44. Legal claims

As at 31 December 2019, 1645 court proceedings relating to foreign currency loans granted were pending against the Bank (870 court proceedings as at 31 December 2018) with a total disputed amount of PLN 392 million (PLN 210 million as at 31 December 2018), including two group proceedings regarding 75 loan agreements in the first, and 8 loan agreements in the second proceeding. The court proceedings were initiated against the Bank by its customers in connection with foreign currency loan agreements concluded. The Bank’s customers’ claims concerned mainly demands to determine the invalidity of all or part of the agreements or to receive refunds of allegedly undue benefits in connection with the abusive nature of the foreign currency clauses. None of the clauses used by the Bank in the agreements was entered in the register of prohibited contractual provisions. Taking a prudent approach to the protection against the legal risk relating to the court cases which were pending as at 31 December 2019, the Group set up a provision for these pending litigations of PLN 141 million, which reduced the gross carrying amount of mortgage loans.

On 3 October 2019 the Court of Justice of the European Union (“CJEU”) handed down its judgment in Case C-260/18 initiated by requests for a preliminary ruling from the Sąd Okręgowy w Warszawie (Regional Court in Warsaw). The Bank was not a party to the proceedings before the CJEU. The CJEU responded to the four questions asked by the Polish court in respect of an indexed loan contract from November 2008. The CJEU judgment applies only to a situation where the national court has previously found the given contractual term abusive. According to the CJEU judgment, it is the exclusive authority of national courts to assess, as part of court proceedings, whether a particular contractual term may be considered abusive in the context of a particular case. The CJEU left it up to the national courts to assess whether a contract contains abusive clauses and whether, after the elimination of such abusive clauses, the contract may continue to apply and, if not, whether there is a national provision that can replace the removed clauses. In this respect, the CJEU did not support the need to annul contracts, but merely did not rule out such a solution, leaving the final assessment to the national courts, while pointing out that “Based on well-established case-law, the purpose of this provision, and in the first instance of the second part of the sentence, is not to annul all contracts containing unfair terms but to replace the formal balance which the contract establishes between the rights and obligations of the parties with an effective balance which re-establishes equality between them (…)”.

On the basis of the CJEU judgment, if a national court concludes that a contractual term is contrary to the consumer’s interests (abusive), the term is not binding on the parties to the contract. The court removes the term from the contract. The next step is for the court to determine whether the contract may continue (be performed) and, if so, in what form. The court also analyses whether there is a supplementary provision of law that may replace the removed contractual terms. If the court concludes that the contract cannot be performed without the removed terms and, at the same time, it is not possible to replace the removed terms with supplementary provisions of national law, the court may declare the contract invalid.

The CJEU judgment will affect national courts’ case-law first and foremost with regard to loans indexed to a foreign currency and the courts will examine the factual and legal situation, including the text of the loan contract, on a caseby-case basis. It should be pointed out that contracts indexed to CHF are clearly a minority in the Bank’s portfolio (see the note “Management of currency risk associated with mortgage loans for households”). The majority are loan agreements denominated in CHF, where the amount of CHF debt was known to the borrower already at the date of execution of the loan agreement and resulted directly from it. Agreements for loans indexed to CHF in the Bank’s portfolio contain terms according to which the LIBOR interest rate applies to loans whose currency is CHF, whereas if the currency of loans is PLN then the WIBOR interest rate should be applied according to these contractual terms.

Regardless of the absence of significant losses resulting from court cases finalized with a valid court judgment before the date of preparing these financial statements and, in the vast majority, a different nature of the contracts than those covered by the preliminary question referred to above, taking into account an increase in the number of claims relating to mortgage loans in foreign currencies noted in the banking sector, and given the lack of a uniform line of jurisprudence with regard to such loans, in accordance with the prudence concept the Group assessed the legal risk arising not only from the related court cases existing as at the balance sheet date, but also based on certain assumptions as to potential new claims in the future with regard to the entire portfolio of mortgage loans in foreign currencies granted in the past years. In addition, the Group determined scenarios for the possible outcomes in relation to various types of contract templates used in the past and assigned specific probabilities of materialization to these scenarios, based on own analyses and opinions of external lawyers. Based on this analysis, the Group measured the legal risk relating to the entire portfolio of mortgage loans in foreign currencies and arising from potential future legal claims at PLN 281 million. Given the fact that the said amount relates to a new estimate of cash flows from the mortgage loan portfolio, in accordance with IFRS 9 B5.4.6, it reduces the gross balance of such loans as at 31 December 2019 (note “Loans and advances to customers”), with the corresponding charge to costs of 2019, in item “Cost of the legal risk of mortgage loans in convertible currencies”. Additionally, the Bank has set up the provision for potential legal claims against the Bank relating to mortgage loans in convertible currencies of PLN 29 million (see note “Provisions”).

Due to the short span of historical data and the small scale of the Group’s legal risk relating to mortgage loans in foreign currencies to-date, estimates of the number of potential future claims and the direction of jurisprudence are burdened with material uncertainty which results from the need to use certain assumptions based on expert judgment. These assumptions are described in note “Risk management of foreign currency risk associated with mortgage loans for households” and will be reviewed by the Group in subsequent periods.

As at 31 December 2019, 102 court proceedings were pending against the Bank with a total disputed amount of PLN 640 thousand, concerning the reimbursement of the commission in the event that the customer prepays all or part of the loan liability. The provision for these proceedings as at 31 December 2019 is PLN 355 thousand.

On 11 September 2019, the Court of Justice of the European Union (“CJEU”) handed down its judgment in Case

C-383/18 initiated by a request for a preliminary ruling from the Sąd Rejonowy Lublin-Wschód w Lublinie (LublinWschód District Court in Lublin) with its seat in Świdnik. The Bank was not a party to the proceedings before the CJEU. In its judgment, the CJEU interpreted Article 16(1) of Directive 2008/48/EC of the European Parliament and of the Council, stating that it should be interpreted as meaning that the right of a consumer to a reduction in the total cost of the loan in the event of early repayment of the loan includes all the costs imposed on the consumer. In the CJEU’s opinion, the phrase “costs relating to the remaining duration of the contract” should not relate to the type of costs (possibility of connecting them with the duration of the contract) or to their due date, but only to the method of calculation of a reduction. However, the Court did not rule on the method of calculation of reimbursement of costs and left it to national courts.

The CJEU judgment will affect national courts’ case-law in cases involving reimbursement of commission, including those involving the Bank.

As a result of an analysis of the effects of CJEU’s judgment, the Group reviewed its approach to refunds of the part of total costs of consumer and mortgage loans relating to the period from early repayment of the loan until its original maturity date. Currently, such refunds are made on an ongoing basis. The Group estimated the possible prepayments which may occur in the future in relation to the consumer and mortgage loans as at the balance sheet date and reduced its interest income by PLN 147 million, in accordance with the provisions of IFRS 9 (note “Other liabilities” and “Interest income and expenses”). Moreover, the Group estimated the likely costs of satisfying customer complaints relating to reimbursement of commission in connection with early repayments in the past. These costs amounting to PLN 104 million were included in the balance of provisions (note “Provisions”), with the corresponding charge to other operating expenses (note “Other operating income and expenses”).

Due to the short span of historical data, estimates of the number of potential customers complains and loans repayment ratio, especially relating to mortgage loans, are uncertain.

Three proceedings have been brought before the President of UOKIK ex officio and are currently in progress:

• Proceedings initiated ex officio on 28 June 2017 on the acknowledgement that the provisions of the template contract are inadmissible. The breach, of which the Bank is being accused, involves the use of contractual provisions in template mortgage loan agreements which are revalued/indexed/denominated in foreign currencies and their appendices, presenting the method of setting the foreign currency buy and sell rates, which, according to the President of the UOKiK, may be considered inadmissible in the light of Article 385 § 1 of the Civil Code. In the opinion of the UOKiK President, a part of the provisions included in the appendix to the annexe is imprecise, and the manner of determining exchange rates on this basis depends on factors randomly adopted by the Bank. In the opinion of the UOKiK President, such wording of the provisions may lead to the inability of consumers to verify whether the Bank accurately estimated the exchange rate at which it translates loan/mortgage loan instalments. In its letter dated 9 August 2017 the Bank presented its position on the charges formulated by the UOKiK President. On 31 July 2018 the Bank filed a motion for the issuance of a consent decree. In his letter dated20 September 2019 the President of UOKiK extended the term to the conclusion of the proceedings until 31 December 2019. On 23 December 2019 the Bank submitted a letter in which it informed about its will to close the proceedings by issuance of a consent decree and asked for a meeting with the representatives of UOKiK to discuss the Bank’s position concerning the obligations. As at 31 December 2019 the President of UOKiK did not undertake any further steps in this matter. As at 31 December 2019 the Group had not set up a provision for these proceedings.
• Proceedings initiated on 26 July 2017 ex officio concerning using practices which violate the collective interests of customers. The violation with which the Bank has been charged consists of collecting higher instalments on loans and advances denominated in foreign currencies to customers than those following from the advice about interest rate risk provided to customers before they had concluded the contracts, and transferring possible currency risk to the customers. The Bank presented its position on the claims in its letter dated 23 September 2017. In its letter of 14 March 2019, the President of UOKiK requested that the Bank present answers to 16 detailed questions in order to determine the circumstances necessary to settle the case. The Bank provided answers in a letter dated 10 May 2019. As at 31 December 2019 the President of UOKiK did not undertake any further steps in this matter. As at 31 December 2019 the Group had not set up a provision for these proceedings.

• Proceedings initiated ex officio on 12 March 2019 on the acknowledgement that the provisions of the template contract are inadmissible. The proceedings are related to modification clauses which specify the circumstances in which the Bank is entitled to amend the terms and conditions of the agreement, including the amount of fees and commission. In the opinion of the President of UOKiK the modification clauses applied by the Bank give the Bank unilateral unlimited and arbitrary possibilities of modifying the execution of the agreement. Consequently, the President of UOKiK is of the opinion that the clauses applied by the Bank shape the rights and obligations of the consumers in a way that is contrary to good practice and are a gross violation of their interests, which justifies the conclusion that they are abusive. In its letter of 31 May 2019, the Bank presented its position on the charges made by the President of UOKiK. By a letter dated 12 August 2019, the President of UOKiK, extended the deadline for the closure of the proceeding to 31 December 2019, and then by a letter dated 19 December 2019 – to 30 April 2020. As at 31 December 2019 the Group had not set up a provision for these proceedings.

The Bank is party to proceedings initiated by the President of the Competition and Consumer Protection Office (Urząd

Ochrony Konkurencji i Konsumentów – UOKiK) on the basis of a decision dated 23 April 2001 upon the request of the Polish Trade and Distribution Organization Employers Association (Polska Organizacja Handlu i Dystrybucji – Związek Pracodawców – POHiD) against operators of the Visa and Europay payment systems and banks issuing Visa and Europay/ Eurocard/ Mastercard banking cards.

The claims under these proceedings relate to the use of practices limiting competition on the market of banking card payments in Poland, consisting of applying pre-agreed “interchange” fees for transactions made using the above cards as well as limiting access to this market for external entities. On 29 December 2006, UOKiK decided that the practices, consisting of joint determination of the “interchange” fee, did limit market competition and ordered that any such practices should be discontinued, and imposed a fine on, among others, the Bank, in the amount of PLN 16.6 million. The Bank appealed against the decision of the President of UOKiK to CCCP (Court for Competition and Consumer Protection / Sąd Ochrony Konkurencji i Konsumentów – SOKiK). By judgement of 21 November 2013 SOKiK reduced the penalty imposed on the Bank to PLN 10.4 million. The parties to the proceedings appealed against the judgment. In its judgment of 6 October 2015, the Court of Appeal in Warsaw restored the original amount of the imposed penalties stipulated in the decision of the UOKiK, i.e. a fine amounting to PLN 16.6 million (fine imposed on PKO Bank Polski SA) and a fine amounting to PLN 4.8 million (fine imposed on Nordea Bank Polska SA; PKO Bank Polski SA is the legal successor of Nordea Bank Polska S.A. through a merger pursuant to Article 492 § 1 point 1 of the Commercial Companies Code). The fine was paid by the Bank in October 2015. As a result of the cassation complaint made by the Bank, in its judgment dated 25 October 2017, the Supreme Court revoked the appealed judgment of the Court of Appeal in Warsaw and submitted the case for re-examination. The fine paid by the Bank was reimbursed to the Bank on 21 March 2018. Currently, the case is being examined by the Court of Appeal in Warsaw. After two hearings, the Court of Appeal adjourned the trial without setting a date. As at 31 December 2019 the Bank maintained a provision for this litigation of PLN 21 million.

The Bank was served three summons to participate, as an intervening party on the respondent’s side, in cases relating to the interchange fees. Other banks are respondents in the case. The claims vis-à-vis the sued banks amount to almost PLN 146 million and are pursued as damages for differences in interchange fees resulting from applying practices that restrict competition. If the courts find the claims justified, the respondents may claim recourse in separate court proceedings from other banks, including, among others, from PKO Bank Polski SA. The Bank entered the proceedings as a side intervener.

As at the date of the consolidated financial statements the three proceedings pertaining to reprivatization claims. One of the proceedings has been suspended. In the second proceeding ended with a final court judgment favourable to the Bank, the opposing party lodged a cassation complaint, and the Supreme Court accepted it for consideration. In the third proceeding the subject matter of which is to confirm invalidity of the decision refusing to grant temporary ownership of the Bank’s property to the applicant, the cassation complaint has been lodged with the Voivodeship Administrative Court against the final decision discontinuing the proceedings as groundless.

The Management Board of PKO Bank Polski SA is of the opinion that it is unlikely that serious claims may be brought against the Bank in these matters.