The Supreme Court’s February 28 ruling updates its 2015 decision, which had found that obliging clients to pay all origination expenses was abusive. All mortgage origination expenses, including stamp duty, notary, agency and land registry fees, have historically been charged to customers. As a consequence of the 2015 ruling, banks had been liable to be sued for reimbursement.

After years of provisioning related to mortgage-floor clauses, this had been another unwelcome source of litigation risk for the Spanish banking sector.

While noise in the market around this issue has been reputationally damaging, Spanish banks did not believe it would lead to a material need for provisions, even though the Financial Users Association (ASUFIN) calculated that eight million people might have been in line to claim back mortgage-related expenses. Scope believes a prudent estimate of the maximum liability for the banking system is EUR 32bn.

Scope estimates that stamp duty accounts for over half of mortgage-related expenses. Given that average mortgage fees that can be reclaimed by customers (excluding stamp duty) are around EUR 1,600 against average litigation costs of EUR 3,000, the agency does not expect an avalanche of lawsuits. The impact on banks should therefore be limited.

“We would expect banks to accumulate provisions but these should be manageable, especially so following the 2018 ruling. We note that a culture of litigation has emerged in Spain following the crisis, creating litigation risk as well as associated negative financial impact and reputational risk for the banks,” noted Alvaro Dominguez, associate analyst at Scope Ratings, in a new report.

The full report can be found here.