Filenews 16 March 2021
Opposition to the proposals for a law tabled in the House and to be discussed today at the session of the Parliamentary Committee on Finance, expresses the Association of Banks of Cyprus.
The SKK states in a statement that, "We would like to point out that the adoption of the relevant law proposals will have a negative impact on both credit institutions (PI) and the stability of the financial system, as well as on the credit rating of the Cypriot economy. The Law Proposals modify, inter alia, the timing of the sale process, exclude specific mortgage contracts from the sale procedures, suspend divestment procedures for specific categories of real estate, affect the market value of the property and link the repayment of debts with the restrictive Decrees of the Ministry of Health."
The proposals for laws concern:
- Proposals for Laws amending the Real Estate Transfer and Mortgages Laws
- Proposal for a Law -The Suspension of the Obligation to Pay Debts (Temporary Provisions) Law of 2020
- Proposal for a Law -The Establishment and Operation of the Single Body for the Extrajudicial Resolution of Financial Disputes (Amendment) Law of 2020
- Proposal for a Law -The Suspension of Mortgage Property Disposal Procedures (Temporary Provisions) Law of 2021
In detail the announcement of the link
The Cyprus Banking Association (SKK) is against the proposals under discussion in their entirety.
We would like to point out that the adoption of the relevant proposals for a law will have a negative impact on both the Credit Institutions (PI) and the stability of the financial system, as well as on the credit rating of the Cypriot economy. The Law Proposals modify among other things the timing of the sale process, exclude specific mortgage contracts from the sale procedures, suspend divestment procedures for specific categories of real estate, affect the market value of the property and interconnect the repayment of debts with the restrictive Decrees of the Ministry of Health.
It is well known, as recorded in the reports of the rating agencies, the European Commission, the International Monetary Funds and others, that the management of Non-Performing Loans (NSRs) is the greatest challenge and priority for the Cypriot economy. The legislative amendment of the divestment framework through the proposals for a law will make the divestment process ineffective and ineffective, make it difficult to recover debts, favour the strategic bad payers who will take advantage of the delays of the Courts, create a culture of non-repayment of loans and obligations and increase the risk of spreading this culture to the consistent borrowers who serve their loans. , with all that this entails.
We note that the existing framework contains reliable procedural mechanisms, where where there are reasonable grounds for suspending the divestment process debtors have the possibility to obtain a relevant prohibition order but also to appeal to the Financial Dispute Resolution Body for matters of billing, mediation and implementation of the Code of Conduct of the Central Bank of Cyprus.
Impact on the financial system and Credit Institutions (PI)
Below, we set out in more detail our concerns and the main impact that will arise on the PEs and the financial system should the Law Proposals be adopted.
1.The European supervisory authorities (European Central Bank, European Banking Authority and the Single Supervisory Mechanism) have made it very clear that continuous changes in legislation, in particular the timetables relating to collateral liquidation procedures, increase credit risk with significant consequences for PEs. Be aware that the definition of capital requirements, including Pillar II, and the necessary provisions for MUS, is largely based on assumptions about the value of collateral. Therefore, uncertainty in relation to the stability of the Cypriot legal framework and the continuous modification/extension/suspension of collateral liquidation procedures and timetables leads to the imposition of capital growth and additional provisions.
2.The European supervisory authorities and the European Institutions have made the reduction of NSOs an absolute priority at European level. To this end, they have adopted and put into force strict European Regulations and Guidelines.
If the Law Proposals are adopted, Cypriot banks will be in a worse position than other European banks since, while they are obliged to implement the Directives, Regulations and Guidelines, they will not be able to use the divestment tool.
Characteristics are the Guidelines that have already been implemented and concern the creation of provisions for secured and unsecured loans. From the first year of granting a credit facility, even for those loans which do not show delays, it becomes compulsory to create provisions for each exposure (loan).
3.European supervisory authorities shall monitor events and domestic developments and accordingly change their supervisory requirements in relation to the capital adequacy of PEs. Therefore, the adoption of the Law Proposals will have the following consequences:
(i)Increase the risk profile of the Cypriot banking system and, by extension, of Cypriot banks.
(ii)Uncertainty in relation to the stability of the Cypriot legal framework.
(iii)Degradation of the debtor of the Cypriot economy and the PEs.
(iv)Negative change in assumptions applied during stress tests, both during individual (per bank) checks and in checks carried out at European level. The results of these audits shall determine the level of the provisions and, by extension, the capital requirements of the PEs.
(v)Decrease in the value of collateral, both served and non-performing loans, precisely because of the delay and lengthening of the completion time of the liquidation procedures.
(vi)The need to provide additional collateral for new loans and a possible increase in the cost of borrowing by households and businesses.
(vii)Encouraging and possibly increasing strategic underpays.
(viii)Decrease in the value of loan portfolios in case of sale of loans to third parties (credit redemption companies).
Suspension of divestments
We do not agree with the proposals for a law on the suspension of mortgage divestment procedures.
1.In Cyprus there was a six-month universal suspension of divestments (March – August 2020) followed by a partial suspension of divestments (January – March 2021) for specific categories of borrowers and real estate. It is noted that the practice of suspending divestments has not been applied in a European country other than Greece.
2.The existing auctions, as well as those planned, relate to mortgage debts which were over-dated well before the start of the pandemic, for which there are court decisions and debts where the date of termination of the accounts dates back even to the 1990s.
3.The vast majority of auctions concern fields, land and commercial real estate.
4.At this stage no sale of a first residence (house/apartment) worth less than €350,000 is planned, whether it concerns a natural person or a small business.
It is underlined that the implementation of the Estia Plan offers protection (first home protection) to those borrowers (natural or legal person) who have submitted a completed application and have been deemed eligible and viable.
Furthermore, in cases where applicants (borrowers) who have submitted a completed application and have been declared eligible but unsustainable, the Ministry of Finance plans to implement a new plan through which the possibility of maintaining the main residence will be offered and at the same time the suspension of the divestment process. For this reason, the Ministry of Health does not send a letter of rejection to the applicants for inclusion in the Estia Plan until the processes have been completed and the new plan has been implemented. Until then, any legal or other proceedings are suspended and therefore these applicants (eligible but non-viable) do not face the risk of divestment of the main residence.
Finally, the existing cases of auctions of houses/apartments concern holiday properties, high-value properties, rental properties and very old properties which, due to damage and poor condition, are unsuitable for owner-occupied accommodation and in need of demolition.
Property value
We do not agree with the Proposal for a Law containing provisions concerning the value of immovable property.
The value of immovable property varies either upwards or downwards depending on market and demand conditions at the time.
The Guidelines, Regulations, Guidelines and International Accounting Standards specify that for the purposes of determining capital adequacy and provisions, as well as preparing financial statements, the value of collateral (assets) is reflected on the basis of market value and/or forced sale value.
Therefore, the value of the immovable property cannot remain static and unchanged for the reasons set out above.
Otherwise, there is a risk that PEs will be forced to take a more conservative approach in the process of granting credit facilities, with a negative impact on economic activity.
Constitutional issues
In addition to the above impact on the PEs and the financial system if the Law Proposals are adopted, we note that serious issues of incompatibility with the Constitution of the Republic of Cyprus arise. Here are some of the constitutional issues identified:
A. Proposals of a Law amending the Real Estate Transfer and Mortgages Laws, with a view to suspending divestment proceedings.
1.Article 23 of the Constitution enshrines the right to property. The Law Proposals prevent the mortgage creditor from exercising his conductive right to claim the debt owed to him which constitutes property.
2.Further infringes the contractual right of the mortgage lender to claim the debts thus limiting his right to carry out profitable work provided to him by Article 25 of the Constitution.
3.The right to freely contribute to Article 26 of the Constitution is affected as the proposed suspension of the divestment procedure intervenes and subsequently amends the debtor's contractual obligations arising from the loan and mortgage agreement. The right to contribute may, in accordance with the Constitution, be restricted only by contract law.
4.Article 30 of the Constitution enshrines the right of the mortgage lender to bring proceedings against the mortgage debtor under the loan agreement and/or the mortgage contract for debt collection purposes, mortgage lenders shall be deprived of that right under these Proposals of Laws.
B. Proposals for Laws amending Article 44C(3) by adding a plea of appeal for suspension of sale due to pending court cases concerning debt dispute, legality of the contract, unfair terms, etc.
1. The abovementioned Proposals for Laws contain provisions relating to additional or more favourable procedural possibilities, in particular, granted to the mortgage debtor by law, which abolish and restrict in any meaningful way any 'ownership' right of the mortgage lender (Article 23).
2. Furthermore, the contractual right of the mortgage lender to claim the debts is infringed by limiting his right to carry out profitable work provided to him by Article 25 of the Constitution.
3.In addition, we consider that there is a question of incompatibility with Article 26 of the Constitution, since a prohibition is imposed on the mortgage lender, which is practically of indefinite or unknown duration, i.e. the right of the mortgage lender to the extent that it is deprived of its right is limited.
4. The principle of separation of powers enshrined in the Constitution shall be affected since the provisions promoted may be regarded as unlawful interference by the Legislative Power in the sphere of competence of the Judicial Authority. In this case, a specific provision is identified in one of the Law Proposals, which allows an application to set aside any decision, whenever it has been issued, to be registered. This means that the gravity of a judgment is annulled, since the principle of finality can be challenged at any time and the principle of finality is arbitrarily removed.
C. Proposal of a Law amending the Recommendation and Operation of the Single Body for the Extrajudicial Resolution of Financial Disputes, with the aim that, as at the time of receipt by the lender of the notice of repayment of the mortgage debt, debtors have the right to apply to the Financial Commissioner for referral to arbitration of financial dispute resulting from that notice.
The forced participation of the institution of arbitration for the settlement of disputes arising from a contractual relationship, circumvents the fundamental right of freedom of association since ex post intervention of the legislator in the way of resolving disputes of a contract without the consent of the creditor, is in principle incompatible with the freedom of contracts.
Also important is the possible violation of the constitutional principle of separation of powers since the proposed provisions may be considered illegal interference of the Legislative Power in the sphere of competence of the Judiciary by abolishing its powers.
D. Proposal for a Law providing for the Suspension of the Obligation to Pay Debts
The automatic preliminary suspension of payment of debts under the provisions of this Proposal Law entails the suspension of contractual rights and therefore constitutes an unacceptable interference with the freedom of contract enshrined in the Constitution.
We reserve any further comments on the above Law Proposals.
