BANKS could be forced to fork out millions of pounds in compensation if lawsuits brought against them by their clients prove successful.
The issue came to a head on Wednesday following a Nicosia district court’s decision to allow a defendant to file a defence, and subsequent counterclaim, against Laiki Bank.
The defendant based his defence on a decision taken by the Competition Commission in June, which found the island’s three main banks – Bank of Cyprus, Laiki and Hellenic – in violation of Article 4 of the Protection of Competition Law 207/89.
The fundamentals of the Competition Law are that it protects consumers from abusive behaviour by members of the commercial set-up. This abusive behaviour can take the form of an abuse of a dominant position in the market, or an agreement between the dominant players of the market who form a cartel and artificially push up the prices, thus making a profit.
With this in mind, the Commission examined the three main banks’ activities and found they had formed a cartel and were fixing prices. The banks were fined a total of £5 million by the Competition Commission.
According to the Commission’s Secretary, Fanis Tryfonos, the finding of a violation by the Commission creates a cause of action for affected persons.
But, he added: “Since the law was first passed in 1989, no one has ever sought compensation and although similar legal provisions exist in other European countries, very few decisions exist.” In other words very few people have ever attempted to go through with their compensation claims, she explained.
Legal sources said the reason behind the small number of claims was the difficulty in proving the amount of damages incurred.
“By price-fixing interest rates, for instance, individuals would have to prove what the interest rates should have been set at, and therefore how much they lost. Unlike abuse of dominant position claims, where plaintiffs can more easily show inflated prices are much above the average profitability of a sector, this is harder to do,” the source said.
Difficult to prove or not, on Wednesday the judge ruled that the defendant’s claim constituted “sufficient actual evidence to raise the issue within the framework of the trial and therefore leave for the defendant to file a defence must be given”.
This is because consumers who had a higher purchase agreement with one of the banks, which fell within the period examined by the Commission, have a cause of action against that institution, because the interest rate that they were paying was artificially high due to the cartel set up.
A banking source said: “A consumer’s damage would be the difference between what that particular service would actually have cost and the amount he in fact paid. So if for argument’s sake he was paying 10 per cent interest, because that is what everyone had agreed, how much would he have been paying had that cartel, which artificially pushed the price up, given him?”
She added: “Even if the bank’s client had only been made to pay eight per cent interest and his damage was two per cent of that value, which for a £10,000 loan would amount to £200 a year, multiplied by the number of loans, by the number of people, by the number of years, then you get into serious amounts of money.”
Although experts admit there is a practical problem in proving how much the actual damage is, it can be overcome by expert evidence opinions – provided to the court – as to how much the cartel distorted the pricing of these products.
Wednesday’s judgement can now be used by consumers in two ways, said the legal source.
“One, people who are already in litigation with banks, and fall within this definition, may ask for a reduction of the claim against them. And two, people who have already paid what the bank has asked, have a cause of action against the bank for the amount they overpaid the banks because of this cartel situation,” he said.
Although the amounts might be small for each separate claim, if enough people got together then the amounts became serious. “You’re talking millions,” he added.
