputed in the aforementioned case was taken out, the Act on Consumer
Credit, No. 121/1994, was in effect. This legislation transposed into Icelandic
law Directive 87/102/EEC, on consumer credit. The first paragraph of Article 12
of the Act provides that the annual percentage of cost for inflation-indexed
loan contracts shall be calculated based on the assumption that price levels,
interest and other charges will remain unchanged for the term of the loan.
Landsbankinn interpreted the provision to clearly mean that inflation should
not be considered in the calculation of the annual percentage rate of charge
(0% inflation). The opinion of the EFTA-Court is advisory and it is now for the
Icelandic courts to consider the case. One of the issues that will be
considered is whether the Directive was correctly implemented into Icelandic
law. The Bank takes the view that the Icelandic Act on Consumer Credit, in
force at the time, very clearly stipulated that changes in price levels
(inflation) were not to be considered in the calculation of the annual
percentage rate of charge.  The opinion of the EFTA Court, furthermore,
indicates that it matters whether the consumer knew or could have known about
the impact of inflation if inflation was not taken in the calculation. Various
issues will therefore be considered by the Icelandic courts. 

Landsbankinn has reviewed the potential impact of a ruling holding the Bank
responsible for the illegitimacy of provisions on inflation-indexation or of it
being established that information provided in connection with the granting of
indexed loans was insufficient. Such a verdict could negatively impact the
value of the affected portion of the Bank's inflation-indexed loan portfolio.
The Bank's equity ratio is, however, very strong and would remain well above
the FME's minimum capital requirement despite such an outcome. Such a verdict
would not impact the Bank's capacity to repay the covered bonds issued by the
Bank and admitted for trading on a regulated market in Iceland. 



For further information, please contact

Kristján Kristjánsson, pr@landsbankinn, +354 410 4011/ +354 899 9352