Charging negative interest rates on consumer customer deposits
According to the Financial Supervisory Authority (FIN-FSA), charging negative interest on basic payment accounts, which are considered to necessity services, should be approached with caution. In addition, due attention should be given to the fact that changing to negative interest rate of other existing accounts may be a substantial impairment of terms and conditions of agreement for the customer which the bank cannot make with a unilateral notification of changes.
Negative deposit interest rates not directly addressed by legislation
In Finland, legislation does not specifically prohibit the charging of negative interest rates on consumer deposits. In the absence of directly applicable legislation, the general principles of contract law and consumer protection currently have to be applied when assessing whether a negative deposit rate is permissible. Full legal certainty on this issue would require clarifications to current legislation.
Factors to be considered when assessing the current situation
The FIN-FSA considers that there are problems associated with charging consumer customers a negative deposit rate, both from the perspective of basic payment account agreements and changing existing deposit agreements. By expressing its view, the FIN-FSA wishes to draw attention to the following consumer protection considerations.
Basic payment account
In principle, everyone has the right to open with a credit institution a basic payment account, the fees charged for which must be reasonable. The purpose of basic payment account regulations is to safeguard for everyone the right to obtain a deposit account for use in daily transactions, which can be considered a necessity service in modern society.
In the case of a necessity service, stricter criteria than usual should be applied when assessing the terms and conditions of agreement and any changes to them as well as the fairness of pricing principles and the predictability of fees. For these reasons, the charging of negative interest rate on basic payment accounts should, in principle, be approached with caution.
Changing existing deposit agreements
In the view of the FIN-FSA, most terms and conditions of existing deposit agreements as based on the deposit interest rate being at least zero. In the terms and conditions of agreement, there is no particular provision for a situation where the deposit rate could be negative.
In deposit agreements, banks have typically reserved for themselves a unilateral right to change the terms of the deposit agreement. In addition to the applicable legislation, the FIN-FSA considers that the unilateral changing of agreements is restricted by general principles of contract law, such as the prohibition on making substantial changes to terms and conditions of agreement. Changing the roles of parties with regard to the obligation to pay interest is likely to be deemed a substantial change to an agreement, particularly with regard to the consumer's status as a party to the agreement.
In the current interest rate environment, the FIN-FSA considers that banks’ power of discretion in applying the above-mentioned principles is wider with regard to large deposits deemed to be investments. At present, legislation does not define what would be the lower limit for a large deposit of this kind. In some EU countries, this limit has, in practice, been set at EUR 100,000.
In recent years, the general level of interest rates has fallen close to and even below zero, for example in the euro area and in some other European countries. On the one hand, the financial crisis and the unconventional monetary policy designed to overcome it form the backdrop to this. However, low interest rates are partly also due to structural factors that have lowered the general level of interest rates. During the late summer and early autumn, market expectations for the development of interest rates have continued to decline as both the European Central Bank and the United States Federal Reserve have eased their monetary policy. At the same time, expectations of a period of exceptionally low and even negative interest rates have been extended.
One instrument of the unconventional monetary policy in the euro area has been the use of negative deposit rates. Currently, euro area banks pay -0.5% (per annum) negative interest on their central bank deposits (with certain exceptions). One consequence of this is that euro area banks fairly commonly charge negative interest rates on corporate customer deposits. In some euro countries, individual banks also charge households negative interest rates on deposits above a certain limit, such as EUR 100,000.
For further information, please contact
Samu Kurri, Head of Department, tel. +358 9 183 5247 or samu.kurri(at)finanssivalvonta.fi
Sanna Atrila, Senior Legal Adviser, tel. +358 9 183 5552 or sanna.atrila(at)finanssivalvonta.fi