Bank of Russia to take measures against consumer credit cooperatives’ malpractices, misselling and shadow lenders issuing housing-backed loans

The Bank of Russia revealed malpractice in the operations of certain consumer credit cooperatives. Sometimes, after having made a personal savings transfer agreement, shareholders receive a certain amount of money as a bonus along with the accrued interest. Thereby, the total payment to a shareholder exceeds the acceptable interest payment for the cooperative’s use of borrowed funds. The regulator believes that this practice bears risks of violation of consumer credit cooperative shareholders’ rights, and may negatively affect the organisation’s financial stability. This point was sounded by Elena Nenakhova, the head of the Bank of Russia Service for Consumer Protection and Financial Inclusion, at the meeting of the Expert Board for Consumer Protection held on 24 April 2018.

The regulator is working on an information letter to self-regulatory organisations of consumer credit cooperatives, which reads that in compliance with the basic standard for financial market operations, the maximum payment (interest, indemnity) for the use by a consumer credit cooperative of funds borrowed from a shareholder may not exceed 1.8 of the key rate established by the Bank of Russia as of the date of a personal savings transfer agreement. The letter suggests that self-regulatory organisations of consumer credit cooperatives enhance control over their participants and, given the serious and deliberate nature of this violation, take the appropriate measures up to the termination of the violator’s membership with the self-regulatory organisation.

Furthermore, the Expert Board’s meeting discussed the solicitation of insurance to borrowers (such as a borrower’s inclusion in a group insurance contract) and misselling, the sale of non-bank financial products by credit institutions to their customers without providing due information on their specifics and associated risks. Board participants suggested employing effective legal mechanisms to curb misselling of insurance products, and discussing an abrogation of legal grounds used to solicit such products and a possible introduction of standards for this market.

At the moment, the Bank of Russia, the self-regulatory organisation (SRO) of insurers and banking associations are discussing the application of the basic insurance consumer protection standard to the operations of agents, including credit institutions that sell insurance products. The standard regulates the requirements to agents’ operations and insurers’ responsibility; the regulator and SROs will be able to check the compliance with the standard. Depending on the gravity of the revealed violations, the responsibility may imply contract termination and reimbursement of losses as established by the contract. The Bank of Russia is expected to discuss the road map of the suggested changes with banking and insurance communities as soon as June.

Victor Klimov, the chair of the Expert Board and the leader of the movement For Borrowers’ Rights of the All-Russia People’s Front, told Expert Board members about the existing defects in the regulation of real estate backed loans. They lead to a situation where mortgage loans may be issued by any legal entity or individual (sole proprietor) outside of the Bank of Russia’s supervision. In some cases, this results in violations of borrowers’ rights and their loss of housing. Where the victims’ handwritten signatures are in place on the contract, it is rather complicated to prove the creditor’s misconduct. In the course of the discussion, the regulator’s representatives informed the public that the Bank of Russia has joined forces with the Ministry of Finance and the deputies of the State Duma and the Federation Council to elaborate amendments to the effective law which restricts the right to issue both mortgage loans and consumer loans to the financial institutions supervised by the regulator or determined by AHML (дом.рф). The Bank of Russia suggests that even a one-off issue of such loan be prohibited to the entities without the respective status. Should the creditor’s income exceed a certain threshold as a result of the loan issue, the illegal lender may be criminally liable. This will help solve the problem of shadow lenders often disguised as microfinance organisations. According to the latest VCIOM survey, most Russians have no clear idea of who and where issues microloans.