Stanislav Danilov on the ban of hard selling of additional services to loans
The Ministry of Finance is proposing to legally prohibit lenders to give loans to citizens on the condition of purchase of additional services, as well as to oblige borrowers to pay the insurance for the whole term of the loan. This stance is supported by the Central Bank which believes that such regulation will allow to eliminate the existing law enforcement challenges. Market players point out that they have not employed this practice for a long time. Rights advocates see the main problem in the inefficiency of insurance products.
The Ministry of Economics asked market players to evaluate the amendments to the law on Consumer credit (loan) (353-FZ), currently developed by the Ministry of Finance, as to any provisions introducing excessive groundless restrictions for entrepreneurs as well as asses the amount of additional expenses for businesses, which might occur following the adoption of such amendments.
The Ministry of Finance proposes to amend the law by adding an article which prohibits lenders to give loans to clients on the condition of purchase of separately paid additional services, except for cases when that stems from the requirements to insurance of the subject of pledge.
At the same time the lender shall compensate to the borrower all costs they incurred due to the violation of their right to choose services freely, in the two-fold amount of the cost of such additional services. The bill also specifies that consumer loan contracts for a term exceeding one year shall not contain the borrower's obligation to purchase insurance for the whole term of loan in case of one-time payment of all insurance fees or prohibit annual payment of insurance fees.
As Partner of Pen & Paper Attorneys at Law Stanislav Danilov explained to Kommersant, the ban of conditioning the sale of goods or services by purchase of other goods or services stems from the Law on Protection of Consumer Rights and the Civil Code. “The difference from the proposed changes is that now the credit organization is going to face a fine in the two-fold amount of the cost of the additional service it hard-sold to the consumer,” he adds. “If now borrowers may only try to avoid a hard-sold obligation, in the future they will be able not only to demand its termination, but also to collect compensation from the credit organization.”
How credit organizations turn free services into paid ones
The Ministry of Finance says that the bill is aimed at enforcement of rights and interests of borrowers, as well as ensuring conditions of fair competition among lenders, including taking into account the common practice of hard-selling of additional services. “Within the framework of behaviour supervision conducted by the Bank of Russia the Central Bank will monitor the risk of bypassing by lenders of these legal measures,” the Ministry added. The Central Bank claims to positively asses the proposed legal changes, with a note that the introduction of such regulation will allow to eliminate the existing law-enforcement challenges. At the same time the regulator acknowledges that such changes do not guarantee against bad-faith actions of individual lenders. Kommersant's inquiry sent to the Ministry of Economy was not answered.
Lenders in general support the proposed novelties, however they point out that the latter need further development.
VTB believes the legal changes will positively affect the activity of good-faith market players, and revenues of lenders who use hard-selling will shrink. “However, special attention is to be given to regulation of relations between the parties and the criteria for qualifying such services as hard-sold,” the bank suggests. “It’s necessary so that the credit organizations which offer such services don’t suffer losses from bad-faith lawyers.” Alfa-bank says that the peak of disputes between financial institutions and borrowers was witnessed three years ago. “Since then the Central Bank has carried out substantial work, and now clients choose insurance exclusively on voluntary basis,” the bank’s press office reports. “This initiative is more of a legislative consolidation of the existing practice. According to Vice Chair of Renaissance Credit Board of Directors Sergey Korolev borrowers are unlikely to prolong insurance if they understand that they will repay the loan in a few months, however that increases the risks for the client in case of loss of employment or health-related problems. Very often additional services, including insurance, allow the borrower to avoid many negative consequences in case of force majeure, Director of MiR Self-Regulating Organization of Microlenders Alliance Yelena Stratyeva. We deem it expedient to oblige the lender to guarantee the borrower their unconditional right to fully discontinue the service within 14 calendar days after its purchase. Sberbank refused to comment.
Experts agree that the requirement for insurance has long been excluded from contracts, but that doesn’t stop the lenders. “We have multiple times carried out monitoring of terms of consumer loans and bank employees explained that insurance in those cases is not an obligation,” says Yevgeniya Lazareva, Head of All-Russia People’s Front’s “For Borrower’s Rights” project. “But they also added that in case of non-purchase of insurance the rate becomes higher and the chance for approval slimmer, thus the ban of direct hard-selling of products is bypassed. Russian borrowers do not see insurance products as effective, she adds. “Until the insurance market changes its attitude to the customer, we shouldn’t expect a citizen to voluntary prolong insurance for the whole term of the loan each year,” Ms. Lazareva points out.