Category: Banks and finance

Europe may force banks to take greater responsibility for financial fraud

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Financial fraud is currently one of the fastest-growing forms of crime in Europe. Phishing emails, fake bank messages, scam calls, and social engineering schemes swindle millions of euros from consumers every year.

In practice, the same scenario often plays out in such situations: the bank refuses to compensate for the lost funds, arguing that the customer “disclosed the information” themselves and must therefore bear the financial consequences.

However, there is a growing trend in European Union law to change this practice. A recently published opinion by the Advocate General of the Court of Justice of the European Union addresses an important question: can a bank refuse to immediately refund a customer for an unauthorized payment solely on the grounds that it suspects the customer of gross negligence?

The Advocate General’s proposed answer is quite clear and unequivocal.

According to his conclusion, the bank must immediately refund the amount of the unauthorized transaction to the customer, and only then may it determine whether the customer acted with gross negligence.

In other words, the logic of the legislation is as follows: first, the protection of consumers’ money must be ensured, and only then is the issue of liability allocation addressed.

In his opinion, the Advocate General emphasizes that European Union legislation has deliberately sought to put an end to the practice whereby payment service providers refuse to refund funds on the grounds of alleged improper conduct on the part of the customer. Such practices often forced consumers to take legal action themselves in order to recover their money.

That is precisely why the Payment Services Directive stipulates that:

  • the payment service provider must immediately refund the amount of the unauthorized transaction;
  •  If the service provider believes that the customer acted in bad faith or with gross negligence, the service provider must prove these circumstances and, if necessary, seek compensation through the courts.

This means that the financial risk falls primarily on the bank or other payment service provider, rather than on the consumer.

If the Court of Justice upholds this conclusion, it will fundamentally change the practical approach to fraud disputes. Until now, in most cases, consumers have had to prove themselves that they were not at fault for the lost funds. This often meant lengthy disputes with the bank or even litigation in court.

Under the interpretation proposed by the Advocate General, the situation would be different: consumers would not have to spend years in court fighting for their money. The bank would be required to compensate for the loss first, and if it believes that the customer acted with extreme negligence, it would have to prove those circumstances itself.

This logic is also consistent with a general principle of European payment law: the consumer is considered the weaker party in the relationship, and therefore the payment system must ensure a high level of protection for the consumer. Under the PSD2 Directive, the payment service provider is generally liable for unauthorized transactions, except in cases where the consumer acted fraudulently or with gross negligence.

However, even in such cases, the burden of proof lies with the bank.

This case is not an isolated incident. There is growing discussion in European legislative circles about the need to strengthen consumer protection in cases of financial fraud. The European Commission is already proposing new payment regulation rules that would, in certain cases, hold payment service providers liable even in cases of so-called“authorized push payment”fraud—where the customer authorizes the payment themselves but does so after being misled by a fraudster.

This points to a clear regulatory direction: the fintech and payments sector must play a more active role in fraud prevention and assume a greater share of the risk.

A Signal for Lithuania

The number of financial fraud cases in Lithuania is skyrocketing. Disputes between banks and customers over lost funds are also not uncommon. Therefore, the European Court of Justice’s ruling in this case could have very real implications for Lithuanian legal practice.

If the Court agrees with the Advocate General’s opinion, it will become significantly more difficult for banks across Europe—including in Lithuania—to refuse to compensate victims of fraud for their losses. This would mark a significant shift: in the financial services market, the center of responsibility is gradually shifting from the individual consumer to the institutions that manage the payment infrastructure.

 

Laurynas Staniulis
Partner at the law firm AVOCAD, attorney

Bonds: a popular but risky financing instrument

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Recently, new bond offerings have been hitting the market almost every week. In many cases, the new bond issues are refinancing previous issues or additional placements when the first one failed to raise sufficient funds.

Bonds are becoming an increasingly popular financing instrument, targeting not only institutional investors but also the consumer retail market, but the latter are not always able to properly understand and assess investment risks. Increasingly, bonds are being offered to the general public, people who are not always able to properly assess the degree of risk and the purpose of the issue. A bond is essentially a loan with a fixed interest rate. Therefore, by investing, a person is effectively making a loan to the issuer - which means that he or she is taking on the risk of the creditor.

Despite its fancy name, a bond is simply a loan with a fixed interest rate. If the issuer fails to redeem the bond at maturity, the bondholders become creditors, whose order of claim depends on whether the bond was secured and what kind of security was provided. In essence, bonds create a loan relationship between the bond holder and the issuer. A decision to purchase bonds is therefore equivalent to a decision to grant a loan. In some cases, bonds distributed by the private sector are still equated with government securities, which are even safer than bank deposits and are more of a savings than an investment instrument. Buying private sector bonds is not saving but investing. Therefore, in order to assess the risk, the investor should understand to whom the loan is being lent, for what purpose and under what conditions the funds will be repaid.

The most common types of bonds offered on the market can be categorised according to listing and collateralisation criteria. Listed bonds are securities traded on stock exchanges. Listing bonds provide liquidity, as holders can sell their bonds at any time at the then current market price and thus recover at least part of their investment or even make a profit, depending solely on the market price of the bond. Unlisted bonds, on the other hand, do not have liquidity, so that the funds invested will, in principle, only be recovered at the end of the bond's term. Bonds are also divided into secured and unsecured. The key difference is that if the issuer is unable to redeem the bond, the proceeds from the realisation of the collateral (e.g. real estate, securities or other security) will be used to repurchase the secured bond.

In the case of unsecured bonds, if the issuer fails to redeem the bonds at maturity, the bondholders become third-ranking creditors, after mortgage creditors, the tax authorities and employees. This means that in the event of the issuer's insolvency, bondholders are unlikely to recover anything. In the event of an issuer's bankruptcy, unsecured bondholders are often left without any compensation. It is therefore necessary to look at what exactly the issue is secured by - whether it is a real asset or just a pledge of shares, which is often formal in nature.

What should be valued and understood?

For secured bonds, it is important to consider what is being pledged and the possibilities of recovery from the collateral. In some cases, existing or developing real estate is pledged - this type of collateral provides the greatest protection for bondholders and ensures that a larger part of the investment will be recovered, even in the event of failure. The situation is slightly different for bonds secured by a pledge of the issuer's shares. In some cases, the issuer does not carry out any activity itself, but lends the funds raised to the company developing the project. In other cases, the shares of the project company itself are pledged, but, as a rule, the assets of the project company are already pledged to the financial institution. Thus, in the event of failure, the result will be the same as with unsecured bonds. A security instrument only has real value if it can be effectively recovered. If the collateral is already encumbered by a bank mortgage, it often offers no real protection to bondholders.

Understanding that bonds are a risky investment, it is important to consider the purpose of the borrowing and the sources from which interest will be paid and the bonds repurchased. In some cases, bonds are used as bridge financing. For example, bonds may be used to finance the construction of a real estate project, with a view to mortgaging the property to a financial institution and then redeeming the bonds with the loan proceeds. In this case, the refinancing risk should be assessed. If bank financing is not forthcoming, e.g. due to insufficient cash flow, the issuer may have to issue a new issue. However, there is no guarantee that the market will accept it.

Alternatively, the bond proceeds can be used for construction work on a real estate project, and then the property is disposed of, with the proceeds used to redeem the bond. In any case, when valuing a bond, it is important to understand not only what the funds will be used for and how they will be repaid, but also how much equity is being invested in the project by the issuer or by its affiliates and controlling persons. The presence of equity indicates that the issuer has confidence in the success of the project. The higher the contribution, the stronger the incentive to maintain the project even in the event of a crisis.

Risk indicators: interest rate and reputation

Another important element that may be relevant for assessing bond risk is the reputation of the issuer and its affiliates and the financial capacity to provide additional capital in the event of a crisis.

The level of interest offered is also a key indicator of risk - the higher the interest, the higher the risk.

The proliferation of high-yield bonds suggests that cheaper financiers - banks, funds or crowdfunding platforms - have refused to lend because of excessive risk.A proposed interest rate of 15% or similar should be a clear warning. Cases such as Integre Trans or BigBrand have shown that even tempting return offers can result in investor losses.

In any case, bonds are a good and fast-growing financing tool, but like any other investment they come with risks. When deciding whether to invest in bonds, it is useful to rely not only on a colourful prospectus but also on the advice of professionals who understand the nature of these financial instruments. Bonds are not evil, but they are not a deposit either. It is lending, which always involves risk. Therefore, the most important thing is to understand what you are buying.

 

AVOCAD partner, lawyer Laurynas Staniulis

Important reminder from the Supreme Court of Lithuania to natural persons in bankruptcy

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Bankruptcy of natural persons has existed in Lithuania for more than a decade. It gives people in financial difficulties the chance to start their lives afresh. A lot of practice has been accumulated over this time, but according to lawyers, bankrupts often forget the basics, with very painful consequences.

Commenting on the recent case law of the Supreme Court of Lithuania, Egidijaus Langys, Managing Partner of AVOCAD, reminds that one of the essential duties of a natural person who intends to initiate bankruptcy proceedings is to inform creditors about the intention to initiate a bankruptcy proceeding of a natural person.

According to the lawyer, the fulfilment of this obligation is important in several respects:

Firstly, it should be in the natural person's own interest to inform creditors about his/her bankruptcy proceedings, as only the outstanding claims of creditors as set out in the natural person's solvency plan will be written off when the natural person's bankruptcy proceedings are closed.

Second, creditors have the right to submit to the insolvency administrator, within the time limit set by the court, their claims arising before the date of the opening of the natural person's insolvency proceedings. Creditors may exercise this right only if they have been informed of the natural person's bankruptcy proceedings.

"Therefore, a person seeking to restore his or her solvency has a duty to be proactive and to keep all creditors properly informed and to indicate the pending proceedings in respect of the claims brought by creditors," points out Egidijus Langys.

According to the lawyer, the write-off of creditors' claims upon the termination of the insolvency proceedings of a natural person is a specific statutory ground for the termination of an obligation. The obligation is extinguished when the insolvency proceedings of the natural person are closed.

"It is very important to understand that when a natural person's insolvency proceedings are closed, only the outstanding claims of creditors listed in the natural person's solvency plan are written off. In other words, only the claims of those creditors who have been informed of the bankruptcy proceedings are written off," notes Langys.

Consequently, other creditors' claims which arose before the opening of the insolvency proceedings against the natural person but were not included in the insolvency plan, or which arose after the opening of the insolvency proceedings against the natural person, do not automatically expire. It is therefore in the debtor's own interest to name all potential creditors. This is because, at a later stage, after the natural person's insolvency proceedings have been closed, creditors will be able to make claims in accordance with the law and can be enforced against the natural person after the natural person's insolvency has been closed.

The Supreme Court of Lithuania has clearly and unequivocally absolutized the debtor's duty in the context of the protection of the creditors' interests and has stated that the relevant circumstance is not whether the creditor knew or should have known of the debtor's bankruptcy proceedings, but whether the natural person seeking bankruptcy was active in such proceedings and duly fulfilled the statutory obligation of the bankruptcy court to inform the debtor of his/her property claims brought in other proceedings.

It is therefore very important to remind both natural persons themselves and their advisors that all possible creditors must be informed of the intention to initiate insolvency proceedings. If bankruptcy proceedings have already been opened, to the court, and to the court of the proceedings in other cases.

"Otherwise, the only person left to blame is himself, because not all debts that could have been written off were written off at the end of the insolvency process," stresses Egidijus Langys.

(Civil case No 3K-3-191-381/2024 of 24 October 2024)

 

Laurynas Staniulis. The price of risk appetite

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Recently, the market has seen a number of bond offers that have surprised the market with the level of returns offered. Investors have been offered bonds with yields as high as 12% or more. Integre Trans UAB, one of the fastest growing transport and logistics companies, was no exception.

In spring 2023, Integre Trans launched a €4,000,000 bond issue with an impressive interest rate of 12% + 6-month EURIBOR, to be redeemed in May 2026. However, already on 6 May 2024, the company announced its planned restructuring.

Very recently, the market received news that Integre Trans UAB's restructuring efforts were not successful and on 17 July 2024 the Vilnius Regional Court opened bankruptcy proceedings against Integre Trans UAB. Subsequently, the Court of Appeal of Lithuania annulled the decision and referred the matter for reconsideration.

What lies ahead for bondholders.

It should be recalled that the bonds issued by UAB Integre Trans were not secured by pledges or other collateral. This means that, in the event of the company's bankruptcy, the bondholders are simply the company's creditors without any privileges.

In the event of insolvency, the bondholders would be included in the creditors' queue on a general basis and their claims would be jointly satisfied with other creditors, but only after the claims of the mortgage holders, the employees and the claims of the State Tax Inspectorate (VMI) and the Social Insurance Institution (Sodros) had been satisfied.

Thus, the 70% discount on UAB Integre Trans bonds is available today, which clearly reflects investor sentiment.

Of course, it is difficult to predict at this stage how the restructuring case will turn out and, if it does, whether it will be possible to restructure the business and avoid insolvency, but two things can already be said today:

  1. The bonds will not be redeemed on the due date.
  2. Investors will not get the promised 12% + 6 month EURIBOR return.

UAB Integre Trans bonds are currently available at a 70% discount.

So, once again, a bond is simply a debt security issued by a company or government. It is a document that gives the holder of the bond the right to apply to the entity that issued the bond at the end of the bond period. The entity that issued the bond is obliged to repay the money invested. In other words, the bondholder and the issuing entity are linked by an elementary loan relationship.

Sometimes it seems that underwriting bonds is a way of avoiding the requirements for informed investors by making it possible for people to invest - to buy bonds - who are not prepared to properly assess the risks involved. This is particularly the case when bonds are issued by collective investment undertakings for informed investors, commonly known as funds.

I have already mentioned that in recent years we have seen a trend towards very high yields and relatively short maturities. In the market, bonds with yields as low as 15% may, in fact, mean that, for one reason or another, traditional financing methods, such as loans from financial institutions or investment funds, are not available.

It is important to note that bonds offered on the market are usually not secured by mortgaged real estate, but rather by a pledge of the shares of the company that issued the bond as collateral. In terms of whether such collateral provides real protection, the answer is probably not.

If shares are pledged, it is likely that the issuer does not have any assets to pledge or that those assets are already pledged. This means that if the worst case scenario does occur and the entity is unable to redeem the bonds, the claims of the bondholders would only be satisfied after the claims of the mortgage lender have been satisfied and only if there is any money left would the claims of the bondholders be satisfied. I would therefore probably not be very far wrong in saying that such bonds are, in essence, simply a loan without any additional security for the bondholder.

It should also be noted that bonds can be placed to refinance an existing bond issue, while the source of redemption for a new bond is a future bond issue. This pattern of short-term high-yield bonds implies that the bonds are not issued to finance new activities that would directly result in a source of redemption, but rather to temporarily balance cash flows, build equity or the like.

The natural question is whether the issuer will be able to refinance the bonds at maturity and service even more expensive bonds if necessary. Probably not, which leads to the view that the bonds issued simply reflect the issuers' belief in a positive market development. But the question "what if..." remains unanswered.

Sometimes the answer to this question can be deduced, albeit indirectly, from the assessment of the issuer. If the issuer is a project company that is part of a large group of companies and the bonds are not guaranteed by the "parent" company, we may consider that the "parent" company is aware of the risks of the project and is not prepared to fulfil its obligations to the bondholders at any cost. Of course, these are only assumptions and one would like to believe that, in the event of the issuer's inability to meet its obligations, there would be a consolidation of the Group's forces to redeem the bonds. However, the reluctance to commit formally leaves the question open.

Bonds are not a new way of raising funds and are certainly not a threat in themselves. Bonds, like any other investment, involve risks that each investor has to assess individually according to his or her risk appetite. However, in any case, investing in bonds should not only involve a careful assessment of the issuer or the collateral, but also an understanding of the objectives of the bond issue. Better still, you should outsource the assessment of these risks to experts in the field - investment funds.

What can we learn?

Perhaps the main idea is that the rate of return is proportional to the investment risk.

Bonds are a complex investment product that is not designed for "household" investors.

 

Are you entitled to a credit reduction when you buy a car?  

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To buy a car, we often use a variety of financing instruments. Some of the most popular are car rental or leasing contracts. Eimantas Čepas, Senior Associate at AVOCAD, comments on what you need to know about these contracts and what misunderstandings often arise when you want to buy a financed car early in the hope of saving money .

According to the lawyer, when concluding a car rental or leasing contract, the buyer of a car can usually choose between paying only monthly instalments during the contract period and not buying the car at the end of the contract, or paying the residual value of the car and taking personal ownership of the used car.

It is important to note here that this refers to rental or leasing contracts between a consumer and a trader. In a consumer contract, the trader undertakes to transfer the ownership of the goods or services to the consumer and the consumer undertakes to accept the goods or services and pay the price. A consumer is a natural person who enters into transactions for purposes other than his business, trade, craft or profession. The consumer is considered to be the weaker party to the transaction when concluding a contract with a trader, which is why the law provides for additional safeguards to protect the rights of the consumer.

The Consumer Credit Act is one of the tools designed to protect the interests of consumers who are considering taking on financial obligations. The Consumer Credit Act enshrines the consumer's right to discharge all or part of his obligations under a consumer credit agreement at any time. If he does so, he is entitled to a reduction in the total cost of the consumer credit, consisting of interest and costs for the remaining period of the consumer credit agreement, calculated from the date of repayment of the consumer credit or part thereof.

Thus, if a contract is concluded and the owner decides to take ownership of the financed car before the final contractual maturity date, it is common practice to expect to save on the interest part of the lease or hire purchase agreement. However, there are occasions when, after expressing such a wish, the car financier asks to pay not only the residual value of the car, but also the interest for the entire pre-agreed period of the contract.

"Such situations have been created by the provisions of the Consumer Credit Act, according to which this Act applies to consumer credit agreements, but not to lease or hire-purchase agreements, where these agreements or a separate agreement do not stipulate an obligation to purchase the object of the agreement, in this case a car," says Čepas.

Financing agreements are usually drawn up in advance by the lender. The condition that at the end of the contract it will not be necessary to buy the car for the remaining value and that it will be up to the buyer's wish to do so, may seem attractive to many consumers. However, a financier who takes advantage of this, by formally stipulating in a standard rental or leasing contract that the consumer is not obliged to acquire the car, or only acquires the right to acquire the car by expressing his/her will in a separate notice, may seek to avoid the application of the provisions of the Consumer Credit Act, which enable the consumer to save money by early repayment of the contract, without having to pay a portion of the interest. Such a provision is undoubtedly advantageous for the creditor, as it ensures that the consumer, even if he decides to repay the credit early, will have to pay the full amount of the pre-agreed interest for the entire term of the contract.

The Supreme Court of Lithuania, which has established uniform case law in Lithuania, has pointed out that when assessing whether the financier in such contracts, by not imposing an obligation on the buyer to purchase a car, does not intend to evade the application of the Consumer Credit Law and to make a potentially unjustified profit from the consumer, the purpose for which the buyer enters into the contract should be taken into account. In this case, the consumer's purpose is usually clear, namely to purchase a car by spreading the payments over a period of time.

In the Court's view, where the contract in question does not contain a clause requiring the consumer to acquire ownership of the car and these circumstances have not been individually discussed with the consumer, or where other circumstances suggest that the terms of the lease or hire-purchase agreement were intended to avoid the application of the Consumer Credit Act, the provisions of the Consumer Credit Act must apply to such contracts and the consumer's rights to discharge all or part of his obligations under the consumer credit agreement and to reduce the total cost of the consumer credit at any time must be protected.

Nor should the consumer's right to discharge all or part of his obligations under a consumer credit agreement at any time be confused with a modification of the credit agreement. This means that the consumer may decide on his own to prematurely discharge all his credit obligations, in which case he may not be required to renegotiate the terms of the financing provided.

According to Eimantas Čepas, attorney at law at AVOCAD, notwithstanding the possible unfair behaviour of creditors in not stipulating the obligation to purchase a car in rental or lease agreements, in order to formally avoid the application of the Consumer Credit provisions, a consumer who decides to redeem the car subject to the agreement before the due date is entitled to a reduction of the total price of the consumer credit, i.e. to the conversion of the interest rate at the time of the redemption of the car, thus lowering the overall price of the interest payable.