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

Two decisions recently issued by the Court of Milan on 25 March and 3 April 2015 stated that the prohibition of interest compounding in banking transactions provided for by art. 120 of the Italian Consolidated Banking Act (as amended by Law no. 147/2013) is effective since the 1st of January 2014.

Such decisions dismiss the view of part of the doctrine whereby the prohibition to interest compounding could not be considered in force until the enactment of the relevant implementing measures by CICR (an interministerial body).

According to the Court of Milan the prohibition is effective independently from the enactment of such implementing measures. The same opinion was expressed by the Court of Appeal of Genova with a decision dated 11 March 2014.

In the light of such decisions, banks cannot apply contractual clauses providing for the compounding of interest with effect from the 1st of January 2014 and any amount paid by way of compounded interest from such date should be returned to the borrowers.