INTEREST RATES AND USURY IN CYPRUS AND THE UK
Interest was always the basis for making and accumulating profits in the lending industry. Despite its coherent simplicity as a term, interest rates have been the subject of numerus debates either from a legal or an ethical perspective.
Whatever the purpose of financing, interest accrues on the principal sum at an agreed rate. In addition, should there is a material breach of the loan terms, default interest will be added compensating the lender for the extra risk.
Considering the above business practises, many jurisdictions have been enacting laws to protect borrowers against profiteering and usury.
Cyprus implemented laws against usury and profiteering by private lenders and non-banking institutions, on 29th April 2011 by amending the Criminal Code, Cap. 154 (Law No. 72(I)/2011). The amended law introduced the usury and profiteering offence, as well as applicable exceptions for banking institutions and exempted loans.
Cyprus Law restricts lending by private lenders and non-banking institutions, with an interest rate exceeding the reference interest rate and such act is an offense punishable (upon conviction) with imprisonment not exceeding five years and/or a penalty not exceeding €30,000.00, or both. It should be clarified at this point that the reference interest rate is determined on a quarterly basis by the Central Bank of Cyprus and as from 24/04/2020 and until the next quarter, the Reference Interest Rate is set at 8.71%.
The usury offence will not apply to situations where the lender and the borrower are considered related parties as per the provisions of Cyprus Income Tax Law and if:
- A loan is granted towards a legal entity, where the capital originates (directly or indirectly) from abroad and the amount of the facility exceeds €1,000,000.00 (minimum initial payment of €500,000.00); and
- A loan is granted towards a legal entity for an amount exceeding €1,000,000.00 (minimum initial payment of €500,000.00), and the facility amount is to be transferred abroad.
In respect of profiteering, a person who takes advantage of the need and the financial state of another, by receiving or collecting assets exceeding the value of his own contribution (obvious disproportion in value), commits an offence punishable (upon conviction) with imprisonment not exceeding five years and/or a penalty not exceeding €30,000.00, or both.
The UK on the other hand follows a more liberal approach in respect to usury as an offense and applicable lending interest rates. For instance, up to and until 2015 no restrictions existed on payday loan companies, who could charge extraordinarily high rates of interest. In response to such practises the UK’s Financial Conduct Authority (FCA) introduced restrictions on such type of loans with the following parameters:
- Initial cost cap of 0.8% per day (i.e. interest and fees);
- Fixed default fees capped at £15 (interest on unpaid balances and default charges must not exceed the initial rate);
- Total cost cap of 100% (borrowers must never have to pay back more in fees and interest than the amount borrowed).
Loan agreements often specify the payment of an increased rate of interest upon the default of the borrower. However, if such default interest is significantly higher than the normal rate of interest (imposing disproportionate detriment on the borrower), the Courts may hold this default interest to be a penalty and hence unenforceable.
Case law addressing the level at which a default interest rate becomes a penalty is poor, however, in one case a rate of 1% default interest was deemed acceptable and characterised modest and commercially justifiable (Lordsvale Finance plc v Zambia), whereas in another a clause providing that late payment by the borrower would be subject to a default interest of 5% per week (approximately 260% per annum) was considered by the Courts unenforceable (Jeancharm Ltd v Barnet Football Club Ltd).
Regrettably there is little guidance in respect to the applied levels of interest between the two extreme scenarios illustrated above, however, publicly available data show that an approximate monthly interest rate of 0.45% ranging up to 1.10%, accompanied by a low single digit monthly default interest rate, is a commercially acceptable rate in the UK’s unregulated short-term and bridge loan industry.
With interest being at heart of any lender’s business as the primary source of the lender’s income, the jurisdictional restrictions on the interest rates and terms of lending should be one of the first questions for lenders to consider when planning their lending strategy.
Andreas Chr. Christoforou
Advocate