Brazilian consumer organisations have filed a multitude of claims against banks who withheld the contractually convened interest payments with the primary argument that that keeping to their contractual obligations towards Brazilian small savers would have caused them to have to file for bankruptcy.
At the eights financial services conference in Hamburg the participants received the following email: „Wishing that all is going well out there, we are glad to inform you that, yesterday, idec won the case tried in stj by 8 votes in favor and 7 against!“
While all courts up to the appeal level gave consumer organisations right, the Supreme court was exposed to unexpected interventions from the government and the central bank arguing on the basis of a Chicago University drafted expertise that this class action would ruin the Brazilian banking system. The background of the claim are savings book accounts which like consumer credit had associated interest rates indexed to the high Brazilian inflation rate 20 years ago. While consumer credit had to be paid according to the indexed rate, banks however refused to honour the indexed savings rate which led to this class action.
Director of iff, Udo Reifner, while visiting the University of Porto Allegre in Southern Brazil in March 2014 to present his book on lifetime contracts met with consumer leaders from Brasilia, Rio de Janeiro and Porto Allegre in support of their claim. Also acting as the spokesman for the European Coalition for Responsible Credit he delivered a letter of support from this European consumer initiative which was personally delivered to the Supreme court and ministers of the Brazilian government. Walter José de Moura Faiad from Brasilia, one of the leading attorneys in this case was announced as a participant to the panel on Lobbying in the annual ECRC/iff conference on financial services (planned 22-23 May 2014) where he was prepared to inform about the enormous lobbying efforts of Brazilian banks to influence the supreme court ruling in this case. He is now withheld by the sudden announcement of the Supreme Court session on 21 May 2014, which had been postponed after several interventions from outside had made the lobbying public information. Iff will try to get an immediate feedback on this trial from Walter Moura to its conference via a skype message.
We annex the letter of support from iff – it had been translated into Portuguese before a letter was presented to the Brazilian Supreme Court addressed to each Supreme Court Judge.
Some links below show the initial media reports of the subject.
8.1.2014: Brazil: Lawsuits Threaten Banks, http://www.latinvex.com/app/article.aspx?id=1118
”Walter José Faiad de Moura, partner at Moura Lamounier Advogados in Brasília and Marilena Lazzarini, president of the board of directors of the Brazilian Institute for Consumer Defense (IDEC): There is no doubt that the Brazilian government’s measures in the 1980s were intended to reduce currency inflation. However, in July 1987 and January 1989, banks applied a lower indexation to savings accounts, on their own and without any statutory command. As a consequence, the amount deposited by individuals was reduced. Banks were not bound by any legal norm to proceed in that way. Brazilians savers sued banks to recover the values they lost. In addition to the individual lawsuits, IDEC has led class actions under Brazilian law to defending collective interests. During 25 years of litigation, courts including the Supreme Court ruled that the central bank and the government had no liability because banks had a private relationship with consumers. The amount owned by the banks is considerable. However, it is far less than $65 billion because banks ignore that many savers have died. Also, many savers had very little deposited and have not sought justice. The Supreme Court could rule in favor of the plaintiffs without creating a major impact on Brazil’s economy nor increasing economic risks. Any money awarded to savers would return to the economy.”
Context: ”Supreme court decision on inflationary expectation: Several class-action lawsuits discussing the constitutionality of Brazilian governmental economic plans of the late 1980s, aimed at fighting hyperinflation, are expected to come to an end during 2014. The plans included forbidding banks to index interest payments to inflation and freezing savings accounts. The lawsuits discuss the profits made by banks as a result of these plans and may involve amounts to be paid by the banks to the owners of savings accounts totalling approximately USD 65 billion. The decision was recently suspended until the start of 2014, when oral arguments will be heard by the Brazilian Supreme Court. Depending on the court’s decision, many Brazilian banks will be significantly affected in their Basel ratios and other important indexes. Although Brazil’s constitution allows for the court decision to take into account its impact on the Brazilian economy (which could be highly beneficial to the banks), the decision is yet uncertain. From an economic perspective this will be the main point of focus during the first months of 2014.”
8.2.2014: Economist.com Article (A legal hazard for Brazil’s banks – The Economist) – A row over 25-year-old account adjustments unnerves Brazilian lenders
Nov 27, 2013: Reuters: Brazil top court to review landmark case for banks, economy: http://www.reuters.com/article/2013/11/27/brazil-banks-ruling-idUSL2N0J71R820131127
Feb 26, 2014: Reuters. UPDATE 1 -Brazil court delays hearing on landmark deposit-rates case: http://www.reuters.com/article/2014/02/26/brazil-banks-ruling-idUSL1N0LV2HR20140226
17.2.2014: Link to article from the Brazilian Institute for Consumer Defence (IDEC): http://www.idec.org.br/uploads/releases/pdfs/02.18_The_Wall_Street_Journal__.pdf
In addition to our support of the consumer rights of depositors in this case, ECRC has been an advocate for greater consideration of consumer protection mandates within financial regulator and financial supervisor remits. In the iff study on ”Financial Supervision from a consumer perspective”, it was shown that while there will always be some conflict of interest between prudential and other banking regulation goals (conduct of business, competition, consumer protection, systemic risk etc.), the crisis and global policy makers have acknowledged that consumer protection mandates of financial supervisors can no longer be seen as of low importance. The OECD and G20 have developed Principles that show this. Here is an excerpt of the High level principles of Consumer protection passed by the OECD and the G20 : The Principle 1,2 and 7 are especially relevant for this case in Brazil:
”G20 HIGH-LEVEL PRINCIPLES ON FINANCIAL CONSUMER PROTECTION
The high-level principles were developed as a response to the G20 Finance Ministers and Central Bank Governors call in February 2011 for the OECD, the FSB and other relevant international organisations to develop common principles on consumer protection in the field of financial services by their 14-15 October meeting. They were developed by the Task Force on Financial Consumer Protection of the OECD Committee on Financial Markets (CMF), in close co-operation with the FSB and its Consultative Group, other international organisations and standard setter bodies and consumer and industry associations. The Task Force is open to all G20 and FSB members. It held several rounds of consultations, including a public one, on different versions of the draft principles. A final version of the draft principles was discussed and endorsed by the Task Force on 14 September and transmitted to the CMF and the FSB. The Final High-level Principles on Financial Consumer Protection were endorsed by the G20 Finance Ministers and Central Bank Governors at their meeting on 14-15 October 2011.
1. Legal, Regulatory and Supervisory Framework
Financial consumer protection should be an integral part of the legal, regulatory and supervisory framework, and should reflect the diversity of national circumstances and global market and regulatory developments within the financial sector Relevant non-governmental stakeholders – including industry and consumer organisations, professional bodies and research communities – should be consulted when policies related to financial consumer protection and education are developed. Access of relevant stakeholders and in particular consumer organisations to such processes should be facilitated and enhanced.
2. Role of Oversight Bodies
There should be oversight bodies (dedicated or not) explicitly responsible for financial consumer protection, with the necessary authority to fulfil their mandates. They require clear and objectively defined responsibilities and appropriate governance; operational independence; accountability for their activities; adequate powers; resources and capabilities; defined and transparent enforcement framework and clear and consistent regulatory processes. Oversight bodies should observe high professional standards, including appropriate standards of confidentiality of consumer and proprietary information and the avoidance of conflicts of interest.
Co-operation with other financial services oversight authorities and between authorities or departments in charge of sectoral issues should be promoted. A level playing field across financial services should be encouraged as appropriate. International co-operation between oversight bodies should also be encouraged, while specific attention should be considered for consumer protection issues arising from international transactions and cross-border marketing and sales.
7. Protection of Consumer Assets against Fraud and Misuse
Relevant information, control and protection mechanisms should appropriately and with a high degree of certainty protect consumers’ deposits, savings, and other similar financial assets, including against fraud, misappropriation or other misuses.”
Here are the High Level Principles of Consumer protection passed by the OECD and the G20 including Brazil: http://www.oecd.org/daf/fin/financial-markets/48892010.pdf
The expertise iff provided to the European Consumer Organisations BEUC: http://www.beuc.org/custom/2011-00396-01-E.pdf