Italian Courts take position on interest compounding in banking transactions: the prohibition is effective since the 1st of January 2014

Italian courts seem not to agree with such an interpretation, as the few decisions issued on this matter so far state that the interest compounding prohibition is effective since 1st January 2014, upon entry into force of the amendments to art. 120 CBA.

A first decision was issued by the Court of Appeal of Genova (Ordinance dated 11 March 2014) stating that the prohibition of Art.120 CBA was effective independently from the enactment of the implementing measures by CICR.

This approach has been recently confirmed by two decisions issued by the Court of Milan dated 25 March and 3 April 2015, clearly stating that interest compounding is no longer allowed since the 1st of January 2014 .

The above two Ordinances were issued as a result of precautionary proceedings started by a consumers' association in order to inhibit banks from applying the interest capitalization in respect of interest accrued on bank accounts.

According to the Court, art. 120 of CBA must be interpreted in the sense that interest compounding in banking transactions is prohibited, considering not only the mere literal interpretation of such law provision, but also the content of the report accompanying the Stability Law, which expressly states that the purpose of the law is to prohibit the banking practice of interest compounding and the fact that Law Decree No. 91/2014 - which was intended to re-admit interest compounding – was not converted into law.

The Court also pointed out that the interest compounding applied by banks after the 1st of January 2014 cannot be justified on the basis of the said doctrine's view whereby the prohibition can be effective only after the enactment of the implementing measures by CICR, since the Bank of Italy has never issued any circular or recommendation confirming such view.

Therefore, according to the Judges, banks cannot apply contractual clauses providing for the compounding of interest with effect from the 1st of January 2014, on the basis of the mere literal interpretation of the law provisions.

This triggers relevant consequences also for the contractual relationships in place if the banks applied interest compounding in accordance with the 2000 CICR Resolution from the 1st of January 2014, in which case the banks may be required to repay any amount received by way of interest compounding (e.g. interest accrued on the interest component of past due loan or leasing instalments) in addition to the prohibition of applying interest compounding in the future.