Compound interest is one of the several financial customs, that have until recently been used in Italy in banks’ market.
In the last years however, the bank system has evolved drastically. Hence, the Italian legislator, in the past, tended to leave too much freedom to contract to bank operators in setting up credit clauses and condition, allowing a general reference to custom – “rinvio ad usi su piazza” – in the definition of the terms of the agreements.
In the absence of specific rules governing the matter, bank professionals were forced to operate in accordance with practices and standards commonly recognized in the field for those matters. They end up filling the legal vacuum with conventions and practices, which inevitably left a wide margin of discretion, especially in the determination of rules for calculating interests.
Italian banks abused in many occasions of this state of uncertainty adopting debatable and perhaps unfair and unlawful practices: they used to capitalize quarterly contractual interests and then on the very same interests calculate some more for the entire duration of the contractual relationship.
Compound interest is known as “anatocismo” in Italy, which derives from Greek “tokis” (interest, usury) and “ana” (new) and it literally means new interests. This is a practice based on the idea that interests accrued in a certain period contribute to the overall increase in the debt level, therefore they produce for the following period new and higher interests. In others words, compound interest means interests on interests.
Article 1283 of the Italian Civil Code provides that: “in the absence of practices to the contrary, past due interest may generate interest only from the date of judicial claim or as a result of an agreement entered into after the due date, and provided that the interest concerned is due for at least six months”. This provision, which allowed compound interest, was the object of an important ruling by the Italian Supreme Court. The Court recognised this practice was unlawful as it was merely responding to contractual conventions and not legislative regulations and therefore if went against the basic principles of domestic legal system. [Sentenza n. 21095/2004]
Obviously, for a debtor compound interest represent a higher burden, since it traduces to an increase of level of debt to satisfy.
Despite several efforts of the Italian legislator to limit in time the chances for account holders to obtain the restitution of sums unlawfully paid to banks, finally the Italian Constitutional Courts intervened in the matter. It established a term for the claiming of the restitution, which started as of the day of the termination of the contract or the day of satisfactory payment to cover the liabilities. The Statute of Limitation is set in 10 years.
Another which is strictly connected to compound interest is the one relate to usury. Usury is the practice – criminal prosecution -, which is to provide loans of money at interest rates higher than the legal limit, or at least disproportionate to the provided and taking advantage of the difficult conditions of the entity receiving the funds.
In most cases, unfortunately, usury has been and still is possible due to a simple fact: all financial agreements are full of clauses and technicalities, which are not easy to understand – particularly for foreigners investors who approaches Italian bank. Consequently, contractors enter those agreements in good faith and then find themselves dealing with unexpected obligations and burdens.
Now, if compound interest means a tort and thus a civil offence, usury is punished as a criminal one. Usury is a crime regulated by art. 644 of the Italian Criminal Code, entitled “Usury”. It reads: “whoever, except in the cases provided for in Article 643, do you give or promise any form whatsoever, for himself or for others, in consideration of the provision of money or other benefits, interest or usurious other benefits, shall be punished with imprisonment from two to ten years and a fine ranging from EUR 5.000 to EUR 30.000…….. The law sets the limit at which the interest is always usurious”.
In recent years, discussions about usury in bank contracts have been more and more frequent; however, it is still not clear when an interest rate can be really qualified an usurious one and which are the remedies granted by the Italian legal system in order to solve this situation.
This issue is very complicated and it is subject to different interpretations, both doctrinal and jurisprudential. In order to clarify the current state of uncertainty, it is advisable to start considering the legislative background. Originally, Law n.108 of the 7th March 1996 on usury stated that the limit above which rates must be considered usurious is to be fixed at the same level as set in the Italian criminal code (“law sets the limit”). Then, the renewed version of Article 644 specified that “in order to determine the usurious rate, all commissions, remunerations of any kind and expenses connected with the credit supply must be taken into account, with the sole exclusion of taxes and duties”.
Ultimately, the Supreme Court – Criminal Section, by sentence n. 46669, November 2011, fixed important limits concerning the calculation of the rate. It confirmed that the maximum overdraft charge – MOC – (commissioni di massimo scoperto -CMS) are relevant factor to determine the usury rate. In other words, once when the total sum of account’s liabilities exceeds the rate then there is usury. Therefore, when the account’s liabilities. This rate is usually calculated as actual overall average rate (tasso effettivo globale medio – T.E.G.M.) and it is the main reference for detecting usury crime, as it is quarterly determined through the instruction of the Bank of Italy , for each and every category and the source of financing.
Advice on compound interest in Italy
If you are a business-man seeking to conduct business in Italy and if you are interested to know further details on issues regarding usury, transparency of bank services and compound interest in Italy, please do not hesitate to contact our Italian department or send an email to firstname.lastname@example.org. We will offer you legal assistance and guidance for settling rapidly and cost efficiently.
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Article by Dott. Fabrizio Di Patti and Dot.sa Daniela Pacino | Contact KM Legal Net here.