At Belzuz Abogados, as specialists in Insurance Law, we frequently deal with queries related to all aspects of such a broad and complex area of the legal system as Insurance Law. For this reason, we strive to provide constant training in order to keep abreast of the latest regulatory developments that may affect our sector, directly or indirectly, all in order to provide the best possible service to our clients.

I. What is a revolving credit?

Revolving credit is a special financial product, essentially characterised by the fact that the borrower can draw down up to the limit of the credit granted without the need to pay the full amount drawn down at the end of the month or within a given period, but by repaying it in instalments, the amount of which can be chosen and modified during the term of the contract, in accordance with minimum amounts established by the institution. The amount of the instalments may vary according to the consumer's use of the revolving credit and the instalment payments he makes.

The credit limit decreases as the borrower makes use of it by purchasing goods or services or by withdrawing cash. In turn, the credit can be replenished through payments made by making regular instalments or early repayments. The basic idea is that the instalments paid by the borrower to repay the principal become part of the available credit. This is the origin of the term "revolving" which refers to a revolving credit that is automatically renewed at each maturity, which makes it somewhat similar to a line of credit.

The characteristics of this financial product, which is very complex for the average consumer to understand, have resulted in practice in the repayment of the principal over a generally long period of time, which, together with interest rates that are generally comparatively high, means that the consumer ends up paying a high total amount of interest, or that the debt is prolonged indefinitely.

These practical problems have led, in recent years, to a high level of litigation in relation to revolving credit. In the case of Spain, this litigation has mainly been aimed at seeking, on the part of the plaintiff borrowers, the consideration of the interest rate associated with the revolving credit as usurious or abusive, therefore null and void, with the consequence that the parties only have to reimburse each other for the benefits mutually received (the borrower the totality of the principal and the financial institution the amounts received from the borrower). In practice, the consequence of the nullity is that the borrower is obliged to repay the lender only the principal, but not the interest.

In order to reduce the legal uncertainty surrounding this financial product, which was not originally regulated in detail, the legislator and the government have tried to regulate revolving credit in more detail in order to fill a gap that had previously had to be filled by case law.

II. The Bank of Spain’s Governance and Transparency Guide

In view of the situation described in the previous point, the Bank of Spain has drawn up a Governance and Transparency Guide on revolving credit for institutions subject to its supervision. We should explain, firstly, that Law 10/2014 of 26 June 2014 on the regulation, supervision and solvency of credit institutions (LOSSEAC) establishes that the Bank of Spain may draw up technical guides for institutions subject to its supervision, in which it establishes in detail the practices, methodologies and procedures that it considers correct for compliance with the regulations under its supervision (art. 54 LOSSEAC).

In other words, the Governance Guides contain the Bank of Spain's criteria for the interpretation and application of sectoral regulations, both national and Community, generating good practice criteria that are applied to the financial institutions subject to control and supervision by the Bank of Spain, which is the regulatory body in this area, in parallel with the way in which the Bank of Spain's Directorate General for Banking Supervision (DG ECB) and the Bank of Spain's Directorate General for Banking Supervision (DG ECB) apply these criteria to financial institutions.

The guide establishes a series of good practices, which will come into force on 31 December 2024, aimed primarily at financial institutions. These are briefly summarised below:

a. Marketing policies: this basically refers to the training requirements for staff responsible for distributing revolving credit, as well as the mechanisms necessary for institutions to ensure that customers are duly informed in advance, taking into account their financial knowledge, age, financial situation and needs.

b. Marketing channels: the main emphasis is on the need to provide the customer with pre-contractual information sufficiently in advance.

c. Contractual modifications: modifications in favour of the customer may be implemented immediately. Otherwise, they must be notified at least one month in advance and the borrower's acceptance or rejection must be facilitated by the same or another means that is not more burdensome.

d. Information and prior actions: emphasis is placed on the need to use simple language that the average customer can understand, expressly including the term "revolving" in communications, avoiding terms such as "free of charge" and providing representative examples of the applicable interest rates.

e. Assessment of solvency: this is a highly topical point, namely the obligation of lenders to assess the customer's ability to meet the obligations arising from the loan, especially if they can meet the repayments without falling into over-indebtedness. This obligation was already included in art. 18 of Order EHA/2899/2011 and has given rise to recent litigation.

We have made a basic summary of the main new features introduced by the Guide to Governance and Transparency, as this is an article specialising in insurance law and not in banking law.

III. The importance of the Bank of Spain's Guide for the insurance sector

Having said this, the reader may ask why a Guide to Good Practice of the Bank of Spain on a banking or financial matter such as revolving credit is of interest to the insurance sector. Well, the answer is that this Guide incorporates a series of specific provisions aimed at the insurance industry.

The reason for these provisions is that, in practice, it is common for revolving loans to be marketed together with ancillary products, typically a combined insurance, which usually aims at payment protection, guaranteeing coverage of the debt contracted in different scenarios (for example, in the event of the borrower's death, loss of employment, temporary or permanent disability or severe disability, among other possibilities). The marketing of these insurance policies associated with loans does not pose any legal obstacle and is common in many financial products (such as payment protection insurance taken out with mortgage loans), and may even be beneficial for the parties, as it guarantees payment of the debt when one of the insured risks occurs.

However, the Bank of Spain points out that it is necessary to comply with a series of transparency requirements for the marketing and distribution of these insurances. These requirements are basically manifested at four levels:

i) Informing the consumer in a way that is comprehensible to him that credit insurance is an ancillary and voluntary product.

ii) Informing the consumer in a comprehensible manner of the essential characteristics of the insurance product he is taking out (in particular its cost), as well as the consequences for the revolving credit if he does not take out the insurance.

iii) Ensure that the revolving credit insurance is independent. Information on the settlement of the credit claim, its periodic instalment, quarterly reports and additional information must be separate from information on the premium and the insurance product. In particular, non-payment of the premium cannot be considered as a debt arising from the credit, nor can it be capitalised by accruing any interest agreed in the credit.

iv) Financial institutions are recommended not to include in the insurance products formulas that prevent the activation of the cover, such as those based on changes to the deferred payment mode.

IV. Conclusions

The Bank of Spain has drawn up a Governance and Transparency Guide on revolving credit for institutions subject to its supervision, which will enter into force on 31 December 2024 and contains numerous guidelines on good practices relating to revolving credit that must be taken into account by institutions subject to control and supervision by this body. In particular, it contains a series of provisions aimed at the marketing and distribution of insurance associated with revolving credit, of which both institutions and customers should be aware, in order to facilitate the proper functioning of legal transactions and avoid high levels of litigation.

 Adrián Macias Catalina 

Insurance Law department | Madrid (Spain)

Belzuz Abogados SLP

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