Belgian Law Is Poorly Suited to Negative Interest Rates

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Apart from certain rules on savings accounts, no provision anticipated interest rates falling below zero. Theoretically, even capital-guaranteed life insurance could carry negative rates. More and more banks offer clients non-regulated savings accounts, not subject to the obligation to offer a minimum return of 0.11%.

An economic context that is no longer theoretical

For some years, negative interest rates have become increasingly frequent in Belgium, a situation our laws are ill-prepared for. Since summer 2019, the yield on ten-year Belgian government bonds has regularly moved into negative territory. This rate serves as a reference for many economic transactions in Belgium, such as mortgage credit contracts. Belgian government bonds of shorter maturities have had negative rates for even longer: the yield on two-year Belgian bonds fell below 0% as early as September 2014. This situation, still unthinkable a decade ago, was not anticipated by the legislature, so that Belgian law is poorly suited to negative interest rates.

The example of the risk-capital deduction (notional interest)

Take the risk-capital deduction, a tax advantage that was very successful before the last corporate tax reform. Even though the scope of this measure, better known as notional interest, was significantly reduced in 2018, it can still be useful to companies increasing their capital. The principle is relatively simple: a company that increases its equity can deduct from its taxable profit an amount equal to a certain percentage of the money injected into the capital. The Income Tax Code links that percentage to the yield on ten-year Belgian government bonds. As a result, since this year the deduction is no longer possible, except for SMEs (which enjoy a slightly higher rate), because the reference rate has moved into negative territory. To limit the impact of reference-rate fluctuations, the Code sets a 3% cap for this deduction but no floor: the notional interest rate can fall to zero and even become negative. This is the case for income year 2020 (assessment year 2021), for which the rate amounts, so to speak, to -0.092%. Obviously, since deducting a negative amount would increase the taxable base, the companies concerned will not use this option.

Interest on savings accounts

Negative rates could not, however, take hold across the whole Belgian economy. While the law generally omits the hypothesis of sub-zero rates, there is a notable exception concerning regulated savings deposits, i.e. savings accounts. The good old passbook is strictly regulated, and the royal decree implementing the Income Tax Code states that no debit interest may be charged to the holder of a savings deposit. So there is no question of applying a negative rate to savings accounts in Belgium. An extensive interpretation of these rules even requires banks to grant a minimum interest rate of 0.11%, made up of a base rate of at least 0.01% and a fidelity premium of at least 0.10%. The royal decree is far from explicit on this: it provides that the remuneration of savings deposits necessarily comprises a base interest and a fidelity premium. In 2016, when financial institutions saw rates plunge and wished to pass this on to the remuneration on their savings accounts, the Minister of Finance conveniently deduced from this rule that banks had to grant savers a positive minimum rate, hence the 0.01% base rate. As for the 0.10% fidelity premium, the decree provides that the fidelity premium rate offered may not be lower than 25% of the base rate offered, rounded down to the tenth of a percent; although this seems aimed rather at rounding, the Minister concluded that the fidelity premium could not be lower than a tenth of a percent. Several tax experts have contested this extensive interpretation, but the courts have not had, and will probably never have, to decide, since an institution risking going against it would likely attract very bad publicity among savers.

For some banks, negative rates can pose profitability problems. Their excess deposits, i.e. those not transformed into credits to borrowers, are placed with the European Central Bank, which applies a penalising rate of -0.5%. Belgian institutions must therefore be ingenious to generate margins, since they are obliged to remunerate savings deposits at 0.11%. But this minimum remuneration seems the only exception in Belgian law. There is, to our knowledge, no other specific rule imposing minimum thresholds. Consequently, nothing prevents Belgian banks from applying a nil or even negative rate to other deposits, such as current accounts or non-regulated savings accounts.

What about current accounts?

No legal or regulatory provision therefore prohibits providing for a debit interest rate on the sums credited to a current account. A fortiori, a credit institution could modulate the contractual application of a different rate according, for example, to the average annual balance in the account.

Negative-rate mortgages?

The Belgian legislature is not alone in having barely anticipated sub-zero rates. Financial institutions themselves were caught off guard. Some had to apply a negative rate to variable-rate mortgages because the reference rate had fallen below 0%. In other words, the borrowers concerned were able to repay their bank less than they had borrowed, their loan contracts not having provided a floor for the variable rate. According to Febelfin, negative credit rates are rather an accident, due to contractual terms of variable-rate credits that had not anticipated reference rates becoming negative, a situation now settled in practice: the general conditions on mortgage credit now exclude any possibility of these rates becoming negative.

And in life insurance?

The lack of anticipation is also seen in the rules on life insurance. So-called branch 21 contracts are supposed to guarantee capital preservation. Unlike branch 23, where the amount returning to the insured depends on market fluctuations, branch 21 life insurance must in principle offer the saver protection of their investment and a guaranteed rate. But given rate developments, the FSMA (Financial Services and Markets Authority) concedes that the rate offered may be negative. While no legal rule seems to preclude negative rates in branch 21, not a single insurer has yet applied a sub-zero rate. The FSMA draws attention to the impact of life insurance costs: savings products marketed in Belgium have generally generated relatively little return in recent years, and if the remuneration is too low to offset the costs, a savings product’s return may be negative due to entry, management, exit or administration fees. In other words, even if the interest rate stated in a branch 21 contract is positive, the real return, after fees, may well be negative. Account must also be taken of the 2% tax on premiums paid by the insured. The FSMA advises taking into account the potential impact of taxes and other levies.

Brainstorming: legal arguments for and against applying a negative interest rate on bank accounts

We list below some points that may positively or negatively influence the idea of using a negative interest rate on bank accounts other than regulated savings accounts.

Legal arguments against a negative interest

Despite the absence of limitation (apart from regulated savings accounts) noted above, a client unhappy to see negative interest charged for depositing his cash might invoke several legal arguments to try to annul it, notably: the very essence of the notion of interest, interest being the remuneration of the amount lent (to the banker here), which by essence is always positive; the principle of the deposit contract and the banker’s restitution obligation, the deposit contract entailing the Bank’s obligation to repay the credit balance when the client requests it (current account) or on the agreed term or expiry of any notice period (article 1239 of the Civil Code); the cause of the deposit by the client (the decisive motive for concluding the account contract) may be the assurance of preserving his assets, but also their growth through a credit interest rate, and if this cause disappears, the client might consider the account contract lapses (though this conception can be questioned, since in a low-rate context below inflation the value of deposits erodes despite a positive rate); and, from the client’s viewpoint, a negative rate could exclude the deposit from the deposit protection made mandatory by Directive 2014/49/EU, since the client would not recover the whole deposited capital (though this is purely theoretical, as the client could not blame the institution if the protection mechanism is inoperative because the institution has failed). It should be borne in mind that a bank applying negative interest will always inform the client in advance, who has the right, in case of disagreement, to terminate the contractual relationship; failing that, acceptance of a rate change is presumed.

Legal arguments justifying a negative interest

Contractual freedom is a fundamental principle of law. It is perfectly accepted that the depositary of an asset (as, in banking law, for renting a safe) may stipulate a fee for keeping the deposit and be indemnified for its costs (article 1928 of the Civil Code). This principle is also accepted for banking contracts on accounts. The remuneration of the deposit and safekeeping of the assets is doubtless a sufficient basis to justify a negative interest rate.

Conclusion: other possibilities?

A custody commission? It is not absurd, legally or economically, to conceive a commission for keeping the money deposited by the client, calculated by means of a rate. Such a solution has the merit of reproducing almost symmetrically the economic reality of the ECB’s policy; the safekeeping of funds will be interpreted as a service provided by the banker. The custody commission must be clearly distinguished, in the texts, from any management commission applied.

A change to the banks’ general conditions? Another possibility could be to amend the general conditions applicable to regulated savings accounts. These could, in our view, perfectly provide, for example, that a client may hold only one regulated savings account. One could combine this with a clause under which, beyond a certain credit balance on the savings account, the surplus is automatically transferred to the client’s current account, which would de facto limit the bank’s prejudice.

Mandatory prior warning of the client. In any event, for clients already bound by an account contract, they must be able to be warned in advance of this contractual change, and their consent must be obtained with certainty (expressly or tacitly, but certainly). A possibility of terminating the account contract, on reasonable notice, must also be left to the client. Care should be taken not to confuse this interest with the question of late-payment or debit interest claimed by the bank.

This article is a translation and a condensed version. Only the French version is authoritative. It is provided for information purposes and does not constitute legal advice.