August Newsletter 2018

Published 09 August 2018 by Nina Boteva Law Office

Legislative changes were introduced in the Law on Credit Institutions (LCI) in June, which are related to benchmark for the interest rate used by banks under the credit agreements. According to Art. 3 of Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indexes used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 (hereinafter Regulation (EU) 2016/1011), “benchmark” means any index by reference to which the amount payable under a financial instrument or a financial contract, or the value of a financial instrument, is determined, or an index that is used to measure the performance of an investment fund with the purpose of tracking the return of such index or of defining the asset allocation of a portfolio or of computing the performance fees. Obviously a change in benchmark parameters used by the bank under credit agreements is an issue that substantially affects borrowers. In order to protect the interests of both parties (banks and borrowers) LCI is complemented by a new para. 5 and 6, which respectively provide that upon change of the benchmark for an interest rate used by a bank for a reference interest rate under credit agreements, the procedure under Art. 28 paragraph 2 of Regulation 2016/1011 is applicable. According to the requirements of Art. 28, paragraph 2 of Regulation 2016/1011 when supervised entities use a benchmark they shall produce and maintain robust written plans setting out the actions that they would take in the event that a benchmark materially changes or ceases to be provided. Where feasible and appropriate, such plans shall nominate one or several alternative benchmarks that could be referenced to substitute the benchmarks no longer provided, indicating why such benchmarks would be suitable alternatives. The supervised entities shall, upon request, provide the relevant competent authority with those plans and any updates and shall reflect them in the contractual relationship with clients. In the new para. 6 of Art. 58 of the LCI explicitly states that the bank has the obligation to notify its clients about the changes in the credit agreement as a result of a change of the benchmark, and the new interest rate of the contract being not higher than the interest rate of the contract before that moment. In conclusion, it should be noted that the procedure for the implementation of the benchmark plans within the meaning of Art. 28 paragraph 2 of Regulation 2016/1011 does not apply to credit agreements under the Consumer Credit Law and Law on Real Estate Loans to consumers.