Financial Ombudsman is to help Ukrainians in protecting their rights in disputes with banks and non-bank financial institutions at the pre-trial stage. Of course, the right of people to defend their own interests in the courts is preserved, but the introduction of the Institute of the Financial Ombudsman should reduce the number of such cases in the courts, speed up their consideration, and simplify the lives of most bank customers.
This is one of the key issues of reforming the financial sector and strengthening the protection of consumers of financial services. The consideration of the case of a financial institution against a borrower in court lasts one year in average now, while only 10% of clients “reach” the court, the rest do not even try to defend their rights. Moreover, due to the complexity and entanglement of the procedures, 78% of Ukrainians generally prefer not to go anywhere, in case of disputes with financial institutions, because they are convinced that they will not find the truth. The consequences of this are obvious: banks are confident of their own impunity, clients are convinced that “the bank is always right”, even if it is not, citizens’ trust in the banking system and the financial sector does not recover after a long crisis, which in the end negatively affects the banks themselves and the financial institutions.
The main objective of the draft law “On the Establishment of a Financial Ombudsman” (# 8055) is precisely to increase the confidence of financial services consumers in the financial sector by strengthening the protection of clients’ interests and establishing a civilized channel of communication between them and the financial institutions.
The insecurity of client rights directly impedes the development of consumer lending in Ukraine. In neighboring Poland, proportional with the size of the financial sector, for example, more than 59% of loans issued to individuals, in Ukraine, consumer loans to the population are only 17% of the total credit portfolio of banking institutions. Therefore, consumer lending in Ukraine has significant potential for growth, but for a number of reasons, it is not growing. Of course, the numerous crises that the Ukrainian banking system was experiencing have had their imprint, but the main problem lies not so much in the crises themselves, but in their causes.
For years, a large number of Ukrainian banks worked on a simple, but very risky business model: collecting deposits from the public and crediting the business of their owners, or people, associated with them. It is clear that the requirements for borrowers that were associated with the owners of banks were minimal if any, and at the end, this or that bank left the market, and deposits to their customers were already returned by the Deposit Guarantee Fund for individuals. So, besides the fact that these practices from time to time provoked global crises of the financial sector, they also led to the fact that Ukrainian banks, which were constantly focused only on working with clients are legal entities, they did not have a similar experience with individuals-borrowers. It’s a shame to admit, but the direction of consumer lending has not been a priority for Ukrainian banks over the years, so the banks still do not use strategies to promote it, practical methods of developing this area. Among the seven dozen functioning banks, only 15 are actively engaged in consumer lending, but real leaders, in general, can be counted on the fingers of one hand.
Moreover, even among experienced banks, there is a common perception that individuals are not reliable borrowers, they are looking for an opportunity not to return debts and to avoid responsibility for this. In fact, banks do not trust their customers, just as customers do not trust banks. As a result of total mistrust, additional conditions are constantly appearing in credit agreements, risks that may not be present are put into a percentage, additional fees often lead to an unreasonably high percentage of loan servicing and the like. Bank customers, in their turn, prefer to avoid such “services” at all, because the real mechanism for resolving a problem is that this issues simply does not exist. Now, 73% of Ukrainians are convinced that the loans “from banks cannot be taken under any circumstances”, or “can be taken only in extreme cases”. Considering that finance is a service sector, this attitude to these services on the part of consumers is a verdict for the sector.
These and other data were obtained by USAID, in the framework of the project “Transformation of the financial sector”, the purpose of which is to study the situation with the protection of the rights of customers of financial institutions in Ukraine. According to the results of these studies, USAID experts helped to prepare changes to Ukrainian legislation that will help rectify the situation and restore confidence in the retail lending sector.
In fact, the research results are amazing. More than 73% of all consumer finance promotional materials do not contain any financial information at all. Potential customers are not provided with the most important terms of cooperation ‒ the real annual interest rate, the final cost of the loan, the grounds for termination of the contract, and the like. And in the advertisement that contains information about rates and tariffs, in most cases, the real annual rate on the loan is not indicated, and the cost of the loan does not always correspond to reality since it does not take into account additional fees and payments.
When communicating in person, managers also prefer to provide clients with incomplete information about the conditions for granting loans, avoid explanations, and only in 15% of cases, at the request of the borrowers, allow them to take a copy of the draft loan agreement with them. The researchers also had questions about the loan agreements themselves. More than 30% of the analyzed draft contracts do not contain a detailed list of the total value of the loan, 17% do not contain a payment schedule, 54% contain conditions that violate the borrower’s right to early repayment of the loan. More than half of the contracts contain items that impose additional services, and the creditor is given the right to unilaterally change any terms of the contract.
It is clear that such methods do not return the client’s trust, in fact, borrowers at the time of signing such an agreement lose any opportunity to defend their rights, and become hostages of the bank or financial institution. Worse, in most cases, is that the customers simply do not know where to turn if they have a conflict with the bank, they go to the same bank with their problems and rarely get real help there. Moreover, some banks continue to include in the loan agreements the consideration of any disputes in the arbitration court, although, disputes on consumer rights protection are excluded from the competence of the arbitration courts in 2011. And this is about banks, but if we recall other financial institutions ‒ pawn shops, credit unions, and financial companies, the situation looks even worse.
The establishment of the financial ombudsman is an independent body that will resolve disputes between consumers of financial services and will help to protect their rights. The authors of the bill are convinced that disputes between consumers and financial service providers will be resolved quickly and impartially. The new mechanism will not limit the consumer’s right to go to court but will have several advantages over the courts. In particular, the draft law sets out the mechanisms, ensuring the impartiality, fairness, and independence of the financial ombudsman. The financial ombudsman will be elected by the Supervisory Board of the institution to which representatives of consumer protection organizations, associations representing the interests of financial service providers, and financial market regulators will be delegated, thus ensuring a balanced representation of the interests of all parties. The bill also guarantees the independence of the financial ombudsman from political pressure and its immunity.
Financing of the activities of the financial ombudsman will be at the expense of contributions from financial service providers and citizens’ fees for considering the dispute.
The number of contributions will be determined by the Supervisory Board of the institution and will depend, among the other things, on the reputation of the bank and the number of violations on its part, which were recorded.
The organization itself will contribute as much as possible to reconciling consumers with suppliers of financial services at all stages of resolving a dispute, advising them and providing them with legal assistance in preparing documents and collecting evidence. The employees of the institution will not only consider appeals and disputes but also consolidate legal practice in order to highlight the paths of abuse and the corresponding protectors to them. In particular, the institution will be required to provide and publish regular reports and inform regulators and the financial market about the shortcomings of legal regulation in the provision of financial services.
The general term for consideration of disputes will not exceed 90 calendar days, and the focus will be on minor disputes, the amount of which does not exceed one hundred minimum wages (today ‒ 372,300 UAH). Such a restriction will, on the one hand, unload the judicial system, and on the other, make it impossible to use the institution of the financial ombudsman to resolve important and complex disputes, which should be considered in the courts yet. The fee for the consideration of the dispute by the financial ombudsman institution is rather insignificant, compared to the existing court meetings, ‒ 85 UAH, which will allow consumers to apply to the institution in cases when appealing to the court would be more expensive than the sum of the dispute.
It is important that the decision of the financial ombudsman will be binding and financial service providers will be able to appeal against them in court only for certain reasons.
The practice of the institution of a financial ombudsman is generally accepted in the civilized world. Similar structures operate in 26 out of 28 EU countries and have already shown their effectiveness.
However, even after the adoption of the draft law, much will need to be done so that customers of banks and other financial institutions learn about the possibility of resolving disputes in this way. According to the USAID study, more than 56% of surveyed consumers, who had experience of conflicts with financial institutions, complained to the financial institution itself.
It is hopeless that employees of financial institutions themselves advise clients to seek truth in the institution of a financial ombudsman, so there is much to do to popularize such a service and convince financial institution clients that their problem can be solved in a civilized way, and they can hope for impartiality and fair consideration of controversial issues.
By Valentyna Yushchenko