RUSSIAN FEDERATION Diagnostic Review of Consumer Protection in Financial Services Volume II Comparison against Good Practices July 2009 THE WORLD BANK Private and Financial Sector Development Department Europe and Central Asia Region Washington, DC This Diagnostic Review is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. Russian Federation Diagnostic Review of Consumer Protection in Financial Services Volume II – Comparison against Good Practices Contents Abbreviations and Acronyms ................................................................................................... iii Acknowledgments....................................................................................................................... v Russian Federation: Overview of Household Finances ............................................................ 1 Russian Federation: Consumer Protection in the Banking Sector ............................................ 7 Good Practices: Banking Sector ............................................................................................. 13 Russian Federation: Consumer Protection in Non-Bank Credit Institutions .......................... 49 Russian Federation: Consumer Protection in the Securities Sector ........................................ 61 Good Practices: Securities Sector ........................................................................................... 65 Russian Federation: Consumer Protection in the Insurance Sector ........................................ 77 Good Practices: Insurance Sector ........................................................................................... 83 Russian Federation: Consumer Protection in the Private Pensions Sector ............................. 97 Good Practices: Private Pensions Sector .............................................................................. 103 Russian Federation: Consumer Protection in the Credit Reporting System ......................... 113 Good Practices: Credit Reporting System ............................................................................ 124 Tables Table 1: Growth of Households Loans in Russia and CEE Countries ...................................... 1 Table 2: Household Debt Composition..................................................................................... 2 Table 3: Household Debt in Russia and CEE ........................................................................... 2 Table 4: Access to Financial Services....................................................................................... 3 Table 5: Distribution of Middle- and High-class Households by Average Annual Income ..... 4 Table 6: Household Financial Investments ............................................................................... 5 Table 7: Banking Concentration ............................................................................................... 8 Table 8: Bank Loans to Households ......................................................................................... 9 Table 9: Number of Supervisory Actions on Credit Institutions by Regional CPS Offices ... 10 Table 10: Number of Cases where Regional CPS Offices represented Consumers before Courts ...................................................................................................................................... 10 Table 11: Legislative Frameworks of Non-Bank Credit Institutions ...................................... 50 Table 12: Growth of Cooperatives .......................................................................................... 51 Table 13: Structure of Loan Portfolios by Purpose................................................................. 52 Table 14: Savings Captured by Cooperatives ......................................................................... 52 Table 15: Membership, Funds and Services from Cooperatives ............................................ 54 Table 16: Insurance Penetration in European Countries ......................................................... 78 Table 17: Geographical Distribution of the Insurance Market ............................................... 78 Table 18: Distribution of Life Insurance Premiums per Term of Contract ............................. 79 Table 19: Top Life Insurance Companies by Adjusted Premium ........................................... 79 Table 20: Evolution of Non-Life Insurance Premiums ........................................................... 80 Table 21: Number of Credit Headers in the Central Catalogue of Credit Histories ............. 114 Table 22: Overview of Rules for Credit Reporting............................................................... 116 Table 23: Overview of Rules established by the CBR.......................................................... 119 Figures Figure 1: Number of Credit Cards ............................................................................................ 3 Figure 2: Insurance Premium Incomes ................................................................................... 77 Annex Annex 1: List of Recommendations ..................................................................................... 141 Banking.............................................................................................................................. 141 Securities ........................................................................................................................... 143 Insurance............................................................................................................................ 144 Credit Reporting ................................................................................................................ 147 Annex 2: Key Laws and Institutions ..................................................................................... 151 General Laws and Regulations .......................................................................................... 154 Laws and Regulations for Financial Institutions ............................................................... 155 Banks .............................................................................................................................. 155 Non-Bank Credit Institutions ......................................................................................... 155 Securities ........................................................................................................................ 156 Insurance ........................................................................................................................ 157 Non-State Pension Funds ............................................................................................... 157 Credit Reporting ............................................................................................................. 158 ii Abbreviations and Acronyms ADR Alternative dispute resolution AMC Asset management company APR Annual Percentage Rate of Charge ARB Association of Russian Banks ARBR Association of Regional Banks of Russia ARIA All Russian Insurance Association ATM Automatic teller machine B2B Business to business B2C Business to consumer CBR Central Bank of the Russian Federation CCCH Central Catalogue of Credit Histories CEE Central and Eastern Europe CIS Commonwealth of Independent States CIU Collective investment undertaking COE Council of Europe CPS Federal Service for the Oversight of Consumer Protection and Welfare DOLCETA Development of On-Line Consumer Education Tools for Adults EC European Commission ETS European Treaty Series EU European Union FAQ Frequently Asked Questions FAS Federal Antimonopoly Service FCAC Financial Consumer Agency of Canada FFMS Federal Financial Markets Service FINCA Foundation for International Community Assistance FSB Federal Security Service FSIS Federal Service for Insurance Supervision FSS Federal Service for the Supervision of Mass Media, Communications and Protection of Cultural Heritage FSTEC Federal Service for Technical and Export Control G-8 Group of Eight Countries (Canada, France, Germany, Italy, Japan, United Kingdom, United States, Russian Federation) GDP Gross domestic product ID Identity document IFC International Finance Corporation KonfOP Interrepublican Confederation of Consumer Societies KYC Know your customer LIBOR London Inter-bank Offered Rate MICEX Moscow Interbank Currency Exchange MOF Ministry of Finance MOUs Memoranda of Understanding MTPL Motor third party liability NAFI National Agency for Financial Studies NAUET National Association of Electronic Commerce Participants NAUFOR National Association of Stock Market Participants NFA National Securities Market Association iii NGO Non-governmental organization NLU National League of Management Companies NPF Non-state pension fund OECD Organisation for Economic Co-operation and Development PFR Pension Fund of the Russian Federation RAMI Russian Association of Motor Insurers RTS Russian Trading System Stock Exchange RUB Russian Ruble SME Small and medium enterprise SRO Self-regulatory organization UK United Kingdom US United States of America USAID United States Agency for International Development n.a. Not Available $1 = 32 RUB (July 2009) iv Acknowledgments This review was prepared by a team led by Sue Rutledge, Regional Corporate Governance / Consumer Protection Coordinator and Senior Private Sector Development Specialist, World Bank. The project team consisted of Rodney Lester (Senior Advisor), Richard Symonds (Senior Counsel), Eric Haythorne (Former Lead Counsel), and Kirill Vasiliev (Senior Education Specialist) all from the World Bank. Also part of the team was Nicola Jentzsch, Senior Research Fellow at the Technical University of Berlin, and Juan Carlos Izaguirre Araujo, Consultant of the World Bank. Research assistance was provided by Guljahan Kurbanova of the World Bank. The report was translated by Inna Davidova. Special thanks go to Ljudmilla Poznanskaya (Private Sector Development Specialist), Andrei Markov (Senior Human Development Specialist) and Klaus Rohland (Country Director). The team expresses its appreciation to the Russian authorities for their cooperation during the preparation of the Review. Detailed comments on an early draft of the report were provided by the Ministry of Finance, the Consumer Protection Service, the Federal Financial Markets Service, the Federal Service for Insurance Supervision, KonfOP, the Association of Regional Banks of Russia, the Association of Russian Banks and the National Association of Non-State Pension Funds. The project team is very grateful to all those who so generously contributed to the final report. Helpful peer review comments were received from Tomáš Prouza, former Deputy Minister of Finance of the Czech Republic, and Lewis Mandell, Kermit O. Hanson Professor of Finance and Business Economics at the University of Washington and the authors also thank them for their contributions. v vi Russian Federation Household Finances Russian Federation: Overview of Household Finances The Russian household credit market has been expanding rapidly over the past few years, registering one of the highest growth rates in Central and Eastern Europe. From 2003 to 2008, the volume of credit institutions’ lending to households increased at an average annual nominal growth rate of 84 percent. Despite a relative cool-down in 2006 and 2007 with below- average growth rates of 78 and 58 percent, these figures remain all but unparalleled in comparison with other countries in Central and Eastern Europe (CEE). Equally strong developments were only witnessed in Romania and Lithuania (Table 1). Table 1: Growth of Households Loans in Russia and CEE Countries (in percentage) Average Country 2003 2004 2005 2006 2007 2008 2003-2008 Romania 258.9 58.3 80.0 83.8 82.1 38.7 100.3 Russia 121.0 116.4 96.2 78.3 57.8 35.2 84.2 Lithuania 98.2 96.4 86.8 69.3 58.1 20.6 71.6 Latvia 76.2 74.8 84.2 75.5 39.2 6.9 59.5 Bulgaria 80.7 74.8 58.4 30.6 52.2 31.4 54.7 Estonia 48.0 52.0 69.1 63.0 33.9 11.0 46.2 Slovakia n.a. 45.5 44.5 44.7 31.0 39.4 41.0 Hungary 60.6 27.2 26.4 25.5 24.3 30.5 32.4 Czech Republic 30.9 32.7 32.5 29.4 34.3 21.2 30.2 Slovenia n.a. n.a. 25.2 26.6 26.8 44.9 27.8 Poland 13.6 11.6 24.0 34.4 38.6 14.8 23.4 Croatia 27.7 18.7 20.3 21.8 18.0 12.1 19.8 Weighted average 38.66 26.79 35.57 39.35 39.36 32.16 35.31 (without Russia) Source: European Credit Research Institute, Central Bank of the Russian Federation (CBR) In general, countries with emerging consumer credit markets have experienced massive annual growth rates. Russia is no exception – like the other transition countries in the region – recording double-digit growth in both the housing loan and consumer credit markets. Growth rates have been more pronounced for housing loans and loans in domestic currency. The share of consumer and other loans decreased from 90 percent in 2004 to 70 percent in 2008, whereas the share of loans denominated in foreign currencies dropped from 22 percent in 2002 to only 12 percent in 2008 (Table 2). Despite an upward trend, the share of housing loans in the household credit market is still remarkably low relative to other countries. The share of loans for housing purposes has tripled in the past four years, representing 30 percent in 2008. This share is remarkably low compared to the EU Member States and the US, where housing loans constitute 71 percent and 78 percent of the total household credit market. The only European countries with an aggregate value of housing loans less than that of consumer and other loans are Bulgaria, Croatia, Cyprus, Poland and Romania – however housing loans in these still amount to at least 39 percent of the total sum lent. Increasingly, housing loans are secured by real estate: mortgage loans accounted for 83 percent of all housing loans in Russia in 2008, as opposed to only 33 percent in 2004. 1 Russian Federation Household Finances Table 2: Household Debt Composition (in billion RUB) 2002 2003 2004 2005 2006 2007 2008 Household loans 112.54 248.66 538.16 1,055.82 1,882.70 2,971.13 4,017.21 Consumer and other loans n.a. n.a. 483.76 930.10 1,532.53 2,213.60 2,819.57 Growth (%) 92.27 64.77 44.44 27.38 as % of total household loans 89.89 88.09 81.40 74.50 70.19 Housing loans n.a. n.a. 54.41 125.72 350.17 757.53 1,197.64 Growth (%) 131.09 178.53 116.33 58.10 as % of total household loans 10.11 11.91 18.60 25.50 29.81 Mortgage loans n.a. n.a. 17.77 52.83 233.90 611.22 995.19 as % of housing loans 32.67 42.02 66.80 80.69 83.10 Foreign currency loans 24.46 50.89 90.00 172.74 304.07 404.39 480.00 as % of total household loans 21.74 20.47 16.72 16.36 16.15 13.61 11.95 Source: CBR In relative terms, the Russian household credit market remains small. Russia still lags far behind CEE countries in terms of the size of the household credit market relative to GDP. In 2008, the outstanding credit extended to households by credit institutions in Russia amounted to 4,017 billion RUB, representing only 9.6 percent of the national GDP. The weighted average rate for CEE countries stood at 28 percent the same year (Table 3). The ratios were even higher for mature markets such as Germany (56.4%), UK (72.3%) and the US (94.1%)1. Table 3: Household Debt in Russia and CEE 2002 2003 2004 2005 2006 2007 2008 Households Debt in Russia (billion RUB) 112.54 248.66 538.16 1,055.82 1,882.70 2,971.13 4,017.22 as % of total bank loans 5.33 8.32 12.31 17.00 20.42 21.34 20.75 as % of GDP 1.04 1.88 3.16 4.88 7.00 9.01 9.64 Household Debt in CEE as % of GDP, weighted average 10.96 12.52 13.69 16.47 20.15 23.83 28.05 Source: European Credit Research Institute, CBR Information on household credit per capita also confirms the lack of development of the Russian household credit market. The level of household credit per capita in 2007 was equivalent to US$878 in Russia. This level is the lowest among countries from the EU and other regions. CEE countries have per capita credit to household that is roughly three times as high (US$2,816 equivalent in 2007), whereas mature markets witness even higher numbers (US$22,163 equivalent on average for Euro area countries, US$44,583 equivalent for the US and US$9,129 equivalent for Japan). The number of loan accounts per capita is also low, according to international survey data. Research shows that broad and deep access to financial services is a key factor in the long-term development of an economy and especially for reducing poverty2. In this respect, Russia ranks 28th in a sample of 157 countries, with 69 percent of the adult population having access to 1 These figures come from the European Credit Research Institute, 2009. 2 World Bank, Finance for All? Policies and Pitfalls in Expanding Access, 2008 2 Russian Federation Household Finances financial services. However, in terms of number of loan accounts per capita, Russia only ranks in the lower third of a survey conducted by the World Bank (Table 4). While in Greece or Poland there is close to one loan account per inhabitant, in Russia there are only 54 loan accounts for every 1,000 citizens. Further data provides some evidence that Russian households may participate in the financial system mostly via deposit accounts. According to the World Bank survey, on average, every person in Russia possesses at least one deposit account3. However, these accounts seem to include also “transaction accounts” that are used to make all types of payments and these have rapidly increased in recent years4. That said, the actual amount of household savings channeled through the financial system is very low. The deposit-income ratio is only 0.07, the lowest indicator in the sample except for Iran. Table 4: Access to Financial Services Percent with Loan Loan- Deposit Deposit- Rank† Country access to financial accounts per income accounts per income services* capita** ratio*** capita** ratio*** 1 Greece 83 776.48 0.83 2,417.64 0.29 2 Poland 66 773.87 0.33 n.a. n.a. Czech Republic 85 n.a. n.a. 1,922.83 0.42 Romania 23 n.a. n.a. 1,207.88 0.25 26 Bulgaria 56 73.85 4.24 1,351.37 0.26 30 Lithuania 70 58.86 3.56 1,166.45 0.21 32 Russia 69 54.11 4.23 1,892.28 0.07 43 Albania 34 4.42 15.41 161.25 2.75 44 Madagascar 21 4.38 18.35 14.46 9.31 † Ranking based on loan accounts per capita * Percentage of the adult population with access to an account with a financial intermediary ** Number of loans (deposits) per 1,000 people *** Average size of loans (deposits) per GDP per capita. Source: World Bank, Finance for All? Policies and Pitfalls in Expanding Access, 2008 Despite the increases, participation in the formal financial sector remains low. Bank savings accounts are considered as “gateway products” that bring consumers into the financi al sector and allow them to benefit from financial services. However, a nationwide poll conducted by the National Agency for Financial Studies (NAFI) and Expert RA Rating Agency in April 2008 estimated that only 16 percent of the population had any type of bank savings account. The Deposit Insurance Agency notes that it provides deposit coverage for only about 50 million savings accounts. Investments in securities are still lower. MICEX Stock Exchange estimates that fewer than two percent of all Russians own publicly traded securities5. Access to credit is also low, although rising. Surveys by NAFI suggest that more than 25 percent of all eligible citizens have borrowed from banks. The CBR estimates that as of January 2008, 104 million bank cards had been issued, of which 9 million were credit cards and the balance were debit cards. An estimated 60 million people (or 42 percent of the population) still have no access to financial 3 In terms of deposit accounts, Austria spearheads the list with an average of three deposit accounts per inhabitant. The information is based on data collected through a survey of bank regulators. In the case of deposits, the survey question was: “How many deposit accounts are there at deposit money banks in your country right now? (Please include all current (checking) accounts, savings accounts, and time deposits for businesses, individuals, and others.)” 4 According to the CBR, the number of transaction accounts for households and corporate entities other than credit institutions increased from 369 million at the end of 2006 to 421 million at the end of 2007. 5 MICEX, Sociological Research of Investment Culture of the Population, November 2007. 3 Russian Federation Household Finances services, not even a basic bank account. Data is incomplete, however, and more precise information on household participation in the financial system is needed. Figure 1: Number of Bank Cards (in millions) Number of credit cards (millions) Source: CBR, The Russian market of payment cards: Tendencies and prospects of development, June 2008 The number of “middle-class” households6 is rising in Russia and strong increases in real household disposable income are being forecast. According to estimates by the Ministry for Economic Development, real household disposable income is to rise 228 percent between 2004 and 2015. Table 5 shows that the number of households in the two lowest middle-class income brackets in Russia have grown markedly from 2006 to 2007, especially those in the range of US$25,000-US$49,999 (65.29%).7 Higher incomes of an increasingly larger share of Russian households are expected to drive credit market growth, as basic financial services become more affordable to a greater number of potential customers. Households with a higher income will generate greater demand for financial services such as consumer and housing loans. Table 5: Distribution of Middle- and High-class Households by Average Annual Income Number of households Household annual income (US$) In millions Growth rate 2006 2007 (%) 16,000 - 24,999 14.6 19.4 32.88 25,000 - 49,999 5.56 9.19 65.29 50,000 - 124,999 2.12 4.50 112.26 125,000 - 249,999 0.70 1.76 151.43 250,000 - 499,999 0.36 0.86 138.89 500,000 - 999,999 0.19 0.42 121.05 1’000,000 + 0.23 0.47 104.35 Source: Centre of Strategic Studies (CSS), Rosgosstrakh 6 According to the Centre of Strategic Studies at Rosgossstrakh, the lowest level of annual income for a middle-class household is equivalent to $16,000. 7 High growth rates for income bracket of $50,000 and above are largely due to the effect of the “low base” and – according to the Centre of Strategic Studies at Rosgossstrakh – the strengthening Ruble, which increased incomes denominated in Dollars. 4 Russian Federation Household Finances Starting at the beginning of 2007 to the end of 2008, financial investments by Russian households grew by 49 percent, led by deposits in banks. Table 6 shows that bank deposits have strongly contributed to the increase, growing 55 percent in the same period. Household net equities in non-state pension funds also went up a remarkable 44 percent over the last two years, although they likely diminished during the September-October 2006 decline in global stock markets, including in Russia. Due to the relatively small weight of life insurance, the decline in households’ net equities in the reserves of life insurance companies does not have any appreciable impact on average financial investment growth. As stated numbers only represent part of all household financial investments, some caution has to be applied when interpreting the aggregate figure. Table 6: Household Financial Investments (in billion RUB) December December December Growth rate (%) 2006 2007 2008 2008 / 2006 Bank Deposits 3,809.71 5,159.20 5,906.99 55.05 as % of GDP 14.16 15.58 14.22 Non-state Pension Funds 316.85 401.80 455.14 43.65 as % of GDP 1.18 1.21 1.10 Non-life Insurance * 140.7 159.5 n.a. n.a. as % of GDP 0.52 0.48 n.a. Life Insurance 24.58 23.73 30.56 24.35 as % of GDP 0.09 0.07 0.07 * Includes motor third-party liability, personal accident and health insurance. Data on household investments in securities is not available. Source: CBR, Axco Increased demand for retail banking services such as consumer and housing loans and the resulting increase of debt service obligations on households emphasizes the need for efficient consumer protection and financial education. Financially illiterate consumers may undertake financial decisions that leave them vulnerable to the risks associated with the purchased product. Long-term credit engagements with variable interest rates constitute financial traps for inexperienced costumers. In addition, liabilities denominated in foreign currencies potentially generate higher burdens through exchange rate fluctuations. Given immense lending growth rates, the financial sector needs to ensure the implementation of effective and adequate tools for the assessment of credit risks. A law on consumer credit is to deal with improving consumers’ understanding of the conditions of credit transactions, to potentially curb interest rates which can be charged by the credit institutions on consumer credit, and to regulate terms under which loan applications of unsuited borrowers can be turned down. 5 Russian Federation Household Finances 6 Russian Federation Banking Sector Russian Federation: Consumer Protection in the Banking Sector Introduction In order to sustain Russia’s remarkable economic growth, substantial local and foreign investments will be required in the foreseeable future. To be assured of tapping into resources of considerable magnitude, the goal of the Russian Government is to make Moscow a world class financial hub as soon as possible.8 Major financial sector infrastructure that reflects good practices world-wide is therefore widely accepted as needed. An adequate framework for consumer protection in financial services is a key element in the development of financial sector infrastructure. Recent remarks of high government officials reflect this idea. Responsibility for developing financial sector infrastructure has been delegated primarily to the Ministry of Finance, the Ministry of Economic Development and Trade, and various applicable regulatory agencies. Establishing good business relationships between local commercial banks and the public in general is one of the key issues for the development of any economy. There has to be mutual trust and confidence. In the absence of transparency in pricing and adequate consumer awareness and protection, as well as fair and reliable dispute resolution mechanisms, banking systems discourage public access and generate inefficiencies. The Russian financial system is small by international standards but it is growing rapidly. Total assets of the financial system were 58 percent of GDP in 2006, compared with over 300 percent in France, Spain, and Germany. Around 90 percent of the financial system’s assets are in commercial banks. Thus, in considering matters of consumer protection in financial services, an understanding of what all stakeholders are required to do or do voluntarily is of fundamental importance before making any recommendations for reform. The Russian financial system is largely dominated by the banking sector. As of December 2007, 1,092 banks operated in Russia9 with more than 3,450 branches, compared to 1,024 unit investment funds, 857 insurance companies and 240 non-state pension funds. Banks are the most highly capitalized financial institutions as their equity capital accounted for 8.1 percent of GDP in 2007 (up from 6.3 percent in 2006 and 5.7 percent in 2005). The total assets of the banking sector represented 61.4 percent of GDP in 2007 (up from 52.8 in 2006 and 45.1 in 2005). These numbers are high compared to: (a) the net assets of unit investment funds, which accounted for 1.6 percent of annual GDP in 2006; (b) private pension funds’ own property, which stood at 1.4 percent of GDP in the same year; and (c) the authorized capital of insurance companies which represented 0.6 percent of GDP in 2006. Despite the decline in the total number of banks, the banking retail segment has grown significantly over the last years. Between 1996 and 2007, the number of banks decreased by half.10 This sharp decline was mainly related to noncompliance with money laundering legislation 8 See, inter alia, the speech by Vladimir Putin on his inauguration as Prime Minister on May 8, 2008 in which he declared this to be an essential element of Russia’s long-term strategy. 9 This number does not include non-bank credit institutions, such as microfinance institutions or credit cooperatives. 10 2,260 banks were licensed in 1996 by the Central Bank of the Russian Federation (CBR). 7 Russian Federation Banking Sector (Federal Law No. 115-FZ of 7 August 2001), as well as low capitalization and lack of capacity.11 At the same time, the retail segment has increased its participation in the banking loan portfolio over the last years. In June 2008 household lending accounted for 15.6 percent of total bank assets as compared to 9.5 percent in 2005. In terms of bank ownership, the banking system is dominated by state-controlled banks. By the end of 2007, there were 24 state-controlled banks, which accounted for over one-third of total banking assets and about 60 percent of all household deposits. Large Russian private banks also accounted for over one-third of banking assets and were often part of financial-industrial groups. Large foreign banks accounted for about 12 percent of banking assets, had a low share of deposits and financed their credit expansion with foreign borrowing. Small Russian banks and regulated non-bank credit institutions accounted for about ten percent of banking system assets. The banking retail segment has become more competitive over the past years, but it still remains highly concentrated. As of June 2008, the largest five banks recorded combined total assets of 9,740 billion RUB, or 42.2 percent of the total banking sector. Compared to 2005 figures, the share remained stable, declining by just 2.8 percentage points. The largest five banks’ share of the banking sector’s retail loan portfolio, however, reveals that competition has increased in that area. The five largest banks lost 16.1 percentage points (or almost one third) of their share in the total household lending business to their smaller competitors over the last three years. However, they altogether still had a remarkable 36.1 percent of the total market as of June 2008. In terms of household deposits, the five largest banks received 3,130 billion RUB as of June 2008, equivalent to 54.2 percent of all household deposits in the banking system. This represents a decrease in banking concentration, since the five largest banks had 65.8 percent of all household deposits at banks just three years earlier (see Table 7).12 Table 7: Banking Concentration December 2008 5 Largest Total 5 Largest Banks Banks Banks as % of Total Banks Retail Sector Loans to households (billion RUB) 1,462.01 4,017.21 36.39 Loans to households (as % of GDP) 3.52 9.67 Deposits of individuals (billion RUB) 3,373.66 5,906.99 57.11 Deposits of individuals (as % of GDP) 8.12 14.21 Business Sector Loans to private companies (billion RUB) 6,709.91 12,843.52 52.24 Loans to private companies (as % of GDP) 16.15 30.92 Loans to credit institutions (billion RUB) 1,311,70 2,501.24 52.44 Loans to credit institutions (as % of GDP) 3.16 6.02 Aggregate Total assets (billion RUB) 12,941.08 28,022.33 46.18 Total assets (as % of GDP) 31.15 67.46 Source: CBR 11 See the 2006 Annual Report of the CBR. Also, in 2006 the Federal Insurance Supervision Service (FSIS) revoked the licenses of 157 insurance companies, mainly due to non-conformity with minimum capital requirements. The number of active companies decreased to 918 as of January 2007. 12 Table 7 also shows that lending to the corporate sector remains in the hands of the largest banks, which control 49 percent of the market, down just 1.2 percentage points from 2005. Interbank lending experienced higher concentration on the largest 5 banks, up 12.7 percentage points from a more equally distributed level (25.85%) by 2005. 8 Russian Federation Banking Sector At the same time, the credit reporting infrastructure is improving. However, with a population of 142 million in 2007 and estimated 50 million potential borrowers, coverage of individuals remains limited despite increases over the past three years (an estimated 4 to 20 million credit reports on borrowers are stored, depending on the credit bureau). Strong increases in borrower population are expected in the near future. Household lending was largely unknown in 2000 but reached RUB 1 trillion by the end of 2005 and RUB 4 trillion by the end of 2008. Household lending has grown from three percent of banks’ total loan portfolios in 2000 to over twenty percent in 2008 (See Table 8.) Such rapid increases carry increased risk. Over the past years, past-due loans have risen from 1.3 percent of total household loans in 2005 to 4.1 percent in 2008. Nevertheless consumer lending in Russia remains low by international standards at just above nine percent of GDP. Also, most household loans in Russia are for consumption not related to housing. Indeed, in 2007, housing loans represented only thirty percent of total bank lending to households. Table 8: Bank Loans to Households (in billion RUB) 2003 2004 2005 2006 2007 2008 Household loans 248.7 538.2 1,055.8 1,882.7 2,971.1 4,017.2 in RUB 197.8 448.2 883.1 1,578.6 2,566.7 3,537.2 in foreign currency 50.9 90.0 172.7 304.7 404.4 480.0 Housing loans - 54.4 125.7 350.2 757.5 1,197.6 in RUB - 36.5 77.4 239.4 579.4 960.6 in foreign currency - 17.9 48.3 110.8 178.1 237.1 Household loans as % of total loans 8.3 12.3 17.0 20.4 21.3 20.7 as % of GDP 1.9 3.2 4.9 7.0 9.0 9.7 Past-due household loans 2.7 7.2 19.9 50.6 96.5 163.7 as % of household loans 1.1 1.3 1.3 2.7 3.2 4.1 Source: CBR Institutional Arrangement The Federal Service for Supervision of Consumer Protection and Welfare (CPS) was established in 2004 in order to enforce the Law on the Protection of Consumers’ Rights. The concept of consumer protection was initially introduced by the 1992 Law on the Protection of Consumers’ Rights. Protection was however limited to what may be termed “traditional goods and services”. It was only as a result of successive definitive interpretations of the term “service”, as provided by the Plenary Commission of Russia’s Supreme Court that Chapter III of the Law (dealing specifically with “services”) was made applicable to bank deposits, consumer and mortgage loans and other similar financial services. The CPS receives complaints from consumers, but it does not publish statistics on complaints related to financial services. The CPS should publish this information as soon as feasible. The number of complaints received is a leading indicator of consumer protection problems in the different segments of the financial system. CPS has conducted on-site inspections to credit institutions through its regional offices. Table 9 shows that 63 regional offices conducted a total of 452 supervisory actions to credit 9 Russian Federation Banking Sector institutions during the first nine months of 2008, which represents more than twice the number of actions conducted in 2007. CPS offices issued 103 administrative decisions and 75 of them were appealed to arbitration courts, whereas 28 were accepted by credit institutions. The arbitration courts issued 35 decisions in favor of consumers. Three cases were not appealed and, from the 32 cases submitted to the court of appeals, 14 were decided in favor of consumers. In total, 45 decisions were resolved in favor of consumers. Table 9: Number of Supervisory Actions on Credit Institutions by Regional CPS Offices January - Type of Action 2007 September 2008 Actions initiated by CPS Total Inspections 452 193 Reports on Administrative Offenses 172 71 Administrative Decisions 103 62 Decisions accepted by credit institutions 28 20 Decisions appealed to Arbitrations Courts 75 42 Decisions appealed to Arbitration Courts Decisions canceled by Arbitration Courts 40 n.a. Decisions confirmed by Courts and not appealed 3 n.a. Decisions appealed to Courts of Appeals 32 n.a. Decisions appealed to Courts of Appeals Decisions in favor of consumers 14 n.a. Decisions in favor of credit institutions 18 n.a. Total number of decisions in favor of consumers 45 n.a. Source: CPS CPS regional offices have also represented consumers of financial services before courts in cases of complaints against credit institutions. Based on Article 40 of the Consumer Protection Law, 19 regional offices of the CPS have gone to court between January and September 2008, in order to protect the rights of consumers in their relations with credit institutions. From a total of 109 cases, 86 were resolved in favor of consumers. Table 10: Number of Cases where Regional CPS Offices represented Consumers before Courts Complaints January - September 2008 Total number of cases 109 Number of complaints resolved in favor of consumers 86 Number of complaints resolved in favor of credit institutions 23 Source: CPS The Central Bank of the Russian Federation (CBR) is in charge of overseeing banking activities, but its mandate does not explicitly include consumer protection. Under the Law on the Central Bank, a key goal of banking regulation and supervision performed by the CBR is to maintain stability of the Russian banking system and protect the interests of depositors and lenders. While the CBR is not directly responsible for consumer protection, the CBR has a role to play in supporting improved financial consumer protection. There should be close cooperation and coordination between CPS and CBR regarding financial consumer protection. 10 Russian Federation Banking Sector Two banking associations have been active in drafting voluntary codes of conduct, although no code has been enforced yet. The Association of Regional Banks of Russia (ARBR) with support from CBR prepared a voluntary principles-based Code of Conduct of Responsible Consumer Crediting, which was approved in September 2008. The Association of Russian Banks (ARB) has also drafted a Code of Conduct, still under discussion among its members. Banks should agree on essential principles of business conduct, which will set out industry codes of conduct with adequate enforcement measures. Disclosure and Sales Practices There are no statutory requirements on know-your-customer or suitability provisions. The draft Consumer Credit Law elaborated by the Ministry of Finance (MOF) would estipulate the information that a customer should give to a bank before receiving a loan. There is a lack of disclosure requirements in the current legislation. There is no requirement or recommendation to provide a consumer with a key facts statement that summarizes the key terms and conditions of a financial service. Regarding the disclosure of terms and conditions of consumer contracts, the MOF draft Consumer Credit Law neither allows for protection against onerous and unfair terms nor establishes requirements of a minimum permissible font-size, among other details. Although the draft Consumer Credit Law includes a cooling-off period provision, it also establishes a maximum amount of penalty for the consumer. The draft law establishes the right of a consumer to refuse a consumer credit within 14 calendar days from the date the credit is granted. It also allows the provision of a penalty not above 0.5 percent of the principal of the credit to be paid by the consumer, which could create a disincentive to turn a credit down. This penalty should either be reduced or eliminated. The ARBR Code of Conduct deals with the need for banks to have competent staff, but in a general and vague way. The industry associations, CBR and CPS should collaborate to establish specific minimum competency requirements for bank staff dealing with consumers, marketing banking services or preparing key fact documents or bank advertisements. Regarding customer account handling, there is no statutory requirement to maintain up-to- date customer records, whereas the requirements on account statement information and notification of changes in financial charges do not cover all the key issues for consumer protection. The ARBR Code of Conduct and the MOF draft Consumer Credit Law cover only some of the information that should be provided in monthly account statements to consumers. Neither the Code nor the draft law establishes consequences on banks for changing unilaterally non-interest charges on a customer account. There is no enforced regulation covering debt collection practices and personal insolvency. The Union of Collection Agencies, in conjunction with the Ministry for Economic Development, has drafted a law on debt collectors. This law would be helpful in creating an adequate legislative framework, provided it defines a regulatory authority responsible for licensing, overseeing and collecting and disseminating information from collection agencies. There is also a draft amendment to the legislation on personal bankruptcy that adequately protects individual debtors and therefore should be enacted. 11 Russian Federation Banking Sector Dispute Resolution Mechanisms There are no statutory requirements for banks on procedures to resolve customer complaints. Although the ARBR Code of Conduct provides for banks to deal with customer complaints, there are no mandatory requirements for this matter. Banks are not required to have a special department or designate a person to deal with complaints. Nor are banks required to have complaints procedures and inform the borrower about them. There is no centralized system for the collection, recording and publishing of complaints. Consumers can submit their complaints to different agencies, including financial institutions, financial supervisory agencies and professional associations. There is no centralized system where consumers can report their complaints and, at the same time, access statistical information on the number of complaints received per institution, the nature of complaints and how they were resolved. The main third-party mechanism to resolve customer complaints is the court system. Small claim courts presided by Justices of the Peace deal with formal consumer claims that are below 200 times the monthly minimum wage. Decisions are generally made in a period of four to six months. The Federal Courts of General Jurisdiction deal with claims at or in excess of this sum. There are two initiatives to establish an ombudsman for financial services. The MOF draft Consumer Credit Law has provided for an ombudsman regarding disputes regarding consumer credits, whose functions could be extended. Another initiative has been drafted by the ARB, but there is concern that the public might not trust an industry-funded ombudsman. Both options should be carefully evaluated in terms of costs and benefits. Consumer Empowerment Public sector initiatives in financial education exist but need improved coordination, identification of good practices and assessment of their impact. A national policy regarding the inclusion of financial education in the general curriculum for schools is also at an early stage of development. There is little independent information available to consumers regarding financial services. Non-governmental organizations have a limited participation in this matter. Government institutions have been more active. Recently, the Ministry of Finance and the CBR released TV advertisements and press statements regarding the devaluation of the ruble. In addition, the CBR recently published 13 videos on its website addressing information that the consumer should consider when soliciting credit. A national policy in the area of financial education with a strong consumer protection component is needed. Consumer education should be a part of an overall strategy, complementing other financial education priorities. Mechanisms need to be put in place to enhance coordination and cooperation among all of the various supervisors, banking associations and consumer NGOs. At the same time, a number of activities should be launched in parallel with the policy development, including support of grassroots initiatives, delivering consulting services to consumers, ensuring access to reliable and well designed information, and promoting basic financial values. 12 Russian Federation Banking Sector Good Practices: Banking Sector SECTION A CONSUMER PROTECTION INSTITUTIONS Good Practice A.1 Consumer Protection Regime The law should provide for clear consumer protection rules regarding any regulated financial product or service, and all institutional arrangements should be in place to ensure the thorough, objective, timely and fair implementation and enforcement of all such rules. a. Specific statutory provisions need to create an effective regime for the protection of any consumer of a banking product or service. b. Either a general consumer agency or a specialized agency should be responsible for implementing, overseeing and enforcing consumer protection, as well as collecting and analyzing data (including complaints, disputes and inquiries). c. The law should provide and not prohibit a role for the private sector, including voluntary consumer protection organizations and self-regulatory organizations, regarding consumer protection in general and in financial products and services in particular. Description Although Russia has relatively clear consumer protection rules applicable to the sale of traditional goods and services generally dating from the enactment of the Law on the Protection of Consumers’ Rights (Consumer Protection Law of 1992), this Law was not crafted with a focus on financial services. It was only as a result of successive definitive interpretations of the term “service”, as provided by the Plenary Commission of Russia’s Supreme Court that Chapter III of the Law (dealing specifically with “services”) was made applicable to bank deposits, consumer and mortgage loans and other similar financial services. 13 TheFederal Service for Supervision of Consumer Protection and Welfare (the Consumer Protection Service or CPS) was established in 2004 in order to enforce the Consumer Protection Law.14 In addition, the definition of “consumer” in the Consumer Protection Law is not as broad as it could be. The preamble provides that, for purposes of this Law, “the consumer is an individual who has the intention of ordering or acquiring goods, works or services or who orders, acquires or uses 13 By Decision of the Plenary Commission of the Supreme Court of the Russian Federation dated November 21, 2000 (No. 32), it was resolved to make the following explanation regarding the Law on Protection of the Rights of Consumers, namely that “this Law regulates relations between the citizen having an intention to … obtain … services … for personal, family, house and other needs … not connected with … enterprise activity, on the one hand, and the organization … rendering services to consumers by means of a contract, - on the other hand.” The Decision went on to advise that “the relations regulated by the legislation on the protection of rights of consumers can arise from contracts … on rendering of financial services directed to the satisfaction of personal, family, house and other needs of the consumer - the citizen, not connected with the realization of any enterprise activity, including the granting of credits, and the opening and conducting of accounts of clients …. Besides, since December, 20th, 1999 … the relations regulated by the legislation on protection of the rights of consumers, can arise from a contract of the bank in which the investor is the citizen, and other contracts directed on satisfaction of personal, family, house and other needs, not connected with realization of enterprise activity.” See Decision of the Plenary Commission of the Supreme Court of the Russian Federation from September 29, 1994 (No. 7) as modified by Decision No. 6 from 25 April 1995, Decision No. 10 from 17 January 1997, Decision No. 32 from 21 November 2000 and Decision No. 6 from 6 February 2007. See also Executive Order No. 160 of May 20, 1998. 14 Prior to 2004, the Consumer Protection Law was administered by the Ministry of the Russian Federation for Antimonopoly Policy and Support to Entrepreneurship. 13 Russian Federation Banking Sector them exclusively for personal, family, household and (emphasis added) other needs not relating to the pursuance of entrepreneurial activities.” By way of contrast, the EU definition of “consumer” is broader than the Russian definition, since the EU definition looks first at who is not a consumer and then stating that all others are consumers.15 In the recent past, numerous statutes and regulations of relevance to consumer protection in banking services have been enacted and adopted. Also, draft statutes are aimed at filling in some holes remaining in the existing legislative framework. In addition, a plethora of agencies are involved in implementing, overseeing and enforcing consumer protection. Although lacking a large cadre of specialists in consumer protection regarding banking matters, the CPS deals with the implementation of the Consumer Protection Law in the provision of financial services. The head of the CPS is appointed by the Prime Minister and reports to this office. The actions of the CPS regarding consumer protection in the banking system include inspections and administrative decisions on credit institutions (see Table 9 above), reception of consumer complaints, and representation of consumers before courts (see Table 10 above). From January to September 2008, CPS conducted 452 inspections to credit institutions and issued 103 administrative decisions; it also represented consumers in 109 cases, obtaining favorable results in 86 cases. Furthermore, although there are no provisions regarding consumer protection in the Law on the Central Bank of the Russian Federation (CBR Law), the Central Bank of the Russian Federation (CBR) is required by statute to maintain stability of the Russian banking system and protect the interests of depositors and lenders. While the CBR is not directly responsible for consumer protection, the CBR has a role to play in supporting improved financial consumer protection. That said, the CBR does not regulate or supervise credit cooperatives, microfinance institutions and other non-bank credit institutions,.16 In order to appreciate the full extent of his or her legal rights as a consumer of any financial service a Russian bank may offer, a consumer first needs, at the very least, to understand each relevant provision of the Constitution17, the Civil Code18, the Consumer Protection Law19, the CBR Law20, the Law on Banks and Banking Activities21, the Law on Advertising22, the Law on the Protection of Competition23, the Law on Insurance of Natural Persons’ Deposits in Banks of the Russian Federation24, the Law on Personal Data25, the Law on Collateral26 and the Criminal 15 See Article 2(b) of the EU Council Directive 93/13/EEC of 5 April 1993 on Unfair Terms in Consumer Contracts where the term “consumer” is defined as meaning “any natural person who, in contracts covered by this Directive, is acting for purposes which are outside his trade, business or profession”. 16 Although the CBR has no statistics on the extent of funds flowing through these non-bank institutions, the CBR maintains that the total amount is a tiny fraction of the entire flow of funds in the banking system. For more information on these institutions, see the Section on Non-bank Credit Institutions. 17 See Constitution of the Russian Federation, adopted by Referendum, 12 December 1993, as amended 18 See Federal Law No. 51-03 of November 30, 1994 as amended, and Federal Law No. 14-03 of January 26, 1996, as amended. 19 See Law of the Russian Federation No. 2300-I of February 7, 1992, as amended 20 See Federal Law No. 86-FZ of July 10, 2002, as amended 21 See Federal Law No. 395-I of December 2, 1990, as amended 22 See Federal Law No. 38-FZ of March 13, 2006 on Advertising, as amended 23 See Federal Law No. 135-FZ of July 26, 2006 24 See Federal Law No. 177-FZ of December 23, 2003, as amended 25 See Federal Law No. 152-FZ of July 27, 2006 26 See Federal Law No. 216-FZ of November 11, 2003 14 Russian Federation Banking Sector Code27, as well as the relevant regulations, orders, decisions and directives made pursuant to these various laws. There is no single place or publication where a Russian consumer can readily obtain a clear statement of the protections in place or required to be in place in order to serve his or her interests in terms of any banking service. Nor is there any single statement that provides a clear warning to consumers as to those banking practices that still remain legitimate but which can be harmful to consumer interests. Furthermore, no data collection and analysis regarding individual consumers (including their complaints, disputes and inquiries), exists in any systematic and official way in respect of banking operations, whether by commercial banks, the CBR, the CPS or any Government Ministry. Although good progress is being made of late, Russia still does not have the full array of statutory and regulatory provisions necessary to create a fully effective regime for the protection of consumers of banking services. While the CBR is keen to play a role in supporting improved consumer protection in banking services, , it now seeks advice on what this role should be in practical terms. The question has been posed: What role do central banks play regarding consumer protection in financial services in “peer group” countries (i.e. those that have approximately the same percentage of the population with bank accounts, the same size of banks, the same extent of household lending, etc.) such as Brazil, Italy and Spain? Often, central banks take the intellectual lead, especially regarding consumer protection in the banking sector. Indeed in Brazil, by National Monetary Council Resolution No. 2878 of 2001, the Brazilian Central Bank issued rules on relations between banks and their clients with regard to the services and products offered to the latter. This regulation offered broad legal protection to banks' clients in addition to Brazil’s comprehensive Consumer Protection Code (Law No. 8078 of 1990), which formerly exclusively regulated this type of relationship. Bringing together the interests of both banks and consumers, Resolution No. 2878 has been viewed as a more appropriate statute than the Brazilian Consumer Protection Code. The Brazilian Central Bank’s rules simultaneously offer legal protection to banking clients and reduce the risk for banks when providing credit to their clients. The procedure has also reduced the number of non-performing loans. Recommendation Consideration should be given to enlarging the definition of the term “consumer” along the lines of the EU definition. Mechanisms need to be put in place to enhance coordination and cooperation among all of the various supervisors with an interest in consumer protection regarding financial services, including the CBR, the Federal Financial Markets Services (FFMS), the Federal Insurance Supervision Service (FSIS), the Federal Antimonopoly Service (FAS) and the CPS. In respect of consumer protection regarding banking services in particular, all relevant institutions, including those in the private sector, need to be drawn 27 See Federal Law No. 63-FZ of June 13, 1996, as amended 15 Russian Federation Banking Sector together regularly so that working level teams can work effectively together in addressing and solving issues in a coordinated fashion. There should be a system in charge of collecting and monitoring the quality of data on complaints, disputes, inquiries and other elements relevant to consumer protection, as well as analyzing the data and providing it freely to the public. The capacity of regulators needs to be enhanced so that they can effectively supervise and enforce the fair behavior of banking institutions and all others involved in the banking services industry. Also, consideration should be given to the option of amending the CBR Law to include consumer protection in banking services as an explicit part of the mandate of the CBR. In respect of banking services, the law still needs to provide clear consumer protection rules concerning disclosure and sales practices, consumer account handling, privacy data protection, dispute resolution, and compensation schemes. Good Practice A.2 Codes of Conduct for Banks a. There should be a principles-based, statutory code of conduct for banks that is devised in consultation with the banking industry and if possible with consumer protection associations, and is monitored by a statutory agency or an effective self-regulatory agency. b. Every bank, acting alone and together, should publicize and disseminate this statutory code of conduct to the general public through appropriate means. c. The statutory code should be augmented by voluntary codes of conduct for banks on such matters as facilitating the easy switching of consumers’ current accounts and establishing a common terminology in the banking industry for the description of banks’ charges, services and products. Description No statutory Code of Conduct of any kind for banks exists in Russia. A purely voluntary principles-based Code of Responsible Consumer Crediting has, however, been prepared by the Association of Regional Banks of Russia (ARBR)28 with some support from the CBR. This Code of Conduct, covering general standards that are recommended to be met by all commercial banks in Russia, was adopted by the ARBR at its semi-annual conference on September 5, 2008. The main purpose of the Code has been to define the principles to which ARBR- member banks willingly commit themselves in all of their interactions with their consumer borrowers. The Code sets out essential principles of bank lending operations as being the need for: a. Honesty and openness in dealings with bank customers, b. Observance of professional behavior, c. Observance of legislation, d. Prevention of conflicts-of-interests, e. Non-discrimination, and f. Confidentiality. 28 The ARBR was established in 1990 as the first federal banking union in Russia. It is a non-governmental non-profit organization. Currently, the ARBR unites more than 340 banks and other credit organizations in some 60 localities of the Russian Federation. 16 Russian Federation Banking Sector These principles are to be practiced through the application of several lending standards dealing with issues such as: a. The provision of a package of necessary information on consumer credit before granting a credit; b. The use of clear language in information materials and contracts; c. The provision of a typical contract at the request of the consumer; d. Information regarding specific contract terms, general conditions of a consumer credit and overall cost of credit; e. Requirement of signature of a credit contract; f. Establishment of an effective and clear procedure to deal with customer complaints, which should be observed and disclosed to the consumer; g. Provision of adequate conditions for debt payments; h. The right of a consumer to refuse a credit; i. The establishment by the lender of a borrower’s credit worthiness, especially for the offering of additional services; j. Requirement of a written approval and signature for the provision of additional credit services; k. Prohibition of changing, without preliminary written consent, essential conditions on the credit, if these changes entail adverse consequences for the borrower; l. Provision of information of foreign currency risks; m. Advertising of consumer credits; n. The right of a consumer to refuse a credit; o. The consumer’s right to pre-pay; p. The insurance of consumer credit Importantly as well, the Ministry of Finance (MOF) has prepared a draft Law on Consumer Credit which covers many of the same matters. If enacted as presently drafted, however, the Law would expressly exclude the application of Chapter III of the Consumer Protection Law to all aspects of consumer lending. Also, the Law would be monitored by the CBR. Among other things, the MOF draft Law on Consumer Credit would require a creditor to provide a consumer with all terms and conditions of a consumer credit contract, as well as: information concerning the creditor; documents for the purposes of assisting in establishing consumer credit worthiness; the possible means of disbursement of the credit and the means of repayment of principal and payment of interest; the ways the lender can inform a consumer of his or her obligations during the life of the credit; the accountability of the consumer in the event of a breach of his or her obligations; how penalties for breaches are to be calculated; instructions regarding the lender’s right, if any, to increase interest charges during the life of the credit agreement; the right of the consumer to refuse to execute a consumer credit contract; and a list and conditions regarding the rendering of so-called “accompanying services”. In addition, the Association of Russian Banks (ARB)29 has prepared a draft Code of Conduct but consensus on substantive drafting issues has yet to be achieved. Of particular difficulty has been whether the Code should merely be a statement of moral principles, with no sanctions of any kind for failure to comply being applicable. 29 The ARB is a non-governmental non-profit organization that groups commercial banks and other credit organizations, as well as organizations involved in the functioning of the financial system of the Russian Federation. It was established in 1991 and currently consists of 779 members including 591 banks. 17 Russian Federation Banking Sector Furthermore, a voluntary Code of Ethics for Mortgage Lenders has been prepared pursuant to Russia’s so-called “Primary Mortgage Market Development Project”.30 And this code has been strongly promoted by the CBR, as regulator. This is especially relevant given the speed and extent to which mortgage lending organizations and mortgage borrowers are increasing. This Code of Ethics was drafted in 2006 according to international best practices in consumer protection in housing finance. Industry players and journalists then commented publicly on the draft code and it was modified as a result. Recommendation There should be a principles-based code of conduct for banks that is devised by the banking industry and enforced by the banking association, and publicized to the general public through appropriate means. While the MOF draft Law on Consumer Credit, if enacted, would begin to fill the void, at least in respect of consumer lending, it does not go far enough in general terms. Also, although the ARBR Code of Conduct for its member banks in respect of consumer credit is a good beginning, more would be helpful regarding general matters such as: facilitating the easy switching of consumers’ current accounts; setting forth minimum standards regarding the information to be provided in any advertisement; and providing the consumer with clearly structured options for complaining with his or her banker after all voluntary means of settlement have proven futile, in particular the initiation of action in the courts or before a possible future banking or financial sector independent ombudsman. In addition, the member banks of the ARB should themselves agree on an appropriate general code of conduct. The reason is simple. Where practices and services are still very much in flux, as is the case in Russia, minimum standards of bankers need to be clearly agreed, articulated and applied in order to limit the risk of negative experiences with unethical behavior eroding consumer confidence in the entire market. Such standards will also improve the competitive climate between banks, for instance by reducing misleading information given to consumers about a bank’s service or the service of its competitors. The power of dialogue should not be underestimated, initially between bankers, but then, as discussion develops, between bankers and consumer groups and government. As European experience has demonstrated, consensus stemming from dialogue about consumer protection issues is the most powerful tool to enforce any given set of rules. A general Code of Conduct would bring many advantages to a consumer, especially knowing that his or her bank cannot violate essential principles without facing consequences. Although a series of what might be termed “mild” violations of principles would perhaps lead to a high number of cases with a future ombudsman, more serious violations could lead to a bank being deprived by the relevant association from advertising its adherence to the Code or even membership in the association itself. In an increasingly competitive market, this is something that banks will inevitably find undesirable since a general reputation for unethical practice would hurt business. SECTION B DISCLOSURE AND SALES PRACTICES Good Practice B.1 Know Your Customer When making a recommendation to a consumer, a bank should gather, 30 This Project received financial and technical support from the IFC. 18 Russian Federation Banking Sector file and record sufficient information from the consumer in order to ensure that the bank’s recommendation, product or service is appropriate to that consumer. The extent of information the bank gathers should: (a) be appropriate to the nature and complexity of the product or service being proposed to or sought by the consumer; and (b) enable the bank to provide a professional service. Description Russian banks are only beginning to adopt such practices and, although some banks do have internal rules requiring their application, these are neither widespread nor routine. There is not yet any statutory obligation in these respects. If enacted in its present form, the draft Law on Consumer Credit spear-headed by the Ministry of Finance would, however, require the consumer to provide a bank with information regarding his or her creditworthiness before receiving a loan from the bank.31 Also, the consumer would be required to assist the bank in checking the reliability of the data32 even though it would remain uncertain how this obligation could, in fact, be fulfilled. Recommendation When making a recommendation to a consumer, any Russian bank should be required to gather, file and record sufficient information from the consumer in order to ensure that its recommendation or financial service is appropriate to that consumer. The extent of information the bank gathers should: a. Be appropriate to the nature and complexity of the service being proposed to, or sought by, the consumer; and b. Enable the bank to provide a professional service. Good Practice B.2 Suitability Having regard to the facts disclosed by a consumer and other relevant facts about that consumer of which a bank is aware, the bank needs to ensure that: a. Any product or service it offers to that consumer is suitable for that consumer; b. In offering a selection of product or service options to that consumer, the product or service options contained in the selection represent only the most suitable from the bank’s range of products or services; and c. In recommending a product or service to that consumer, the recommended product or service is, in the reasonable view of the Bank, the most suitable product or service for that consumer. Description There is nothing in the existing law or draft legislation that deals in any way with this topic, much less that requires attention to be paid to the matter of suitability. That said, some banks do voluntarily ensure the above, especially since the ARBR’s Code of Conduct requires a bank to be transparent in respect of its services and processes. This issue deserves especial attention given the extent to which some Russian banks have recklessly showered consumers with pre-approved credit cards with no apparent concern as to the capacity of recipients to understand the implications of using such cards. Recommendation Having regard to the facts disclosed by a consumer and other relevant facts about that consumer of which any Russian bank is aware, the bank needs to ensure that: a. Any financial service it offers to that consumer is suitable for that consumer; 31 See draft Article 7, paragraph 1. 32 See draft Article 7, paragraph 3. 19 Russian Federation Banking Sector b. In offering a selection of financial service options to that consumer, the service options contained in the selection represent only the most suitable from the bank’s range of services; and c. In recommending a financial service to that consumer, the recommended service is, in the reasonable view of the bank, the most suitable service for that consumer. In particular, the law must ensure that a credit card is only issued to an identified customer who, after applying for it, has been recognized by its provider as a suitable consumer to receive it. Suitability rules must be enacted and enforced. The criminal law needs to be strengthened to deal effectively with false advertising and pyramid schemes of any kind. Also, law enforcement agencies, backed by the Ministry of Internal Affairs, need to find all companies running any such scheme and shut them down. Good Practice B.3 Cooling-off Period Unless explicitly waived in advance by a consumer in writing, a bank should provide the consumer a “cooling-off” period of at least seven, but preferably fourteen, days immediately following the signing of any loan agreement between the bank and the consumer during which time the consumer may, on written notice to the bank, treat the agreement as null and void without penalty to the consumer of any kind. Description This concept appears for the first time in the latest MOF draft of the Law on Consumer Credit. It is stated in paragraph 1 of proposed Article 18 of this draft that: “1. The consumer has the right to refuse to execute a consumer credit contract without assigning any reason within 14 calendar days from the date of monetary granting (in case of the demand line of credit - the first granting) of the contract of consumer crediting.” The 14-day period is therefore to run from the date the consumer receives the credit and, by paragraph 2, the consumer is to have three days to return the money in question. Strangely, however, paragraph 2 of the same proposed Article allows the credit agreement to provide for a penalty not in excess of “0,5 percent” of the principal amount of the credit to be payable by the consumer who exercises his or her right in this respect.33 Depending on the financial capacity of the consumer, this clearly could create a disincentive to turn down a consumer credit agreement. Recommendation Consideration should be given to reducing the maximum amount of penalty or else to removing this possibility entirely and then to proceeding with the enactment of Article 18 of the latest MOF draft of the Law on Consumer Credit as soon as feasible. Good Practice B.4 Linked Products and Bundling Clauses Whenever a borrower is obliged by a bank to purchase any product, including an insurance policy, as a pre-condition for receiving a loan from the bank, the borrower should be free to choose the provider of the product. Description While banks quite properly set their own insurance requirements for borrowers in order to allow a loan transaction, the present practice is marred by many banks: 33 Thus, for example, on a loan of 250,000 Rubles, the penalty could be as much as 1,250 Rubles. 20 Russian Federation Banking Sector a. Setting their own requirements as to insurance company qualifications and insurance coverage needed for consumer credits; b. Providing borrowers with lists of approved insurance companies that meet the banks’ so-called “stringent” requirements in these respects; c. Ensuring that the only insurance companies on the bank’s list are affiliated with the bank (i.e. have direct or indirect common ownership); and d. Not informing their borrowers of these facts. Other instances have occurred in which car loans have ostensibly been made by banks at no interest but only in the event that the borrower agrees to accept an inflated insurance premium from a company closely affiliated to the bank. The typical scam in these instances results from the fact that, buried in small font size in lengthy pages of a complex loan agreement (which the customer is not encouraged to read and in fact does not read), there is a provision to the effect that all insurance will be denied to the consumer in the event that an accident occurs for which he or she is in any way responsible. Also, by the terms of Art. 428 of the Russian Civil Code, the concept of a contract of adhesion is permitted which allows any party (including any bank) to determine itself the conditions of any contract by means of its own separate “records or other standard forms” and which can thereupon be accepted by the other party as part of a whole contract being offered. Thus, there is in addition no requirement that the crucial provision actually appear at all in the written agreement signed by the customer, provided the customer signs the agreement indicating acceptance of the contract of adhesion. The only reference to customer rights in this Article is that the “joined party” has the right to demand cancellation or change of contract, if the contract deprives the customer of the rights usually given under contracts of such kind, if it excludes or limits responsibilities for infringement of obligations, or if it contains other burdensome conditions that the customer would have not accepted otherwise. However, this clause is not applicable “if the joined party knows or should know” the conditions of the contract. It is instructive, however, that the ARBR’s voluntary Code of Conduct provides guidance to banks in their dealings with consumers in respect of accompanying services, in particular with insurance regarding consumer credit. Also, by paragraph 5 of Article 4 of the latest draft of the Law on Consumer Credit, full disclosure is to be required in the event that any accompanying services are offered in the context of a consumer loan. Recommendation Bundling of financial services should only be permissible by law if: a. The consumer receives prior notice of the bundling in writing, along with clear statements regarding: (i) its implications in terms of cost to the consumer and (ii) the nature of the bundling and what precisely is and is not covered; and b. Then the consumer agrees in writing to waive his or her right to proceed with the unbundled services. Consideration should be given to amending Article 428 of the Civil Code to do away with the egregious practice of contracts of adhesion. Good Practice B.5 Preservation of Rights Except where permitted by applicable legislation, in any communication or agreement with a consumer, a bank should not exclude or restrict, or seek to exclude or restrict: a. Any statutory liability or duty of care of the bank to the consumer; b. Any duty to act with skill, care and diligence toward the consumer in connection with the provision by the bank of any financial 21 Russian Federation Banking Sector service or product; or c. Any liability arising from the bank’s failure to exercise the degree of skill, care and diligence that may reasonably be expected of it in the provision of any financial service or product to the consumer. Description There is nothing in Russia’s Consumer Protection Law or any Code or other Law that provides for the concepts of “unfair contractual term” and “unfair commercial practice” and then makes these illegal. Russia’s Civil Code provides for general terms of any contract34 but not for bank-specific agreements. Unlike EU Directive 1993/13/EEC, there are no existing protections against terms that are onerous and unfair to individual consumers in their contracts with their banks. Recommendation There should be legal provisions that protect consumers against unfair contractual terms and unfair commercial practices of banks. These provisions could be included in the Consumer Protection Law, the Law on Consumer Credit or other specific regulation. Industry codes of conduct are also important means to improve common business practices in the banking sector. Although the concept is revolutionary in the Russian context, perhaps it is time to contemplate enacting a duty on banks to act with skill, care and diligence toward their consumers in connection with the provision of any financial service and then to hold banks accountable for their failure to exercise the degree of skill, care and diligence that is reasonably expected. It would then be a simple thing to require that in any communication or agreement with a consumer, a bank would be prohibited from excluding or restricting, or seeking to exclude or restrict its statutory liability or duty of care in these respects. Good Practice B.6 Regulatory Status Disclosure In all of its advertising, whether by print, television, radio or otherwise, a bank should disclose: (a) that it is regulated; and (b) the name and address of the regulator. Description Although there are no such requirements in the law, by the terms of the Law on Banks and Banking Activities, all licensed banks must employ the word “bank” in all signs and written communications. By so doing, some at least maintain that a bank implicitly indicates that it is licensed and regulated by the CBR. Problems arise when there are non-licensed entities that engage in financial activities with apparent impunity outside of banking regulations. In a return of pyramid selling schemes which were rampant in Russia in the late 1990s, 2007 saw a disquieting growth in un-licensed credit cooperatives, including entities that bent on fooling gullible “members” into believing that, with a modest investment, enormous future gains would be assured. Of numerous examples were promises that with a fraction of what would be a normal purchase price being paid up-front to a manager of a cooperative (who would masquerade as a residential property 34 The general norms provided by the Civil Code need to be consulted since a consumer credit contract is just one type of civil legal obligation. The general part of the Code contains essential provisions concerning, among other things, the performance of obligations and liability for violations of obligations. The chapter of the Civil Code concerning transactions will also need to be consulted since this contains rules on the form of transactions, state registration of transactions and the invalidity of transactions. Also, as far as the potential transfer of ownership is concerned as a result of a foreclosure or other enforcement of a security interest held by a bank, provisions dealing law of property will prove relevant. Finally, even the most general rules of the Civil Code will be applicable, such as those concerning good faith. See: Burnham, William, Peter B. Maggs and Gennady M. Danilenko, Law and Legal System of the Russian Federation, 3rd Edition, 2004. 22 Russian Federation Banking Sector developer), consumers would, in a reasonable time frame, own a flat in Moscow that was either to be built or renovated. Members or potential members of the cooperative would also be taken to the property on which the housing development was promised to be built or the building promised to be renovated. On the basis of seven separate cases, it has been estimated that some 50 billion rubles were lost by unsuspecting and unsophisticated consumers in the twelve months to 31 December 2007 alone. Recommendation The law should be amended to require a Russian bank to disclose in any of its advertising: a. That it is regulated by the CBR, and b. The name and address of the CBR. Good Practice B.7 Terms and Conditions Before a consumer may open a deposit, current or loan account at a bank, the bank must provide the consumer with a written copy of its general terms and conditions, as well as all terms and conditions that apply to the account to be opened. Collectively, these Terms and Conditions must: a. Disclose details of the bank’s general charges, the bank’s complaints procedures, information about any compensation scheme that the bank is a member of, and an outline of the action and remedies which the bank may take in the event of a default by the consumer; b. Include information on the methods of computing interest rates paid by or charged to the consumer, any relevant non-interest charges or fees related to the product offered to the consumer, any service charges to be paid by the consumer, restrictions, if any, on account transfers by the consumer and the procedures for closing an account; c. Set forth clear rules regarding: (i) the reporting of unauthorized transactions; (ii) stolen cards; and (iii) liability; and d. Be written in plain language and in a font size and spacing that facilitates the reading of every word. Description There have been numerous cases of Russian commercial banks declaring a specified interest rate in a loan agreement and then hiding additional charges either in particularly small print or else by means of a cross-reference to another bank document which is not annexed to the agreement. By the terms of the Ordinance No. 1759-U of December 12, 200635, all banks were obliged by the CBR to indicate the “effective rate of interest” calculated on any consumer loan to a customer, starting from July 2007. The definition of “effective interest rate” was, however, difficult for the typical consumer to understand and concerns were voiced that this term was applied inconsistently and ineffectively. Since June 2008 there is a further requirement that replaces the need to disclose an effective rate of interest with the obligation now on banks to provide their 35 Ordinance of the Central Bank of Russia No. 1759-U on amending Regulation No. 254-P, dated March 26, 2004, on the Procedure for Allocation by Credit Institutions of Provisions for Possible Losses on Loans, Loan Debts and Similar Debts (December 12, 2006). Examples of calculating an effective interest rate on this kind of loans were cited in the Letter No. 175-T on Setting an Effective Interest Rate on Loans Extended to Households (December 29, 2006), 23 Russian Federation Banking Sector consumers with the “full cost of credit” in monetary terms. This results from the recent amendment to Art. 30 of Russia’s Law on Banks and Banking Activities. 36 A bank is thus now obliged to present to its borrower the true cost of any credit, including interest and other payments to third parties if these are defined in the loan agreement with that borrower. The CBR has subsequently introduced a regulation that aims to provide guidance regarding “cost of credit” calculations 37. Coming up with a correct calculation, however, is proving difficult in many instances, especially in instances of the bundling of services. In addition, there are two versions now circulating of a draft Law on Consumer Credit, one prepared under the direction of the Ministry of Finance (MOF) and the other under the auspices of the ARBR. The purpose of each is to go further in ensuring that commercial banks fully disclose all of their lending terms to clients in each loan agreement. The MOF draft has, however, been less than enthusiastically welcomed by a significant number of banks. Unlike EU Directive 1993/13, there are no existing protections against terms that are onerous and unfair to individual consumers in their contracts with their banks. The ARBR voluntary Code of Conduct states that responsible banks should develop general conditions of consumer lending that are clear to the borrower, give a fair idea of the cost of credit, establish accurate rules in respect of the loan account and debt repayment, indicate the term of the credit, provide the way to calculate the overall cost of the credit, carry out sales of “additional services”38 responsibly on the basis of estimation of the borrower’s creditworthiness and under preliminary written approval of the customer. The Code is silent, however, on what the “necessities” of accompanying services must be, as well as on what other information is “necessary”, leaving to each ARBR-member bank to define these terms as it sees fit. Secondly, the Code states that the responsible bank should provide all terms and conditions in a consumer credit contract in a font of one size39 but, strangely, there is no requirement regarding the minimum permissible size. Recommendation Consideration should be given to requiring by statute that before a consumer opens a deposit, current or loan account at any bank, the bank must provide the consumer with a written copy of its general terms and conditions, as well as all terms and conditions that apply to the account to be opened. These Terms and Conditions should then: a. Disclose details of the bank’s general charges, the bank’s complaints procedures, information about any compensation scheme that the bank is a member of, and an outline of the action and remedies which the bank may take in the event of a default by the consumer; b. Include information on the methods of computing interest rates paid by or charged to the consumer, any relevant non-interest charges or fees related to the service offered to the consumer, any charges to be paid by the consumer, restrictions, if any, on account transfers by the consumer and the procedures for closing an account; c. Set forth clear rules regarding: (i) the reporting of unauthorized transactions, (ii) stolen credit and debit cards, and (iii) liability; and 36 The original Federal Law No. 395-I dates from December 2, 1990. The amendments of Article 30 were approved by the State Duma by Federal Law No. 46-FZ of April 8, 2008. 37 Directive of the Central Bank of Russia No. 2008-U on the Procedure for the Calculation of the Full Value of a Credit and for Bringing It to the Notice of the Natural Person Who Is a Borrower (May 13, 2008) 38 Articles 1.23 and 1.24 of the ARBR Code 39 Article 1.13 of the ARBR Code 24 Russian Federation Banking Sector d. Be written in plain language and in a font size and spacing that facilitates the reading of every word. The draft Law on Consumer Credit from the Ministry of Finance should be carefully reviewed in light of the provisions of the EU Directive 2008/48/EC of 23 April 2008.40 What is needed is a simple statutory requirement that each loan agreement between a bank and a customer set forth a detailed schedule that itemizes precisely and transparently what the customer’s ongoing monetary obligations are in respect of: a. The payment of interest and other applicable fees, if any; and b. The re-payment of principal until such time as all payments and re- payments have been made. Banks should also be required by statute to disclose the penalties, if any, for pre- payment of a loan, as well as those penalties that apply in the event of various breaches of the loan agreement. And the statute should further require that all sums in question be set forth in rubles and not in percentage terms. Good Practice B.8 Key Facts Statement a. A bank should have a single-page Key Facts Statement, written in plain language, in respect of each of its accounts, types of loans or other products. b. Prior to a consumer opening any account at, or signing any loan agreement with, the bank, the consumer should have delivered a signed statement to the bank to the effect that he or she has duly received a copy of the relevant document from the bank. Description Some CBR-licensed banks that are controlled in foreign jurisdictions routinely make use of Key Facts Statements in respect of their accounts and loans for their Russian customers, knowing from experience elsewhere that these have proven beneficial for individual customers as well as bank staff members who deal with them. There is, however, nothing yet in Russian law to require this. Although the latest MOF draft Law on Consumer Credit would require such disclosure, at least in respect of consumer loans, this draft Law makes no reference to the concept of a Key Facts Statement as such. Also, there is no existing draft provision aimed at requiring banks to provide such a document in respect of the opening of any account. In addition as indicated above, by ARBR’s Code of Conduct, banks are encouraged to develop general conditions regarding accounts and the repayment of debts. There is no recommendation in this Code, however, that a bank should prepare a single-page Key Facts Statement, written in plain language, in respect of each of its accounts, types of loans or other services. Also, there is no requirement or recommendation that, prior to a consumer opening any account at, or signing any loan agreement with a bank, the consumer should have delivered a signed statement to the bank to the effect that he or she has duly received a copy of the relevant Key Facts Statement from the bank. Recommendation The banking associations should develop Key Facts Statements and recommend their use by the banks that are members of the associations. All banks should be encouraged by the associations to give consumers a Key Facts Statement for each 40 See EU Directive 2008/48/EC of 23 April 2008, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:32008L0048:EN:HTML 25 Russian Federation Banking Sector service that the bank offers to any customer of that bank. Prior to a consumer opening any account at, or signing any loan agreement with a bank, the consumer should have delivered a signed statement to the bank to the effect that he or she has duly received a copy of the relevant Key Facts Statement from the bank. The Key Facts Statement would not replace the contract for legal purposes but each bank should ensure that the statement has no incorrect information. Good Practice B.9 Guarantees No advertisement by a bank should describe either an actual or future deposit or interest rate payable on a deposit as being guaranteed or partially guaranteed unless: a. There is a legally enforceable agreement between the bank and a third party who or which has provided such a guarantee; and b. The advertisement states: (i) the extent of the guarantee; (ii) the name and address of the party providing the guarantee; and (iii) in the event that that party is in any way connected to the bank, the precise nature of that connection. Description By Article 840 of the Civil Code, “the return of deposits of citizens by a bank shall be ensured by means of obligatory insurance of deposits effectuated in accordance with a law and also by other means in the instances provided by a law.”41 The reference to obligatory insurance in accordance with the law means the existing regime of household deposit insurance.42 The Law on Insurance of Household Deposits (Article 6) requires that banks provide depositors with information about their participation in the deposit insurance system and about deposit compensation amounts and procedures. The Law also requires banks to place information about the deposit insurance system in places of bank offices where depositors have free access and deal with legal formalities related to deposits. The Law on Advertising includes provisions related to financial services in its Article 28. This Article establishes, among other things, that an advertisement of banking, insurance and other financial services shall not: a. Contain guarantees or promises of a future effective operation (profitability of deposit/investment), including those based on real past indicators if such operation (profitability of deposit/investment) cannot be effectively assessed as of the time of conclusion of a relevant contract; and b. Abstain from indicating the other terms and conditions for the provision of the services which affect the amount of income that will be payable to the persons using the services, or the amount of expenses to be incurred by the persons using the services, if at least one of such terms is announced in the advertisement. However, there are no provisions regarding the requirements of information for advertisements of deposits that are fully or partially guaranteed. Recommendation In the first place, Article 840 of the Civil Code should be amended to cover all individual deposit holders regardless of citizenship. And, secondly, the law should require that no advertisement by a Russian bank may be made that describes either an actual or future deposit or interest rate 41 As amended by Federal Law of 23 December 2003, C3 PO (2003), no. 52(1), item 5034. 42 See Good Practice F.1 below. 26 Russian Federation Banking Sector payable on a deposit as being guaranteed or partially guaranteed unless: a. There is a legally enforceable agreement between the bank and a third party who or which has provided the guarantee; and b. The advertisement states: (i) the extent of the guarantee; (ii) the name and address of the party providing the guarantee; and (iii) in the event that that party is in any way connected to the bank, the precise nature of that connection. Good Practice B.10 Professional Competence a. In order to avoid any misrepresentation of fact to a consumer, any bank staff member who deals directly with consumers, or who prepares bank advertisements or who markets any service or product of the bank should be familiar with all legislative, regulatory and code of conduct guidance requirements relevant to his or her work, as well as with the details of any product or service of the bank which he or she sells or promotes. b. Regulators and industry associations should collaborate to establish and administer minimum competency requirements for any bank staff member who: (i) deals directly with consumers; (ii) prepares any Key Facts Statement or any advertisement for the bank; or (iii) markets the bank’s services and products. Description There are no generally agreed banking industry standards in these respects and no minimum legal or regulatory requirements of competency for any bank staff members. However some banks, mostly foreign-owned, take it upon themselves to ensure that all of their staff members (at least under categories b(i) and (iii) above) receive what they themselves consider to be “adequate” in-house training before their staff members embark on these client-oriented functions. That said, the ARBR’s Code of Conduct deals with the need for banks to: a. Observe norms of professional behavior; b. Ensure the “necessary” level of knowledge and competence of its employees, representatives and agents in respect of consumer lending; c. Carry out employee training; and d. Consider the observance of this Code of Conduct and other principles regarding consumer lending, when awarding employees, representatives and agents. No objective standards are yet forthcoming, however, as to what constitutes a “necessary” level of knowledge. Recommendation The CBR and the CPS, together with the ARBR and the ARB, should collaborate to establish and administer specific minimum competency requirements at the very least for any staff member of a bank who: a. Deals directly with consumers, b. Prepares any Key Facts Statement or any advertisement for the bank, or c. Markets the bank’s services. SECTION C CUSTOMER ACCOUNT HANDLING AND MAINTENANCE 27 Russian Federation Banking Sector Good Practice C.1 Statements a. Unless a bank receives a customer’s prior signed authorization to the contrary, the bank should issue, and provide the customer with, a monthly statement regarding every account the bank operates for the customer. Each such statement should: (i) set out all transactions concerning the account during the period covered by the statement; and (ii) provide details of the interest rate(s) applied to the account during the period covered by the statement. b. Each credit card statement should set out the minimum payment required and the total interest cost that will accrue, if the cardholder makes only the required minimum payment. c. Each mortgage or other loan account statement should clearly indicate the amount paid during the period covered by the statement, the total outstanding amount still owing, the allocation of payment to the principal and interest and, if applicable, the up-to-date accrual of taxes paid. d. A bank should notify a customer of inactivity of any account of the customer and provide a reasonable final notice in writing to the customer if the funds are to be transferred to the government. e. When an investor signs up for paperless statements, such statements should be in an easy-to-read and readily understandable format. Description A recent CBR regulation requires a bank to inform every one of its customers of the status of his or her accounts on a monthly basis but not all of the matters referred to above are covered. That said, this requirement is not yet being enforced. The MOF draft Law on Consumer Credit would require that all banks provide at least some of this information in the context of a consumer credit in the event that the consumer so requests it.43 Recommendation The CBR regulation needs to be expanded to cover all aspects referred to above and then effectively enforced. Good Practice C.2 Notification of Changes in Interest Rates and Non-interest Charges A customer of a bank should be notified in writing by the bank of any change in: a. The interest rate to be paid or charged on any account of the customer, as soon as practicably possible; and b. A non-interest charge on any account of the customer, a reasonable period in advance of the effective date of the change. Description While at least some banks do comply with these good practices, many apparently do not. There are no statutory or regulatory requirements in these respects. That said, the MOF draft Consumer Credit Law would require the creditor to inform the consumer on any change in annual interest rate one month before it takes effect.44 43 See paragraph 1 of Article 6 of the draft Law. 44 See paragraph 3 of draft Article 6. This requirement would not apply, however, if the consumer contract refers to a floating variable annual interest rate. 28 Russian Federation Banking Sector Neither the MOF draft Consumer Credit Law nor the ARBR Code, however, deal in any way with what should happen in the event that a bank chooses unilaterally to increase any non-interest charge on any account of a customer. Recommendation There should be a statutory requirement for a Russian bank to notify a customer in writing of any change in: a. The interest rate to be paid or charged on any account of the customer as soon as practicably possible, and b. A non-interest charge on any account of the customer a reasonable period in advance of the effective date of the change. Consumers should be able to withdraw without penalty to the consumer when the changes are not satisfactory (as is proposed in the draft Consumer Credit Law). Good Practice C.3 Customer Records A bank should maintain up-to-date records in respect of each customer of the bank that contain the following: a. A copy of all documents required to identify the customer and provide the customer’s profile; b. The customer’s address, telephone number and all other customer contact details; c. Any information or document in connection with the customer that has been prepared in compliance with any statute, regulation or code; d. Details of all products and services provided by the bank to the customer; e. A copy of all correspondence from the customer to the bank and vice-versa and details of any other information provided to the customer in relation to any product or service offered or provided to the customer; f. All documents and applications of the bank completed, signed and submitted to the bank by the customer; g. A copy of all original documents submitted by the customer in support of an application by the customer for the provision by the bank of a service or product; and h. Any other relevant information concerning the customer. A law or regulation should provide the minimum permissible period for retaining all such records and, throughout this period, the customer should be provided ready free access to all such records. Description While at least some banks comply with these good practices, many apparently do not. There are apparently no statutory or regulatory requirements in any of these respects. In addition, there is nothing in the ARBR Code of Conduct that deals with these matters, nor is there any relevant provision in the MOF draft Consumer Credit Law. Recommendation The law should be amended to require a bank to maintain up-to-date records as indicated above in respect of each of its customers for at least some years. Good Practice C.4 Checks The regime regarding the issuance and clearing of checks should be based on clear statutory and regulatory rules that, among other things, set reasonable requirements for banks on the following issues: a. For any bank on which a check is drawn, when the account on 29 Russian Federation Banking Sector which it is drawn has insufficient funds; b. For any bank at which a customer of that bank seeks to cash or deposit a check, which is subsequently found to be drawn on an account with insufficient funds; c. Informing the customer of the consequences of issuing a check without sufficient funds, at the time a customer opens a checking account; d. Regarding the crediting of a customer’s account and its timing, when a check deposited by the customer clears; and e. In respect of capping charges on the issuance and clearance of checks. There should be clear rules on consumer protection, including procedures for error resolution. Description Chapter 46 of the Civil Code deals with the Settlement of Accounts and Section 5 of this Chapter provides for a regime for checks (Articles 877 to 885). This Section, however, does not deal definitively with checks drawn on accounts with insufficient funds, and says nothing regarding either the crediting of a customer’s account when a check deposited by the customer clears or the capping of charges on the issuance and clearance of checks. Depending on the circumstances, knowingly writing a check on an account with insufficient funds and receiving an item of property in return presumably amounts to theft. By Article 158 of the Criminal Code of the Russian Federation, theft constitutes “the secret larceny of other people’s property” an d is punishable by a fine “in the amount up to 80 thousand rubles, or in the amount of the wage or salary or any other income of the convicted person for a period of up to six months, or by compulsory works for a term up to 180 hours, or by corrective labor for a term of six months to one year, or by arrest for a term of two to four months, or by deprivation of liberty for a term up to two years.” “Swindling” is defined by Article 159 of the Criminal Code as “the stealing of another person’s property or the acquisition of the right to another person’s property by fraud or breach of trust” and this likewise could be the motive for intentionally issuing a check on an account without inadequate funds. Here, although the other potential penalties are the same as those for theft, punishment by way of fine can be up to 100 thousand more rubles (i.e. a maximum of 180 thousand rubles). Recommendation Notwithstanding the above-mentioned provisions in the Civil and Criminal Codes, no regime of checking accounts has yet been developed in Russia and none seems likely. Financial transactions occur in cash or by bank transfer made in person, written order or electronically. Thus, no related recommendation would seem appropriate. Good Practice C.5 Debt Recovery a. No bank, agent of a bank or third party should employ any abusive debt collection practice against any customer of the bank, including the use of any false statement, any unfair practice or the giving of false credit information to others. b. The type of debt that can be collected on behalf of a bank, the person who can collect any such debt and the manner in which that debt can be collected should be indicated to the customer of the bank when the credit agreement giving rise to the debt is entered into between the bank and the customer. c. No debt collector should contact any third party about a bank customer’s debt without informing that party of: (i) the debt collector’s right to do so; and (ii) the type of information that the debt collector is seeking. 30 Russian Federation Banking Sector Description Russian debt collection agencies are unlicensed and still free to operate without any regulatory oversight. As a result some, if not most, existing agencies have been unscrupulous in harassing bank customer debtors. Aware, however, of the negative impact of such activity on their reputations, more and more banks are apparently insisting that their collection agents only employ fair and reasonable methods. That said, until a regime for personal insolvencies is enacted and made operational, a delinquent debtor may well experience undue pressure from bank- appointed debt collectors.45 Given their un-regulated status, there are no official statistics available on collection agencies or any aspect of their activities. The Union of Collection Agencies has reacted, however, to the negative press concerning its members and, in conjunction with the Ministry for Economic Development, has taken the initiative to formulate a preliminary draft law on debt collectors. Debt relief at a reasonable cost is essential for any individual unable to pay his or her debts as they come due over some reasonable period of time. Also, the law must grant all individuals and their banks the right to re-schedule debts. There are other problems with the existing regime. An individual debtor cannot take advantage of rehabilitation. And recovery on a debtor’s assets can be carried out by a first creditor whose claim is enforceable in court, with other creditors missing the opportunity of lodging their claims. Provisions of the Federal Law on Insolvency 2002 (Chapter X) regarding the insolvency of non-trading individuals have not yet come into force. A draft federal law has been prepared by the Ministry for Economic Development on amending the legislation related to rehabilitation procedures for personal bankruptcies. The draft legislation aims to: a. Protect a debtor’s interests, b. Enable a debtor to access rehabilitation proceedings, c. Distribute the debtor’s assets fairly among his or her creditors, and d. Provide favourable economic conditions for the development of the consumer credit market through voluntary settlement proceedings.46 If enacted as presently drafted, the legislation on personal bankruptcy would: a. Allow an insolvent individual debtor to file a rehabilitation proceeding; b. Require a debt restructuring plan to be approved by the court with the consent of the debtor’s creditors; c. Require an Arbitration Court to approve the plan offered by the debtor regardless of creditors’ consent if the plan either provides for the full satisfaction of all secured creditors’ claims or creditors will get not less than they would if the debtor’s assets were sold immediately plus 6 months of the debtor’s income; d. Require the plan to be cancelled by the Arbitration Court in the event that any infringement is committed by the debtor that remains uncorrected before the relevant sitting of the court; e. Require the arbitration court to open liquidation proceedings in the event 45 Although no studies have been conducted in detail on the social consequences of debt collection activities in Russia, the adverse consequences are thought to be significant. 46 This draft law has been prepared by the Insolvency Division of the Ministry of Economic Development and Trade of the Russian Federation. 31 Russian Federation Banking Sector that the debtor does not provide a debt restructuring plan or if the plan is cancelled; and f. Permit the plan to have a term of no more than 5 years. Recommendation A law on debt collectors would be helpful provided it would require, among other things: a. The licensing and oversight of all properly registered collection agencies by an appropriate regulatory authority; b. The provision of services in accordance with stated parameters on the basis of generally acceptable fair and reasonable behavior; and c. The provision of statistics by each licensed agency to the regulatory authority on a regular basis for annual consolidation and wide-spread public dissemination. The draft legislation on personal bankruptcies should be enacted. SECTION D PRIVACY AND DATA PROTECTION Good Practice D.1 Confidentiality and Security of Customers’ Information Customers have a right to expect that their financial transactions are kept confidential. The law should require banks to ensure that they protect the confidentiality and security of personal data, against any anticipated threats or hazards to the security or integrity of such information, and against unauthorized access. Description It has been common practice in Russia to distribute vast numbers of pre-cleared credit cards through the mail and in the process be unaware of, and not concerned about: (a) the extent of the recipient’s knowledge of credit cards, their uses and the charges that come with them; or (b) the possibility or even the likelihood that many of these cards will be stolen and used by those who have no right to do so. See also the section on Credit Reporting. Recommendation See the section on Credit Reporting. Good Practice D.2 Sharing Customer’s Information a. A bank should inform its customer in writing: (i) of any third- party dealing for which the bank must share information regarding any account of the customer, such as any legal enquiry by a credit bureau; and (ii) how it will use and share the customer’s personal information. b. No bank shall sell or share account or personal information regarding a customer of the bank to or with any party not affiliated with the bank for the purpose of telemarketing or direct mail marketing. c. The law should allow a customer of a bank to stop or "opt out" of the sharing by the bank of certain information regarding the customer and, prior to any such sharing of information, every bank should be required to inform each of its customers in writing of his or her rights in this respect. d. The law should prohibit the disclosure of any information of a banking customer by third parties. Description See the section on Credit Reporting. Recommendation See the section on Credit Reporting. 32 Russian Federation Banking Sector Good Practice D.3 Permitted Disclosures The law should: a. State specific rules and procedures concerning the release to any government authority of the records of any customer of a bank; b. State what the government authority may and may not do with any such records; c. State what exceptions, if any, apply to these rules and procedures; and d. Provide penalties for the bank and any government authority for any breach of these rules and procedures. Description See the section on Credit Reporting. Recommendation See the section on Credit Reporting. Good Practice D.4 Credit Bureaus a. No credit bureau may begin or maintain operations without being licensed to do so by the appropriate government authority in accordance with the law. b. Every bank should ensure the accuracy and credibility of the information it shares with any licensed credit bureau. c. The law or regulations providing for oversight over credit bureaus should ensure that, amongst other things, the rules relating to consumer protection: (i) Provide for the extent and timeliness of the updating of information regarding any bank customer; (ii) Require that any bank customer’s records be kept confidential, except as may be expressly permitted by law; (iii) Provide clear rules and procedures regarding the retention period of any credit record; (iv) Require that every bank customer be informed in writing of the retention period; (v) Require that every bank customer has ready, free access to all of his or her credit reports and be provided with a copy of any or all of his or her reports on conditions that are transparent; and (vi) Provide procedures for correcting any mistake on a customer's credit report. Description There is widespread lack of data, especially on individual borrowers with modest loans. Credit bureaus were introduced in 2004 and are growing in number, but the information they collect remains limited and not widely used. Despite the CBR’s role as “information clearinghouse” through the Central Catalogue of Credit Histories, the fragmentation of the system, where each bank can potentially set up its own database, does not provide incentives for data sharing. Moreover, the data included in credit bureaus is inevitably limited as each borrower must authorize the inclusion of his or her loan in the data base. See also the section on Credit Reporting. Recommendation See the section on Credit Reporting. SECTION E DISPUTE RESOLUTION MECHANISMS Good Practice E.1 Internal Complaints Procedure a. Every bank should have in place a written complaints procedure 33 Russian Federation Banking Sector for the proper handling of any complaint from a customer, with a summary of this procedure forming part of the bank’s Terms and Conditions referred to in B. 7 above. b. Within a short period of time following the date a bank receives a complaint, it should: (i) acknowledge in writing to the customer/ complainant the fact of its receipt of the complaint; and (ii) provide the complainant with the name of one or more individuals appointed by the bank to deal with complaint until either the complaint is resolved or cannot be processed further within the bank. c. The bank should provide the complainant with a regular written update on the progress of the investigation of the complaint at intervals of not more than 10 business days. d. Within a few business days of its completion of the investigation of the complaint, the bank should inform the customer/ complainant in writing of the outcome of the investigation and, where applicable, explain the terms of any offer or settlement being made to the customer/complainant. e. When a bank receives a verbal complaint, it should offer the customer/complainant the opportunity to have the complaint treated by the bank as a written complaint in accordance with the above. A bank may not require, however, that a complaint be in writing. f. A bank should maintain an up-to-date record of all complaints it has received that are subject to the complaints procedure. For each complaint, this record should contain the details of the complainant, the nature of the complaint, a copy of the bank's response(s), a copy of all other relevant correspondence or records, the action taken to resolve the complaint and whether resolution was achieved and, if so, on what basis. The bank should make these records available for review by the banking supervisor or regulator as and when requested. Description There are apparently no statutory requirements in Russia for any bank in respect of any aspect of the above-mentioned good practices. In addition, as indicated above, most consumers have no way of knowing precisely what their true rights are as consumers of financial services. And obviously, without this knowledge, making a claim that a right has been violated is neither simple nor obvious. Complainants typically send their written complaints to the bank in question, with a copy to the CPS, the CBR, the police and the Prosecutor-General. But there is no standard way of handling these. Some banks at least have customer relations units that exist to react to customer inquiries, but others do not. While subsidiaries of some foreign banks track and catalogue complaints as they do in their head offices and branch offices overseas, few Russian-owned banks apparently have any such practice. By the terms of the ARBR’s Code of Conduct, it is incumbent upon a responsible bank to define an effective and clear operating procedure in respect of an individual borrower’s claims and complaints, to bring this procedure to the notice of the borrower and then to observe it strictly.47 47 See item 1.17 of the ARBR Code. 34 Russian Federation Banking Sector The same Code also has more detailed provisions dealing with the protection of the rights of the borrower, as well as recommendations regarding appropriate efforts to reach a pre-judicial resolution of any dispute.48 Although an individual entrepreneur may re-schedule a debt49, there is nothing yet in Russian law that permits the re-scheduling of a personal consumer or mortgage loan. That said, a draft federal law amending the legislation on rehabilitation procedures for personal bankruptcies has been prepared by the Ministry for Economic Development . If enacted, the legislation would allow for individual re- scheduling of consumer debt.50 Important as well is the fact that the draft seeks settlement through negotiation. It remains a moot point whether voluntary re-scheduling between a bank and its consumer borrower could be unwound by a court on the basis of this lack of legal authorization. Recommendation Debt relief at a reasonable cost is essential for any individual unable to pay his or her debts as they come due over some reasonable period of time. Also, the law must allow all individuals and their banks the right to re-schedule debts. In addition, banks should be required by statute to: a. Have in place a written complaints procedure for the proper handling of any complaint from a customer, with a summary of this procedure forming part of the bank’s General Terms and Conditions for any agreement with the customer; b. Provide the customer with the name and address of an individual appointed by the bank to deal with the complaint until the complaint either is resolved or cannot be processed further within the bank; c. Provide the complainant with a regular written update on the progress of the investigation of the complaint; d. Inform the customer/complainant in writing of the outcome of the investigation within 30 days after first receiving the complaint; e. Explain in simple terms the nature of any offer of settlement being made to the customer/complainant; f. Offer to have any verbal complaint of a customer treated by the bank as a written complaint in accordance with the above; g. Maintain up-to-date records of all complaints it receives, including information of the nature of the complaint, a copy of the bank’s response(s), a copy of all other relevant correspondence or records, the action taken to resolve the complaint, and whether resolution was achieved and, if so, on what basis; and h. Make these records regularly available for a review by CBR and CPS or else on the request of either CBR or CPS. Furthermore, there should be a centralized system for the collection and recording of complaints, and these records should be made public, free of charge, on a regular basis. Finally, there should be a law on personal bankruptcies that clearly encourages negotiated settlements between banks and their customers and expressly allows for the re-scheduling of individual debt as part of such settlements. 48 See items 1.33 and 1.34 of the ARBR Code. 49 As per the Civil Code. 50 Banks are apparently concerned that this draft favors debtors, while consumer organizations take the opposite view. 35 Russian Federation Banking Sector Good Practice E.2 Formal Dispute Settlement Mechanisms a. A system should be in place that allows a customer of a bank to seek affordable and efficient recourse to a third party banking ombudsman or equivalent institution in the event the customer’s complaint is not resolved to his or her satisfaction in accordance with the procedures outlined in E. 1 above. b. The existence of, and procedures before, the banking ombudsman or equivalent institution should be set forth in every bank’s Terms and Conditions referred to in B. 7 above. c. The banking ombudsman or equivalent institution should be impartial and act independently from the appointing authority, the banking industry and the specific bank with which the complaint has been lodged. d. The decision of the banking ombudsman or equivalent institution should be binding upon on the bank with which the complaint has been lodged and this fact, as well as the mechanism to ensure the enforcement of such a decision, should be set forth in every bank’s Terms and Conditions referred to in B. 7 above. Description The CBR at its headquarters in Moscow, as well as through its numerous so-called territorial offices, receives a steady stream of written complaints from customers of commercial banks, but only since April of 2008 has there been any effort to classify these complaints even in the most simplistic of ways. On average, some 200 written complaints per month are apparently being filed with the CBR but this number is readily accepted as capturing only a miniscule proportion of those seeking redress. There is, however, no centralized system for consumers formally to report problems, file formal complaints and learn how other complaints have been resolved by any third party institution, when and by whom. Complaints are most typically handled within the territorial jurisdiction of the court where the contract subject to the complaint was signed, rather than where the bank may have been registered. State Courts presided over by Justices of the Peace (small claims courts) deal with all formal consumer claims throughout Russia that are below 200 times the monthly minimum wage. The Federal Courts of General Jurisdiction have exclusive jurisdiction over all such claims at or in excess of this sum. The judgments of all of these courts are, however, still not routinely published. Fifteen years ago, the ARB chose itself to put in place an Arbitration Court within its premises in Moscow. This institution, however, has played only a modest role essentially in helping to settle disputes between ARB member banks. That said, the ARB is apparently keen to see the work of the Court expand to cover disputes that arise from customers of ARB member banks. The Legal Department of the ARB is also dealing with consumer complaints regarding banking services. A complaint should be addressed to a member of the ARB, and if members agree, the complaint is further addressed to the Legal Department which in turn works with the particular bank to address the complaint. According to the ARB, 90 percent of the cases are solved in benefit of consumers. Some of the main complaints received by the ARB deal with interest rates, charges and delay in payment of deposits. In addition, the ARB has developed a draft document to create an ombudsman within the association. However, concerns have rightly been expressed that any ombudsman appointed directly or indirectly by any bankers association would invariably be viewed by any aggrieved bank customer as necessarily biased in favor of the association’s member bank. 36 Russian Federation Banking Sector The MOF’s draft Consumer Credit Law is the first attempt to provide by statute for an ombudsman, but, if enacted, the services of such an ombudsman would be restricted to disputes in respect of consumer credit only. A separate law would need to establish an independent ombudsman to deal with any other individual consumer complaints that are not readily and voluntarily resolved between a consumer and his or her bank. Although a draft Law on Mediation is presently being considered, it is unlikely to have much, if any, impact on the settlement of disputes between individual consumers and their banks, given the voluntary nature of the process once any dispute has arisen. Without an obligation to respond to a respected, independent third party, such as an Ombudsman, and then to be bound by this party’s decision, most, if not all, banks are unlikely to embrace voluntarily any role of a mediator. For information regarding the process of consumer complaints made to the Central Bank of Brazil see: www.bcb.gov.br/ingles/fis/releases/PressRelease- ReorganizationOfBankSupervision.pdf - For information regarding consumer complaints in financial services in Canada see: http://www.woodstockinst.org/global/global/canada/ Recommendation There should be a system in place that allows a customer of a bank to seek affordable and efficient recourse to a third party (whether a financial ombudsman or equivalent independent institution) in the event that the customer’s complaint is not resolved to the customer’s satisfaction under internal procedures of the bank. It should be a statutory requirement that the third party be impartial and act independently from the authority appointing the third party, the financial industry and the specific financial institution with which the complaint has been lodged. And the decision of the independent third party should be binding upon on the financial institution with which the complaint has been lodged. As a first step, an office of banking sector ombudsman could be established under the professional associations (following the model of the Ombudsman Scheme of the Private Commercial Banks of Germany). In the long term, careful consideration should be given to the establishment, of a statutory financial services ombudsman. In this respect, existing models are worthy of analysis, including those of the EU generally and of Ireland, in particular, as an example of EU Member State. SECTION F GUARANTEE AND COMPENSATION SCHEMES Good Practice F.1 Depositor Protection a. The law should ensure that the regulator can take prompt corrective action on a timely basis. b. The law on deposit insurance should be clear on: (i) the insurer; (ii) the classes of those depositors who are insured; (iii) the extent of insurance cover; (iv) the holder of all funds for payout purposes; (v) the contributor(s) to this fund; (vi) each event that will trigger a payout from this fund to any class of those insured; and (vii) the mechanisms to ensure timely payout to depositors who are insured. 37 Russian Federation Banking Sector c. In the absence of deposit insurance, there should be an effective and timely payout mechanism in the event of insolvency of a bank. Description The Law on the Insurance of Natural Persons’ Deposits in Banks of the Russian Federation51 provides for a Deposit Insurance Agency. This agency was set up in January 2004 as a non-commercial state corporation52 with the following purposes: a. Paying out deposit compensation amounts to depositors on the occurrence of an “insured event”; b. Keeping and updating a register of banks that participate in the Deposit Insurance scheme; c. Monitoring the formation and maintenance of the deposit insurance fund, including he insurance premiums of banks; and d. Managing the resources of the deposit insurance fund. In 2004, the responsibilities of corporate receiver of insolvent banks were also delegated to the Agency.53 Thus, the Agency has two essential functions, namely managing Russia’s program of deposit insurance and the liquidation of insolvent banks. 54 In October 2008, the Law on Additional Measures to Strengthen the Stability of the Banking System through 31 December 2001 provided the Agency with new responsibilities to implement measures for the prevention of bank bankruptcies. These measures, which require the approval of the plan of the Agency’s participation in prevention of the bankruptcy of a bank, include: a. Provision of financial assistance to persons or entities that allow them to determine decisions on matters that are within the competence of the general meeting of its shareholders (according to the plan of the Agency’s participation in the bank); b. Provision of financial assistance to banks that acquire all or part of assets and liabilities of the bank; c. Acquisition of shares or equity interests in the bank in amounts that allow to determine decisions on matters that are within the competence of the general meeting of its shareholders; d. Provision of financial assistance to the bank, provided that the Agency and/or investors acquire shares/equity interests in the bank in amounts that allow to determine decisions on matters that are within the competence of the general meeting of its shareholders; e. Organization of auction sales of assets that are pledged as a collateral for a bank’s obligations including those due to the CBR; f. Conduction of functions of provisional administration based on decisions made by the CBR. According to this Law, the CBR can entrust the Agency to execute provisional administration of the bank, after receiving the Agency’s consent to participate in 51 See Federal Law No.177-FZ of December 23, 2003, as amended on August 20 and December 29, 2004; October 20, 2005; July 27, 2006; March 13, 2007 and October 13, 2008. 52 The Board of Directors of the Agency consists of seven representatives of the Russian Federation, five representatives of the CBR and the Agency’s Director-General. 53 See: Law on Amendments to the Federal Law on Insolvency of Credit Institutions, Federal Law No.121-FZ of August 20, 2004. The current Russian insolvent bank resolution system is based on provisions of the Federal Law on Insolvency of Credit Institutions of 1999. In 2004, this Law was substantially amended with new provisions by which the Deposit Insurance Agency was authorized to fulfill bankruptcy trustee or receivership powers for insolvent banks licensed by the CBR to attract deposits from individuals. 54 Before the above amendments become effective, only individual entrepreneurs accredited for this purpose by the CBR were appointed by Arbitration Courts to act as bankruptcy trustees of insolvent banks. 38 Russian Federation Banking Sector the prevention of a bank’s bankruptcy. As provisional administrator, the Agency is authorized, among other things to: a. Take actions associated with the bank’s equity capital reduction to its fair value; b. Decide on making amendments to the bank’s charter; c. Make a decision on the reorganization of the bank; d. Arrange a sale of the bank’s assets including purchase of the bank’s assets by the Agency; e. Effect the transfer of the bank’s assets and liabilities in full of in part; f. Submit to the court a request to declare transactions committed by the bank invalid, based on article 28 of the Law on insolvency of credit institutions; g. Repudiate any of the bank’s contracts in accordance with rules established in the Law on insolvency of credit institutions; h. Organize the sale of the bank’s assets that are pledged as collateral for the bank’s liabilities, including those to the CBR; i. Make a decision to liquidate the bank. The law also states that, from the day of appointment of the provisional administration by the Agency, the rights of the bank’s shareholders based on their equity interests in the bank (including the right to convene a general meeting of shareholders) and the powers of the bank’s governing bodies are suspended. Recommendation The Agency should make sure that it has all the financial and organizational resources, skilled personnel, and internal control systems required to ensure the timely and effective carrying-out of its functions. 55 There should be increased efforts to broaden public awareness of the details of deposit insurance. Good Practice F.2 Insolvency a. Depositors should enjoy higher priority than other unsecured creditors in the liquidation process of a bank. b. The law dealing with the insolvency of banks should provide for expeditious, cost effective and equitable provisions to enable the maximum timely refund of deposits to depositors. Description From 2004 to December 31, 2007, the Deposit Insurance Agency performed as the bankruptcy trustee in respect of 161 banks. During the same period, liquidation procedures were completed regarding 71 banks. On average, the Agency has between 80 and 90 ongoing bank liquidation proceedings at any time.56 Comparative analysis conducted by the CBR indicates that bank liquidation procedures are speeding up. The Deposit Insurance Agency is also apparently appropriating ever more funds for settlements with creditors but there are no 55 The Core Principles for Effective Deposit Insurance Systems issued by the International Association of Deposit Insurers are particularly helpful as guidelines to enhance deposit insurance effectiveness. They are available at: http://www.iadi.org/IADI%20Core%20Principles/FSF%20- %20IADI%20Core%20Principles%20final%2029%20Feb2008.pdf 56 From the paper by Nikolay N. Evstratenko, Deputy Director, Planning and Strategic Development, Deposit Insurance Agency, Russia, at the Annual General Meeting and Conference of The International Association of Insolvency Regulators, June 25, 2008, Saint-Petersburg 39 Russian Federation Banking Sector readily available statistics indicating what percentage of depositors’ claims remain unmet.57 Also, after the payment of the relevant amounts of deposit insurance, the law does not provide depositors with higher priority than other unsecured creditors in bank liquidation proceedings. Indeed, both are in the third class of creditors. The most highly preferred class of creditors consists of citizens to whom the insolvent bank is liable for harm inflicted either to life or to physical health. The next rank of creditors consists of the disbursement of severance benefits and employees salaries. And the third ranking class consists of other creditors’ claims, with secured claims ranking before those that are unsecured. Russian legislation provides special features for the insolvency of credit institutions. According to the Law on Banks and Banking Activities, a credit institution is a corporate legal entity entitled to carry out banking operations envisaged in order to make a profit and on the basis of a license granted by the CBR. A credit institution is insolvent if it is recognized by an arbitration court as unable to satisfy in full a creditor’s claim with respect to a monetary obligation or to perform its obligation to make any obligatory payment. A credit institution is deemed to be “unable” in these respects if it fails to meet the obligation within fourteen days from its due date or if the value of the bank’s assets after the CBR revokes its banking license is insufficient to discharge its liability to a creditor or to make any mandatory payment. Key to any insolvency proceeding involving a bank is speedy, decisive action taken by the CBR in order to ensure highest possible returns to creditors, including individual depositors, of the bank. Some concerns still persist in these respects. Another key provision to protect the interests of depositors and creditors of banks facing financial difficulties consists of strengthening the role of the central bank to act in a timely manner in order to prevent bank bankruptcies. The recent Law on Additional Measures to Strengthen the Stability of the Banking System assigned new responsibilities to the CBR for that matter, including the authorities to: a. Make a proposal to the Deposit Insurance Agency to participate in the prevention of bankruptcy of a bank; b. Assess the financial situation of the bank, for which purposes the CBR representatives can enter any premises of the bank and access and request any type of information of the bank ; c. Desist from taking measures against the bank identified as subject to prevention of bankruptcy; d. Make a decision on the approval or refusal of the plan of the Agency’s participation in the prevention of bankruptcy of a bank; e. Make a decision on reducing the equity capital of the bank to the fair (real) value of its capital; f. Make a decision on granting the Agency a loan for implementation of measures on prevention of a bankruptcy of a bank. Recommendation At present, the bank insolvency resolution system can be enhanced in the following ways: a. Implementing more effective and less costly methods of insolvent banks 57 Ibid: On average, it now takes 479 days from the date a bank license is revoked by the CBR until the arbitration court decision completes the liquidation process, whereas in previous years the average was 774 days. In addition, in recent years the Agency has managed to satisfy around 84.5% of all creditors’ claims within insolvent banks’ estates. 40 Russian Federation Banking Sector resolution; b. Accomplishing measures aimed at ensuring failed banks’ property and documents preservation; c. Expanding the range of actions which can imply bringing to account persons whose actions or omissions contributed in banks’ bankruptcy. SECTION G CONSUMER EMPOWERMENT Good Practice G.1 Financial Education in Schools Information about basic financial products, such as current and deposit accounts, leasing contracts, term loans and mortgages and credit cards, as well as how to calculate and compare interest rates, should be taught in schools. Description It is widely acknowledged in Russia that the best protection for a consumer of financial services is a sufficiently high level of education, but ensuring this throughout Russia is also acknowledged to be difficult and expensive. Article 3 of Russia’s Consumer Protection Law provides as follows: “The consumers’ right to education in the field of consumer rights protection shall be ensured by inclusion of the respective requirements in state educational standards and programs of general education and vocational training, as well as by the organization of a system to inform consumers of their rights and the necessity of protecting them.” Although these clearly are noble words, the authorities have yet to establish mechanisms to apply and enforce this right. So far, only a very few programs of financial literacy have formed part of the curriculum of any Russian primary or secondary school,58 no such program has ever been made part of any vocational training and no “system” as such has ever been organized to inform consumers of their rights and the necessity of protecting them. A national policy regarding a general financial literacy curriculum for Russian schools is at an early stage of development. Although the Ministry of Education and Science may, in time, become a major promoter of the financial education of children, this Ministry currently concentrates on broad issues of educational reform as the educational sector and is not at all active in financial literacy development. Schools clearly provide a natural opportunity to equip youth with basic financial knowledge and skills and to prepare them for their future activities in the financial marketplace. At least some Russian educational experts are concerned however about: a. The general school curriculum being already overloaded, b. The more urgent needs most schools continue to experience in order to provide more “regular” educational services of appropriate quality, c. The lack of adequate teaching and learning materials regarding financial literacy, and d. The lack of preparation of the majority of teachers to deliver financial education. Public sector initiatives in financial education for consumer protection exist but 58 The public sector has initiated financial education programs that target primarily school population, and it has also introduced financial education topics and modules into the formal Economics curriculum of grades 10 and 11, with the aim of teaching the basics of financial markets. However the steps to date are relatively modest. Also, little or no attention is being paid to developing appropriate personal behavioral patterns in respect of financial market services or to instilling any understanding and sense of personal responsibility in future consumers of such services. 41 Russian Federation Banking Sector need improved coordination, identification of good practices and assessment of their impact. Recommendation Information about basic financial services (such as current and savings accounts, credit cards, personal loans and mortgages), as well as basic financial concepts (such as how to calculate and compare interest rates) should be taught in schools. Opportunities to provide basic financial education need urgently to be explored, at least as a pilot program for students in primary and intermediate schools. Consideration should be given to initiatives that seek to evaluate efficient ways to provide financial education in schools. Good Practice G.2 Financial Education through the Media a. Print and broadcast media should be encouraged to cover issues related to retail financial products. b. Regulators and/or industry associations should provide sufficient information to the press and broadcast media to facilitate analysis of issues related to financial products and services. Description In November 2006, former Russian President Vladimir Putin spoke of the importance of financial literacy this way: "The banking community, as well as state and municipal authorities must increasingly inform the population regarding the essence of banking services and to teach them the rules of cooperation with banks. And just now I have only spoken about mortgages. Far from everyone knows the conditions that are offered in various regions, by central authorities, or, shall we say, about the subsidized rate for young families and for those working in rural areas. People are badly informed about these instruments. And in many respects here we must begin from nothing. Today only a quarter of Russians have bank accounts. And less than 10 percent of the population uses plastic cards. An important portion of the Russian population avoids banks altogether, simply does not understand what banks do, and considers it too hard to understand without specialized professional training."59 Several magazines and websites focus on the issues of personal finance. However they are generally targeted to economically active adults and the most affluent segments of the population. Recommendation Print and broadcast media should be encouraged by Government agencies and others to cover issues related to retail financial services so that consumers have access to high quality sources of information designed to address their needs. Regulators and industry associations should provide sufficient information to the press and broadcast media to facilitate analysis of issues related to financial services. Good Practice G.3 Information Resources for Consumers a. Financial regulators should seek to improve consumer awareness of financial products and services by devising, publishing and distributing independent information on the costs, risks and benefits of such products and services. b. Non-governmental organizations should be encouraged to provide consumer awareness programs to the public regarding financial products and services. 59 The Presidium of the State Council of the Russian Federation met on November 14, 2006 to discuss measures to enhance the role of the banking system in the implementation of national projects and Russia’s socio-economic development. See: http://www.kremlin.ru/eng/speeches/2006/11/14/1638_type82913_113813.shtml 42 Russian Federation Banking Sector Description There is little independent information made available to the general public, and NGOs offer little in the way of public programs regarding financial services. Given its exceptional nature, however, the highly professional TV advertisements and press releases from the Ministry of Finance and the CBR in respect of the devaluation of the ruble were particularly notable. The CBR uses its public website (www.cbr.ru) to provide information to the public, such as the list of credit institutions in the register, the list of administrators accredited by the CBR as bankruptcy receivers, and information on credit institutions whose license has been withdrawn by the CBR. The website also provides consumer information on the legal basis for consumer loans, mechanisms for addressing disputes with financial institutions, procedures for the creation of credit histories and the role of a guarantee in consumer borrowings. The CBR published 13 videos on its website in the context of the issuance of the Instruction for the borrower on a buyer’s credit. These videos deal with the following issues, among others: the information that the borrower should obtain from the bank, including the full cost of credit as well as the specific concepts and amounts of all payments; the necessity of evaluating different options before signing for a credit; the importance of the size fonts and the overall clarity of the terms of the contract; the institutions where a consumer can complain, namely the CPS and the CBR. Recommendation Spot programs or advertisements on television would be helpful in explaining the rights and obligations of banks and consumers when a customer opens a bank account or enters into a loan agreement. These initiatives should be funded by the CBR. What was done in respect of telling consumers about the devaluation of the ruble could perhaps serve as a useful model in these respects. Banks should also engage in initiatives to improve financial literacy of their customers, as a mechanism to promote their healthy financial behavior. There is a need to pay close attention to those who are ignorant of basic services such as savings and term deposit accounts, as well as of more sophisticated services such as consumer and mortgage loans, to say nothing of securities, mutual funds, investment funds, pension funds and insurance schemes. There is a need as well to focus additional efforts on those who have ready access to the internet and are at least somewhat financially literate. In this latter respect, it is recommended that thought be given to the establishment of online gateways to a wide range of information, including all aspects of consumer protection legislation and regulation in respect of financial services, related educational materials and training courses, as well as general counseling and advice.60 Such gateways should be designed around the issues that consumers face (for example, the needs to finance the purchase of a car, to report a fraud or unfair banking practice, to resolve a dispute with a bank, or to find an appropriate mortgage) rather than the specifics of individual financial services, as such. They should employ plain language that is easy to understand for an inexperienced financial consumer. And they should provide access to easy-to-use financial math tools, including calculators of effective annual percentage interest rate, projections of future pensions based on a range of interactive inputs and assumptions, and estimations of excessive debt, based on a range of interactive inputs and assumptions. In addition, such gateways should have a page of Frequently Asked Questions (FAQ). A toll-free hotline to receive consumer inquiries may also be helpful. A well-planned mass media campaign should raise awareness 60 While the number of websites in Russian which explore financial issues and provide advice on related issues (including websites of regulatory authorities and of banks) continues to grow, none of them yet can be properly termed a reliable and easy-to-use resource. 43 Russian Federation Banking Sector of these resources and contribute to the dissemination of consumer protection information. A national policy in the area of financial education with a strong consumer protection component is urgently needed. There should be wide consensus on major aspects of a financial literacy development strategy in respect of its objectives, its target audience, the expected results and the required major mechanisms. Consumer education should be a part of an overall strategy, complementing other financial education priorities as defined by OECD and national policy papers as for example in UK, New Zealand and Australia. However, a number of activities should be launched in parallel with the policy development, including support of grassroots initiatives, delivering consulting services to consumers, ensuring access to reliable and well designed information, promoting crucial values, such as saving, planning, and personal responsibility for one’s own wellbeing. Indeed, the results of such pilot activities should inform policymakers and the strategy development process. A comprehensive learning framework would be useful for building policy and developing consensus, and it would also serve as a basis for designing educational programs and initiatives. For instance, the Adult Financial Capability Framework in Great Britain specifies the requirements for a well-equipped consumer. According to this framework, a consumer should: a. Know about the different sources of generic financial advice, including financial advisers; b. Know of different sources of financial advice and the differences between generic and personal advice; c. Be able to assess and compare different sources of financial advice and information; d. Understand the different rights and responsibilities in relation to different financial services; and e. Understand when it is appropriate to comment or complain and how to access complaint procedures. 61 A similar learning framework would be helpful in Russia. In this respect, the experience of countries that are more advanced in developing financial literacy and providing educational services to consumers should be studied carefully, with what are generally viewed as the best approaches then being adjusted as appropriate for application in Russia. Good Practice G.4 Financial Inclusion Since participation in the financial system, at a minimum by operating a current account, is necessary for any consumer to be an effective and full member of society, any initiative to bring the so-called “un-banked” population into the financial system is to be encouraged. Description Although it appears that few banks in Russia support consumer education programs regarding financial services as such, many do have websites and printed materials that: (a) explain the basics of the services on offer; and (b) aim to persuade Russians and foreigners residing in Russia (whether holders of accounts in other Russian banks or members of the un-banked population) to open accounts in one or more of their branches. More, though, is needed in these respects. Recommendation All initiatives to bring the so-called “un-banked” population into the financial system, by at the very least operating current bank accounts, need to be 61 The Basic Skills Agency and the Financial Services Authority, Adult Financial Capability Framework, Second Edition, March 2006. 44 Russian Federation Banking Sector encouraged. Good Practice G.5 Financial Consumer Advocacy In the development of financial sector policy, government and state agencies need to consult with banks and consumers and their respective associations in order to develop proposals that meet the needs and expectations of these key stakeholders. To ensure that consumers are actively involved in the policy development process, the government should either provide appropriate funding to NGOs for this purpose or create a special entity to lobby on behalf of consumers in the policy-making process. Description It is instructive that the CBR has been expanding “the practice of openly discussing its draft rules and regulations within the banking community”, with a view, among other things, to “protecting the rights of creditors and depositors and perfecting Russian legislation with due account of best international banking practices”. 62 All relevant government and state agencies should avowedly do the same. Arguably, the purpose of creating the Consumer Protection Service was, in part, to establish a government entity that would lobby on behalf of consumers. How well this Service has done in achieving this aim, however, remains an open question. Recommendation Mechanisms need to be put in place to enhance coordination and cooperation among all of the various supervisors with an interest in consumer protection regarding financial services (including CBR, FFMS, FAS, FSIS and CPS), the banking associations and consumer protection NGOs. All relevant institutions (including those in the private sector) need to be drawn together regularly so that working level teams can operate effectively together in addressing and solving issues in a coordinated fashion. Good Practice G.6 Measuring Financial Capability In order to ensure that financial consumer protection, education and information initiatives are proportionate and appropriate, and in order to measure the effectiveness of those initiatives over time, the financial capability of consumers should be measured periodically by way of large-scale market research that gets repeated from time to time. For these purposes, the term “financial capability of consumers” means the ability to manage money, keep track of finances, plan ahead, choose appropriate financial products and services and stay informed about financial matters63. Description An initial nation-wide diagnostic survey of financial literacy was conducted in June 2008, based on a sample of more than 1,600 people in 40 Russian regions that are representative of the entire country. The results of the survey were then complemented by 4 focus groups.64 The survey revealed that: a. About 50 percent of the population believes that the level of its own financial literacy is unsatisfactory;65 62 See the 2006 Annual Report of the Central Bank of the Russian Federation, at page 9. 63 This definition, as amended here slightly, is used on the website of the UK’s Financial Services Authority. 64 The survey was carried out by NAFI, with funding in part from the World Bank. 65 A simple quiz containing 6 questions explored the level of awareness of relevant consumer protection regulations (e.g. effective annual percentage rate, deposits insurance coverage, etc.), of understanding of basic financial mechanisms (e.g. inflation, interest on loans and deposits, etc.), and of financial mathematical skills (e.g. percentages, 45 Russian Federation Banking Sector b. A large percentage of Russians have utterly unrealistic expectations of Government when it comes to their personal financial welfare; 66 c. There are significant gaps in awareness of consumer rights in the area of financial services, including legislation;67 d. A majority of Russians fail to address immediate issues related to financial services;68 e. There is high interest in specific topics for financial education;69 and f. Clear preference exists regarding those most trusted to provide financial educational services.70 Recommendation On an on-going basis, and based at least initially upon the important survey undertaken in 2008, extensive quantitative and qualitative analysis of financial literacy should be conducted in Russia. SECTION H COMPETITION AND CONSUMER PROTECTION Good Practice H.1 Regulatory Policy and Competition Policy Financial regulators and competition authorities should be required to consult with one another for the purpose of ensuring the establishment, application and enforcement of consistent policies regarding the regulation of financial services. Description See the section on Credit Reporting. Recommendation See the section on Credit Reporting. etc.). Only 19 percent of respondents gave correct answers to at least 5 questions and some 25 percent either failed every question or got only one answer correct. 66 For example, 50 percent of the population continues to believe that Government will compensate individuals for losses associated with commercial bank bankruptcy, and 15 percent and 16 percent respectively expect Government to cover any decrease in the value of a unit investment trust or of real estate. 67 Over 60 percent of people are not aware of the obligation of banks to disclose the effective annual percentage rate of interest payable by a consumer when proposing a loan to the consumer. People are also typically uncertain about the proper procedures to be taken with a view to resolving complaints concerning financial services. And there is little knowledge of reliable sources of information regarding any of the rights of consumers of financial services. 68 For instance, over 60 percent of people who feel unsatisfied with a financial service or product do nothing about it, and only 3 percent complain to regulatory authorities. About 50 percent of consumers do not expect a resolution of finance-related issues in a quick and appropriate manner and only 7 percent expect appropriate and timely resolution of any dispute. One out of ten consumers has purchased at least one financial service of poor quality during last five years. Most often it was a consumer loan. Indeed, the dramatic increase in consumer loans made available at points of sale in shops has widely affected financial consumers who have limited understanding of even the most basic fundamentals of such transactions. 69 About one third of the population is interested to learn more about the laws protecting consumer rights as well as about procedures of resolving financial issues and protecting these rights. And in these respects, demand appears highest in respect of consumer credit. Indeed, of those who have been disappointed about a financial product they bought, 47 percent have been disappointed with respect to a consumer loan. Typically, people report at least that this is the most unregulated area with little reliable information available with the result that banks can and do take advantage of uneducated and inexperienced consumers. 70 26 percent of respondents believe that governmental institutions are best able to provide the needed educational and training services. A further 22 percent, however, is concerned about the plethora of government organizations which implement this function more or less inadequately and in an uncoordinated fashion (e.g. CBR, FAS, FFMS, CPS, etc.) and believes that independent financial consultants should deliver these services instead. A further 17 percent of respondents believe that educational institutions are credible providers of support to consumers who seek for advice and education regarding finance related issues. Tellingly, the providers of financial services themselves have little credibility with those surveyed. 46 Russian Federation Banking Sector Good Practice H.2 Review of Competition Given the significance of retail banking to the economy as a whole and to the welfare of consumers, competition authorities should: a. Maintain a watching brief on competition in retail banking; and b. Conduct and publish periodic assessments of competition in retail banking, and make recommendations on how competition in retail banking can be enhanced. Description See the section on Credit Reporting. Recommendation See the section on Credit Reporting. Good Practice H.3 Licensing of Legal Entities All legal entities that either collect funds from consumers or lend funds to consumers should be licensed and supervised. Description Pyramid schemes, consisting of frauds based on recruiting an ever-increasing number of investors, remain all too frequent in Russia. The initial promoters (those at the peak of the pyramid) recruit investors who are expected to bring in more investors, who may or may not sell products or services. Recruiting newcomers is more important than selling products or services. No new money is created in pyramid schemes. Investors who get in early take their profits from investors who join later. At some point, no new investors can be found and as a result the last investors, who are at the bottom of the pyramid, lose their money. In the present context, it is sometimes difficult for Russian investors to get all the facts about a company, its officers and its services before making any investment. Recommendation Information about any company, its officers and its services should be readily available in reliable registry offices that permit ready access by the public. Written copies of a company's marketing plans, sales literature, contracts and prospectus (a legal document that gives prospective investors information about the company) should be readily available to the public by law. Pyramid schemes should be made illegal either under the Law on the Protection of Competition or the Criminal Code. A multi-level sales procedure should be identified as an illegal pyramid if: a. Payment is required for the right to receive compensation for recruiting new salespersons into the scheme; b. There is inventory loading, that is, new salespersons must purchase an unreasonable quantity of a product or service; and c. Purchases of services are required as a condition of entry into the scheme. 71 The penalties for operating or being affiliated with any such scheme should be severe. 71 See, for example, Section 55 of the Competition Act of Canada. 47 Russian Federation Banking Sector 48 Russian Federation Non-Bank Credit Institutions Russian Federation: Consumer Protection in Non-Bank Credit Institutions Introduction The surge of the non-bank credit sector in Russia is linked to the post-communist transition period. The lack of internal financial infrastructure and financial services for the population, specially those living in small cities and rural areas, made necessary the resurgence of the traditional institution of cooperatives in Russia. These institutions were an important social safety net in moments when salaries or pensions were not paid on time or were difficult to access, providing subsistence loans that substituted delayed incomes. Gradually, they became sources of funding for consumer and small business purposes, which were not provided by the regulated banking sector. The banking sector lacked adequate infrastructure to provide access to finance to low- income households. One of the main problems is the degree of geographical concentration of the banking offices in Russia. Although the average national rate is around 26 offices per 100 thousand people, which is comparable with the United States (28), this rate is unevenly distributed within the country. In large cities the rate can reach 100 offices per 100 thousand people, whereas in small cities and rural areas it is around 6 offices. At the end of 2006, about 45 percent of the Russian population did not have bank accounts.72 Banking regulations did not allow for the provision of financial services through less-costly offices, which could facilitate the presence of banks in small cities or rural areas. Between 2004 and 2006, the CBR amended regulations in order to expand the range of permitted transactions for credit and cash offices and operational offices. The CBR Directive on the Procedure for Decisions Regarding the Registration of Credit Organizations and Licenses to Conduct Banking Transactions (Directive No. 109-I of January 14, 2004) authorized those offices to provide credit to the public and SME operators (including natural persons) and to provide remittance and cash services. Given that these types of offices are much less expensive than the branches and additional offices, the measure has allowed banks to reduce the cost to providing retail financial services. In addition, prudential regulation made costly for banks to provide household credits. The risk classification of credits was mostly associated to the quality of collateral, not allowing for mitigation of risks via non-traditional forms of guarantee or other means of ensuring payments (group loans, alternative sources of income). In addition, only in 2004 banks were allowed to provision on the basis of risk assessed on a group of loans instead of separate provisioning for each individual loan. For the evaluation of creditworthiness, credit bureaus started to develop recently in the mid-2000s. Legal Framework The legal framework does not allow for specialized banks or credit institutions, such as microfinance institutions. The Law on Banks and Banking Activities recognizes two types of credit organizations: banks and non-bank credit institutions. Banks enjoy an exclusive right to perform the following banking operations: receive deposits from natural persons and legal 72 Russian Microfinance Center. Microfinance in Russia: Benchmarks and Analysis - 2006, February 2008. 49 Russian Federation Non-Bank Credit Institutions entities, invest these resources on its own behalf and at its own expense, and open and maintain bank accounts of natural persons and legal entities. The banking law allows for non-bank credit institutions only to perform specific banking operations established by the CBR. In 1997, CBR issued a regulation that authorized non-bank credit institutions to perform cash clearing operations and collecting procedures73. Later, in 2001 CBR authorized the establishment of non-bank credit institutions engaged in deposit and credit operations74. These credit institutions are allowed to take time deposits from legal entities, to invest them on their own behalf and at their own cost, and to purchase and sell foreign currency. Their minimum capital requirement is € 500,000 (one tenth of the requirement for banks) and they are subject to the same procedures of incorporation, reporting and supervision as banks. Only regulated credit institutions are allowed to grant credits and take deposits. The Civil Code defines credit and deposit as agreements between a bank or a regulated credit institution and a borrower or depositor. The agreements made between customers and other financial institutions are differentiated as loan agreements (defined in the Civil Code) or savings agreements (such as the personal savings contract of cooperatives, not defined in the Civil Code). In addition to the non-bank credit institutions under CBR supervision, there is a variety of unsupervised non-bank credit institutions operating in Russia. These include cooperatives, state funds for SME support, private institutions and pawnshops. Table 11: Legislative Frameworks of Non-Bank Credit Institutions Institution Law Customers Non-Bank Settlement Law on Banks and Banking Activities Legal Entities Credit Institutions Non-Bank Deposit-Credit Law on Banks and Banking Activities Legal Entities Organizations Agricultural (or Rural) Law on Agricultural Cooperation: Federal Law No. 193-FZ of Natural Persons, Credit Cooperatives December 8, 1995 Legal Entities Citizen Consumer Credit Law on Consumer Credit Cooperatives of Citizens: Federal Law Natural Persons Cooperatives No. 117-FZ of August 7, 2001 Consumer Societies Law on Consumer Cooperation (Consumer Societies and their Natural Persons, Unions) in the Russian Federation: Federal Law No. 3085-1 of Legal Entities June 19, 1992 (General) Consumer Civil Code of the Russian Federation (Article 116) Natural Persons, Cooperatives Legal Entities State (municipal, Law on Nonprofit Organizations: Federal Law No. 7-FZ of January Natural Persons, regional) Funds for Small 12, 1996 Legal Entities Business Support Law on Development of Small and Medium Business in the Russian Federation: Federal Law No. 209-FZ of July 24, 2007 Private Non-Profit Law on Nonprofit Organizations: Federal Law No. 7-FZ of January Natural Persons, Institutions 12, 1996 Legal Entities Private Commercial Law on Limited Liability Companies: Federal Law No. 14-FZ of Natural Persons, Microfinance Institutions February 8, 1998 Legal Entities Pawnshops Law on Pawnshops: Federal Law No. 196-FZ of July 19, 2007 Natural Persons 73 Rules of Prudential Regulation of Nonbank Credit Institutions which Perform Cash Clearing Operations and Collecting Organizations: Order of the CBR No. 02-390 of September 8, 1997 74 Rules of Prudential Regulation of Nonbank Credit Institutions which Perform Deposit and Credit Operations: Order of the CBR No. 153-P of September 21, 2001 50 Russian Federation Non-Bank Credit Institutions In the absence of a clear general legal framework for the sector, each type of non-bank credit institution is governed by a particular law. Table 11 shows an overview of the types of non-bank credit institutions and their respective general legal frameworks. Overview of the Non-Bank Credit Sector Since there is no governmental body in charge of regulating or supervising non-bank credit institutions, there is no publicly available official data on these institutions. Exact information on the number of institutions, volume of operations or number of customers is unavailable. Industry associations and nonprofit organizations have compiled some data based on information from members or from surveys conducted by the organizations, which usually provide estimates about the situation of the sector. Cooperatives are the most important category of non-bank credit institution. There are basically two main groups of cooperatives: agricultural and consumer cooperatives, focused on rural and urban areas, respectively. These institutions have led the growth of the non-bank credit sector in Russia since the late 1990s, providing financial services to segments of the population not covered by the banking sector. Particularly since 2003, they have exponentially increased in terms of number of institutions and membership, as shown in Table 12. The volume of the gross loan portfolio of cooperatives is estimated at RUB 11.4 billion as of 2006 75, which represents around 0.7percent of the total household loans of the banking sector. Table 12: Growth of Cooperatives TYPE OF INDICATOR 1998 2000 2003 2004 2006 COOPERATIVE Agricultural credit Number of institutions 42 122 530 703 1,536 cooperatives Total membership 839 6,838 41,618 70,843 110,000 Consumer cooperatives Number of institutions 143 200 440 540 n.a. Total membership 33,226 48,000 222,686 350,000 n.a. Sources: World Bank, Microfinance in Russia: Broadening Access to Finance for Micro and Small Entrepreneurs, October 2005; Ivanov, Oleg, Financial Services for Low-Income People in Russia, April 2008 Consumer cooperatives are the main non-bank providers of funds to individual consumers. There are three types of consumer cooperatives: citizen consumer credit cooperatives (governed by the Law on Consumer Credit Cooperatives of Citizens), consumer societies (Law on Consumer Cooperation) and other consumer cooperatives (general provisions of the Article 166 of the Civil Code). According to estimates as of 2004, the main line of service for citizen consumer credit cooperatives was consumer loans, whereas for the other consumer cooperatives, these loans represented 41 percent of their portfolio. Agricultural credit cooperatives have a loan portfolio more diversified, whereas state funds and private institutions mostly provide loans to small businesses or personal entrepreneurs. That is why this section will focus on cooperatives. 75 Russian Microfinance Center, Microfinance in Russia: Benchmarks and Analysis – 2006, February 2008 51 Russian Federation Non-Bank Credit Institutions Table 13: Structure of Loan Portfolios by Purpose (in percentage) TYPE OF NON-BANK CREDIT BUSINESS CONSUMER OTHER Institution * 2003 2004 2003 2004 2003 2004 Citizen Consumer Credit Cooperatives 38 32 59 64 3 4 Consumer Societies and (General) 58 54 38 41 4 5 Consumer Cooperatives Agricultural Credit Cooperatives 42 53 37 24 21 23 State Funds for SME Support 93 95 1 2 6 3 Private Institutions 81 85 6 14 13 1 * Latest data available, from a survey of around 180 representative institutions in 2003 and 220 institutions in 2004. Source: Russian Microfinance Center and Russian SME Resource Center, Non-Bank Microfinance Development Trends in Russia 2003 – 2004 Analytical Paper, 2006. Cooperatives are also important takers of savings from consumers. A survey conducted by the Russian Microfinance Center shows that 110 cooperatives captured RUB 1.6 billions in savings at the end of 2004. An extrapolation of these results to the entire sector would result in an estimate of more than RUB 4.5 billions in total savings. Savings constituted the main source of funding for consumer cooperatives, although agricultural credit cooperatives held the highest amounts of savings per cooperative member (in half of these cooperatives, the minimum individual deposit was RUB 84,000) Table 14: Savings Captured by Cooperatives TOTAL SAVINGS AS MINIMUM SAVING TYPE OF SAVINGS PART OF IN 50% OF Cooperative * (million (%) Liabilities Cooperatives RUB) (%) (thousand RUB) Citizen Consumer Credit Cooperatives 998 60.7 77 33 Consumer Societies and (General) 536 32.6 72 57 Consumer Cooperatives Agricultural Credit Cooperatives 111 6.7 27 84 Total 1,645 100 66 * Latest data available, from a survey of around 220 institutions conducted in 2004. Source: Russian Microfinance Center and Russian SME Resource Center, Non-Bank Microfinance Development Trends in Russia 2003 – 2004 Analytical Paper, 2006. The majority of cooperatives are located in the Western part of Russia. The main agricultural cooperatives have developed in the Volga and Southern federal districts, whereas the majority of consumer cooperatives have developed in the Volga, Southern, Central and Northwestern federal districts.76 Characteristics of Non-Bank Credit Institutions Citizen consumer credit cooperatives are the only institutions whose members are exclusively individuals. Members voluntarily pool monetary resources to meet their needs, namely, to give and receive mutual financial assistance. In terms of allowed operations, these 76 World Bank, Microfinance in Russia: Broadening Access to Finance for Micro and Small Entrepreneurs, June 2005 52 Russian Federation Non-Bank Credit Institutions cooperatives can accept members’ personal savings as contribution to the fund of mutual assistance. The fund, composed of personal savings and part of the cooperatives’ own funds, is used to grant loans only to its members. The Law on Consumer Credit Cooperatives for Citizens regulates the activities of the citizen consumer credit cooperatives. This law was approved in 2001, after seven years of discussions in the State Duma. The law establishes the rights and obligations of the members of these cooperatives; the requirements and conditions for their creation, reorganization and liquidation; the characteristics of their governing and management bodies; the nature of the assets of the cooperatives and the contracts for personal savings and for loans; as well as measures to protect the financial interests of members. In addition, the law establishes that these cooperatives have the right to create self-regulatory organizations. Although it is mentioned in the law, there is no supervisory authority for citizen consumer credit cooperatives. The governing law for citizen consumer credit cooperatives provides for an authorized federal executive body to carry out the regulation and supervision of the activity of these cooperatives (Art. 27). However, no such authority has been designated yet. Neither is there a licensing system in place. Credit cooperatives are only required to follow the minimal requirements set for legal entities, and register with the Ministry of Justice and tax authorities. Nonetheless, some local governments have assumed oversight functions regarding the activities of these cooperatives. For example, the federal subject authority of Volgograd issued the Volgograd Oblast Law on State Supervision and Oversight of Consumer Credit Cooperatives of Citizens No. 706-OD of May 27, 2002. According to this law, the local administration’s Economic Committee is the entity authorized to maintain a register of the citizen consumer credit cooperatives operating in Oblast, supervise and monitor them. 77 Consumer societies are cooperatives whose membership is open to natural and legal persons, and that have no upper limit in their number of members . Their activities are regulated by the Law on Consumer Cooperation, which deals with cooperatives that are engaged in traditional activities of consumer cooperation (sales, trade, supply, etc.). Although this Law explicitly states that it should not be applied to specialized credit cooperatives, it also recognizes the right of consumer societies to borrow from their members and from other individuals, and to extend credit and advances to their members. Thus, there are institutions that engage actively in financial activities and operate under this legal framework, despite not calling themselves as credit cooperatives. The reference to the provision of “credit” in the law governing consumer societies is not clear. Given that the term “credit” is strictly defined in the Civil Code as an operation made by a regulated credit institution, the inclusion of credit (instead of loan) as an allowed operation of a consumer society needs further explanation in the law. There are also consumer cooperatives that operate under the Civil Code, since they do not fit the requirements of the other laws. For example, a cooperative which main purpose is the provision of loans but its membership is above 2,000 individuals or includes legal entities. In this case, as seen in Table 15, it cannot fit the requirement of citizen consumer credit cooperatives or consumer cooperatives (since its main purpose is providing loans). Thus, it would operate under the umbrella of the Civil Code Article 116. 77 Russian Microfinance Center, The Legal Environment for Microfinance Activity in Russia: Analysis and Recommendations for Reform, 2003. 53 Russian Federation Non-Bank Credit Institutions Table 15: Membership, Funds and Services from Cooperatives Institution Members Funds Services Agricultural 15 - 2,000 individuals or Combining shares of Credits and advances to members Consumer Credit 5 - 200 legal entities members Not allowed: Cooperatives involved in agricultural Saving members’ money Borrowing from individuals non- activities Borrowing from members, members Associate members: associate members, credit Loans to non-members Not more than 20% of institutions and other members cannot be organizations involved in agriculture Citizen Consumer 15 - 2,000 individuals Receipt of member shares Loans to members Credit Cooperatives Receipt of member savings Conclusion of underwriting by agreement (guarantee) contracts at request and on behalf of members Consultation to members Not allowed: Loans to legal entities Loans to individuals non-members Commercial loans to businesses when the sum of the loan exceeds 50% of the mutual assistance fund Guarantee on behalf of members or third parties Emit own securities, take others; securities or carry out activities in the securities markets. Consumer Societies At least 5 individuals Combining contributions of Engage in activities to meet the and/or members needs of shareholders 3 legal entities Receiving admittance fees Provide loans to shareholders Borrowing from members according to procedures in charter and other non-member individuals (General) At least 2 individuals Combining contributions of Consumer and/or members Cooperatives 2 legal entities Sources: Relevant laws; Russian Microfinance Center and Russian SME Resource Center, Non-Bank Microfinance Development Trends in Russia 2003 – 2004 Analytical Paper, 2006; Russian Microfinance Center. The Legal Environment for Microfinance Activity in Russia: Analysis and Recommendations for Reform, 2003 Agricultural (or rural) credit cooperatives specialize in the provision of financial services to their members, who can be individuals or legal entities, and are obliged to participate in agricultural economic activities. There can also be associate members not involved in agricultural activities, but their number should not exceed 20percent of the total number of members. Agricultural credit cooperatives are allowed to provide “credit” and to “save their members money”. As in the case of consumer societies, the Law on Agricultural Cooperation authorized rural cooperatives to provide credit to their members, but this contradicted the definition of credit in the Civil Code, which restricts this operation to regulated credit institutions. In 2005, the Government launched the National Project for Agrobusiness Development, which encouraged the formation of agricultural cooperatives. The Project had the key participation of the Ministry of Agriculture as advocate and Rosselkhozbank as provider of funds. Thanks to these projects, many regions launched agricultural cooperative development programs, including credit schemes. 54 Russian Federation Non-Bank Credit Institutions The Law on Agricultural Cooperation has also been amended several times, allowing for institutional development of the sector. In 2003, the law was amended to establish a multi-tier system, providing for the setup of second-tier cooperatives. These cooperatives would attract external resources, redistribute liquidity among their first-tier members, and provide training services and advocacy support. This amendment also specified that all agricultural cooperatives had to stipulate standard prudential controls in their charters. These norms were developed by the Rural Credit Cooperatives Development Foundation and the Union of Rural Credit Cooperatives. These associations were established in 1997 and currently operate as second-tier cooperatives. In addition, the Law on Agricultural Cooperation was amended in November 2006 in order to strengthen supervision over the spending of public funds allocated under the National Project for Agrobusiness Development. These amendments required that cooperatives join one of the “review unions”, which in turn would join together in self-regulatory organizations (SROs). These review unions are charged with the responsibility of reviewing: the reliability of the cooperatives’ financial reporting and the compliance with accounting procedures, laws, charters and principles, taking actions for the correction of violations. The Ministry of Agriculture is responsible of regulating and maintaining a register of the SROs covering these review unions. Consumer cooperatives are planning to follow the example of agricultural credit cooperatives in terms of institutional development. There are two leading industry associations for consumer cooperatives: the League of Credit Unions (around 200 cooperatives) and the National Union of Non-Profit Organizations for Mutual Financial Assistance (around 200 cooperatives and members of associations). Recently, the League of Credit Unions started an initiative to design a Framework Concept of Credit Cooperative Development in Russia for 2007 through 2011.78 Besides cooperatives, the non-bank credit sector includes state funds for small and medium enterprise support. At mid-2007, there were approximately 320 state funds, which provide services that range from advisory and information support to direct lending and loan guarantees to small and medium enterprises. The Law on State Support of SME specifically gives state (regional and municipal) funds the right to provide credit, interest-free subsidies and short-term loans to SME without the need for a banking license. Additionally, there are private non-commercial institutions, which were the pioneering providers of microfinance in Russia. Most of them were set up in the mid-1990s as NGOs under donor programs (with the support of leading international institutions such as USAID, FINCA International, Opportunity International or ACDI/VOCA). Clients of these institutions are mainly micro-entrepreneurs, and their main financial service is working capital loans, usually made as group loans under mutual guarantee or individual loans under collateral. Finally, there are several pawnbrokers operating in Russia, which are monitored only at the regional level. According to the Moscow City Government, in early 2005 around 200 pawnbrokers operated in Moscow, with more than 2 million customers79. The Civil Code regulated the activities of pawnbroker, mostly regarding storage and custody contracts. However, since January 2008 the Law on Pawnshops has become effective. This law establishes rules of lending, specifics of loan agreements, provisions concerning the custody of pledged items and procedures for debt collection. 78 Ivanov, Oleg, Financial Services for Low-Income People in Russia, April 2008 79 Idem. 55 Russian Federation Non-Bank Credit Institutions Main Challenges There is no coherent, clear and complete regulatory framework for cooperatives, thus impeding the development of an adequate legal regime for the protection of financial consumers. There are three specific laws for cooperatives. Institutions that do not fall under these pieces of legislation come under the general provisions of the Civil Code. This multiple framework allows for regulatory arbitrage and makes it unclear for the consumer to understand the rights and responsibilities they assume when dealing with consumer cooperatives. The past amendments of the Law on Agricultural Cooperation have encouraged the development of the agricultural credit cooperatives and their institutional framework, which puts this sector ahead of the consumer cooperatives. The agricultural cooperative sector has developed prudential standards through second-tier organizations (set up after one of the amendments of the law). Additionally, cooperatives are required to be supervised by “review unions”, with the Ministry of Agriculture acting as a major overseer. The recent proposal for amendment of the Law on Citizen Consumer Credit Cooperatives establishes a procedure for setting up second- and third-tier citizen consumer credit cooperatives, following the example of agricultural cooperatives. This proposal, debated in the State Duma in June 2008, creates a multi-tier cooperative system comprised of local, regional and federal levels. This initiative would allow third-tier consumer cooperatives have more options for funding and lending (including legal entities), encourage the integration of the industry and the delivery of training, advocacy and other services. These provisions should be included in the legislative framework for consumer cooperatives. There is neither a license requirement nor federal supervision of cooperatives. Given that there is no licensing requirement for cooperatives, there is also no central register of cooperatives that could be accessible to consumers. Furthermore, although the law on citizen consumer credit cooperatives provide for a federal supervisory agency, this has not been designated. There is no mention of a supervisory body for consumer societies or other consumer cooperatives. Agricultural cooperatives are recently required to be supervised by review unions that will join in SROs, which in turn will only be indirectly regulated by the Ministry of Agriculture. There is no public information about the number, membership or performance of agricultural or consumer cooperatives, and they are not required to disclose their financial statements to the public. Therefore, consumers do not have publicly available information to make their decisions and public authorities are not able to assess the situation and performance of the sector, and to raise awareness about malpractices in the sector. The regulatory loopholes, the absence of information and the lack of supervision of consumer cooperatives have made possible the surge of financial pyramids operating under the schemes of cooperatives. There are several new types of organizations, including consumer cooperatives which promise to provide loans for housing accommodation in a short period time, with average annual interest rates between 1 and 3 percent and maturity of 25 years. According to the Municipal Department of Internal Affairs of Moscow, mortgage cooperatives have become “the most criminal version of financial pyramids in Russia”.80 The authority has noticed that 30 percent of the money received is directed towards the attraction of new members to the cooperative, whereas the remaining amount is transferred to accounts of doubtful firms, and then 80 Press conference held by the Deputy Chief of the Municipal Department of Internal Affairs, Victor Vasilev, on August 2, 2008. 56 Russian Federation Non-Bank Credit Institutions cashed and used for personal needs. These entities use different means to publicize their activities, such as media advertisings, seminars and meetings. As a response to the increasing number of fraudulent cooperative schemes, the League of Credit Unions has issued a guideline to identify “seven signs of unfair organizations”. Among these signs, the League has identified: the existence of branches in various regions, aggressive advertising directed to capture funds under high interest rates, impossibility to clearly understand the charter and reports on the activity of the company, and lack of information of the company that is providing the required credit insurance. This initiative seeks to mitigate the risk that the expansion of financial pyramids would undermine the trust of consumers on the entire cooperative sector. The State Duma proposal for amendment of the Law on Citizen Consumer Credit Cooperatives requires these cooperatives to provide information to the FFMS about all their operations with money resources from their members. This amendment will allow FFMS get information to identify possible fraudulent schemes. However, this amendment does not provide for the delegation of supervisory powers to the FFMS. The League of Credit Unions criticizes that this proposal does not rule on the main issue of the sector: having an authority that traces the activities of consumer credit cooperatives and those of pseudo-consumer credit cooperatives that capture and place money unduly.81 Another provision of the draft amendment that deals with the issue of frauds consists of the establishment of new requirements for managers of cooperatives. The draft amendment would require that managers have educational certificates and have not been convicted of an economic crime. The regulation on cooperatives does not include provisions on formal dispute resolution. There is no legal requirement to have internal procedures to deal with consumer complaints. The only reference to a third-party mechanism is included in Article 28 of the Law on Citizen Consumer Credit Cooperatives. This article states that the voluntary industry SROs can represent members of citizen consumer credit cooperatives before arbitration courts, in case of infringement of the members’ rights. Recommendations The cooperative sector requires a comprehensive legislative framework that standardizes and provides consistencies in terms of definitions, legal organization, activities and rules applicable to all cooperatives. This will eliminate regulatory arbitrages and provide a clear scheme for consumers. The recent proposal for amendment of the Law on Citizen Consumer Credit Cooperatives is a step toward this direction. However, this amendment would not resolve the situation of those consumer societies and consumer cooperatives that engage in lending and saving activities. There should be a governmental scheme for licensing, collecting information, regulating, supervising and sanctioning cooperatives. The initiatives of requiring the submission of information of citizen consumer credit cooperatives to the FFMS, and establishing oversight functions on the Ministry of Agriculture for agricultural credit cooperatives go on this direction. However, there should be an explicit supervisory body for all cooperatives. There are three 81 Declaration of the Deputy General Director of the League of Credit Unions, Alexander Solomkin, to RBC Daily on April 2, 2008. 57 Russian Federation Non-Bank Credit Institutions typical schemes of supervision of cooperatives that could be explored: direct supervision, conducted by a financial supervisory agency (which could be in charge of directly supervising cooperatives of a certain size); delegated supervision, where a financial supervisory agency fully delegates supervisory functions to a private institution, but retains the regulatory power (the private institution could be an entity fully independent of cooperatives or two or more industry associations specialized in supervision); self-regulation, where an association of cooperatives performs certain oversight functions based on a framework and process voluntarily accepted by the cooperatives. One approach would be for the Ministry of Finance to be responsible for supervising all credit cooperatives. Another alternative would be to have the CBR supervise all credit institutions, including credit cooperatives. Whichever approach is taken, a separate department should be set up to provide light supervision, such as that needed for business conduct. There should be a central register of cooperatives that is publicly available to consumers. Consumers should have ready and free access to a centralized database of all the cooperatives that are legally operating in Russia. This database should have minimum information on the nature of the organization, allowed activities, location and names of members of the governing bodies and significant beneficial owners. Government authorities should make sure that consumers are aware of the register and that the information on the database is properly updated. Cooperatives should be required to have their financial statements available to the public. Consumers should get easy and free information on the financial situation of a cooperative. The cooperative’s annual financial statements should be available in printed format in its offices or electronically in the cooperative’s website. Legislation should provide for rules on internal dispute resolution mechanisms for cooperatives. Cooperatives should be required to set procedures for dealing with customer complaints. There should also be a clear mechanism to access third-party resources to deal with complaints that are not adequately solved within the cooperatives. All these mechanisms should be clearly informed to the consumers. There should be mechanisms to allow a financial regulator or supervisory agency to supervise non-bank credit institutions that provide financial services to households. Currently, the non-bank deposit-credit organizations that are supervised by the CBR can provide financial services only to legal entities but not to households. These organizations are subject to the same requirements as banks. This situation hampers the establishment of real microfinance institutions (oriented towards households and SMEs) in the fully regulated sector. The law should have a mechanism for the transformation of big cooperatives into regulated microfinance institutions. The participation of microfinance institutions would increase the options for consumers and allow for more competition in the regulated sector. There is an urgent need to clearly distinguish fraudulent schemes from those of legitimate cooperatives. In this effort, different government authorities, industry associations, cooperatives and media should work together in order to raise early awareness on the population about the existence and propagation of these particular scams. At the same time, there should be a campaign to inform the population about the different legal alternatives that exist to allocate their savings or obtain credit. These efforts are needed in order to avoid a general distrust on the legal cooperative sector. The resurgence of fraudulent schemes raises the issue of inadequate financial literacy, especially in low-income population. The high number of people recently affected by financial 58 Russian Federation Non-Bank Credit Institutions pyramids and other fraudulent schemes is of concern, especially considering the previous cases of major frauds in the 1990s and the high levels of general fear against financial frauds according to national population surveys. The government, financial institutions, civil society and media should also work together in order to improve financial literacy. 59 Russian Federation Non-Bank Credit Institutions 60 Russian Federation Securities Sector Russian Federation: Consumer Protection in the Securities Sector Introduction Historically, consumer protection in securities area has developed somewhat differently than in banking. Bank customers in most countries enjoy deposit protection and strong prudential supervision of banks – factors that create a solid safety net for the customers. On the other hand, investors in securities are not guaranteed any returns, and hence, on average, are usually more sophisticated and financially educated than average bank customers. The most important market conduct regulations protecting the investors are those dealing with disclosure of a variety of investment information by industry intermediaries. Activities by unregistered entities, such as pyramid schemes, still pose a serious threat to investors. The pyramid schemes take on a variety of forms and are able to fall with the gaps in jurisdiction of the various government agencies. Some of them such as construction savings schemes are registered with a government agency but are not supervised or regulated. Only one, Garant Invest, has been registered with the Federal Financial Markets Services (FFMS). Many are not registered and use traditional legal forms such as limited partnerships in order to encourage investment in supposedly high profit areas such as forestry. In fact, all of these investment interests should be classified as securities, no matter how they are named, such as “participatory fund” or “participatory shares,” etc. The FFMS, as the expert agency in securities regulation, should be given the jurisdiction and enforcement tools to stop such fraudulent activity and secure and protect investor funds. Legal Framework Law on the Securities Market: Federal Law No. 39-FZ of April 22, 1996 is the basic securities market law that provides for the general framework for the regulation of the securities markets in Russia. Law on Protecting the Rights and Lawful Interests of Investors on the Securities Market: Federal Law No. 46-FZ of March 5, 1999 is the law that provides for the basic customer protection rights in the securities markets. Law on Advertising: Federal Law No. 38-FZ of March 13, 2006 (with the Amendments and Additions of December 18, 2006, February 9, April 12, July 21, December 1, 2007) provides for the basic provisions for advertising and sales practices for the securities markets, among others. Law on Investment Funds/Trusts: Federal Law No. 156-FZ of November 29, 2001 (with the Amendments and Additions of June 29, 2004, April 15, 2006, December 6, 2007) is the law that provides for the regulation of investment funds and trusts in the securities markets. Law on Information, Information Technologies and Protection of Information: Federal Law No. 149-FZ of July 27, 2006 is the law that provides for the protection of personal information. 61 Russian Federation Securities Sector Institutional Arrangements FAS, Federal Anti-Monopoly Service, is the Russian governmental agency charged with enforcing the Law on Advertising, including advertising for securities. FFMS, Federal Financial Market Service, is the Russian securities regulator that is responsible for the supervision of brokers, mutual funds and the exchanges. CBR, Central Bank of Russia, supervises the capital markets activities of banks. MICEX, Moscow Interbank Currency Exchange, is the largest equity exchange in Russia and has the largest number of listings of Russian companies. RTS, Russian Trading System Stock Exchange, is the primary derivatives exchange in Russia, in addition to listing a number of large Russian companies. NAUFOR, National Association of Stock Market Participants, is the largest self-regulatory organization (SRO) for brokers and other market participants. NFA, National Securities Market Association, is an SRO focused on banks that conduct securities market activities. NLU, National League of Management Companies, is an SRO composed of professional securities market participants who manage investment funds and unit investment funds. Taken together, these institutions form the nucleus of a regulatory structure for the securities markets which can provide a level of consumer/investor protection in the markets. The only major institution missing is a central depository and plans have been made to establish one in Russia. Nonetheless, while each of the institutions is in place, many of them lack the full range of authority needed for them to fully carry out their tasks. The future work for capital market development and consumer protection will entail a significant strengthening of these institutions. Disclosure and Sales Practices There are disclosure rules promulgated by the FFMS for brokers when they deal with retail customers at the time of the sales, but they are limited in scope and need to be expanded. The FFMS regulations and decisions also contain general provisions related to misrepresentation in sales practices, and brokers and mutual funds have a responsibility not to use misleading advertising under the Law on Advertising. Nonetheless, these prohibitions are general in nature and, although very useful in a general sense, they could be improved with more specificity to give guidance to brokers and collective investment undertakings (CIUs) regarding the extent of disclosure necessary and the limits of advertising. Directly related to the disclosure issues, sales staff do not have to pass a competency exam which measures their knowledge of the market and sales rules. Some large entities give training and exams to their staff but it is not mandatory. This is surprising in light of the fact that the law and regulations contain provisions regarding qualifications of specific securities markets professionals which the securities brokers must follow in hiring managers and sales brokers. In light of these general qualification rules, the potential sales staff, managers and other personnel should take and succeed at an examination to determine if they meet the qualifications. 62 Russian Federation Securities Sector There is no “know your customer” rule (KYC) or “suitability” rule in the FFMS regulations. One of the most important vehicles for consumer protection is the requirement that a broker or CIU advise a client as to the suitability of an investment for the client. This can only be done if the broker knows the financial situation and investment goals of the client. NAUFOR is currently working on a KYC rule and introducing it into a new Code of Conduct they are preparing. However, since membership in NAUFOR is voluntary this rule will not apply to all brokers and investment funds. At this stage of development, only the FFMS can make the requirement industry-wide and it should pass such a rule. Customer Account Handling and Maintenance Decision of the FFMS No. 32 of December 11, 2001, amended on February 4, 2004 sets forth the requirements for record keeping by securities brokers and requires that the records be maintained for five years regarding the accounting of a clients account. It also provides for the contents of contract notes and periodic reports to customers. These are excellent provisions that significantly assist customers in understanding their securities markets and the activity in their accounts. The Law on Securities provides for the segregation of customer assets. This is an excellent provision, however, there are no detailed regulations setting forth how the segregation should operate. The brokerage house must constantly transfer customer assets in the conduct of its business of buying and selling and the manner in which the assets are segregated should be spelled out in more detail. Privacy and Data Protection Existing FFMS regulations, such as the Rules for Brokering and Dealing Activities on the Securities Market, require brokers to have a system to maintain client’s records confidentially. The Law on Personal Data also requires the information to be maintained in a confidential manner. However, the FFMS regulations are not specific regarding the sharing of customer information and the customer’s rights in the sharing or disclosure of this information. These provisions need to be set out in more detail to clearly define the customer’s rights. Dispute Resolution Mechanisms NAUFOR and NFA have arbitration courts set up in their organizations. In addition, contracts for customers on RTS and MICEX have arbitration clauses that refer disputes to their arbitration commissions. The existence of these procedures is disclosed to customers through their agreements, but the arbitration courts are not used that extensively. The NFA has been lobbying to have the MICEX arbitration court become a more powerful and comprehensive court but nothing had been done to effectuate this as of the date of this Report. However, these tribunals require expensive procedures, arbitrators and counsel. They are not necessarily useful to a customer with a small claim. The creation of a new dispute settlement mechanism or transformation of one of the tribunals into a low cost mechanism that is accessible to small investors would assist in giving small investors confidence in the market. Guarantee and Compensation Schemes There is currently no investor’s guarantee or compensation scheme in Russia. 63 Russian Federation Securities Sector Consumer Education and Financial Literacy The market participants engage in extensive consumer education. Both MICEX and RTS provide extensive information to investors. NAUFOR and the other SROs also do this, although the exchanges do the most. The FFMS mainly acts through seminars and conferences. MICEX has an extensive program for placing news articles and analysis in the media. A sophisticated financial press exists in Russia. 64 Russian Federation Securities Sector Good Practices: Securities Sector SECTION A INVESTOR PROTECTION INSTITUTIONS Good Practice A.1 Investor Protection Regime The law should provide for clear rules on investor protection in the area of securities markets products and services, and there should be adequate institutional arrangements for implementation and enforcement of investor protection rules. a. There should be specific legal provisions in the law, which creates an effective regime for the protection of investors in securities. b. There should be a governmental agency responsible for data collection and analysis (including complaints, disputes and inquiries) and for the oversight and enforcement of investor protection laws and regulations. Description The key laws related to consumer protection in the securities sector are as follows: - Law on the Securities Market: Federal Law No. 39-FZ of April 22, 1996 (as amended) - Law on Investment Funds/Trusts: Federal Law No. 156-FZ of November 29, 2001 (as amended) - Law on the Protection of Rights and Lawful Interests of Investors on the Securities Market (hereinafter referred to as Law on Protecting Investors' Rights): Federal Law No. 46-FZ of March 5, 1999 (as amended) These laws set up a regime for the protection of investors in securities and mutual funds. The Decision of the Government of the Russian Federation No. 206 of April 9, 2004 established the main functions, powers and organization of the Federal Financial Market Service (FFMS). The FFMS has the authority to regulate the securities markets and is the governmental entity with the primary responsibility for protecting investors. The FFMS has enacted numerous regulations for those matters. However, many investors and other government agencies do not appear to be aware of the activities of the FFMS or are not aware of the scope of the FFMS’ jurisdiction and responsibilities. As a result, many complaints do not get to the FFMS and are not handled properly. Pyramids Activities by unregistered entities, such as pyramid schemes, pose a serious threat to investors. The pyramid schemes take on a variety of forms and are able to fall through the gaps in jurisdiction of the various government agencies. So far only one entity that could be classified as a pyramid has been registered with the FFMS, Garant Invest, and it was dealt with by the FFMS. If an unregistered pyramid scheme is structured in such a way that it is selling a security, then the article 51.6 of the Law on the Securities Market could be used by the FFMS to deal with the pyramid. This provision provides that the professional activity in the securities market carried on without a license shall be illegal. In respect of the persons who carry out their activity without licenses, this provision 65 Russian Federation Securities Sector provides that the FFMS shall: a. Adopt measures to stop the unlicensed activity; b. Publish in mass media information about the fact of the unlicensed activity of a stock market-maker; c. Inform in writing the persons concerned about the need to receive a license, and also fix the time for this; d. Send the materials of inspection of the facts of the unlicensed activity to a court of law, for the enforcement of measures of administrative responsibility against the officials of the stock market-makers in conformity with the legislation of the Russian Federation; e. File a claim with a court of arbitration on the recovery for the benefit of the State of the incomes received as a result of the unlicensed activity in the stock market; f. File a claim with a court of arbitration on the forcible liquidation of the stock market-makers, if it has failed to receive a license within the fixed period of time. In this listing of authorities, the FFMS is not given the right to freeze assets of the scheme to protect the investors’ assets. As a result, by the time court action is taken, the assets are frequently dissipated. Moreover, many pyramids do not fit clearly into the definition of a security and are not handled by the FFMS. In these cases, the schemes are left to the Ministry of Internal Affairs which handles them as a criminal matter. Although, considered to be efficient, the Ministry of Internal Affairs is not the expert agency in this area and the FFMS should be the primary entity to deal with these schemes. Criminal referrals to the Ministry of Internal Affairs could be made after the FFMS has finished its investigation. Recommendation The FFMS should educate other governmental agencies and investors as to its activities, so that they can correctly send complaints to the FFMS or other correct agencies. The FFMS should take the leading role in investigating pyramid schemes, since most of them involve the sale of financial instruments that in most countries are considered as securities. Criminal referrals to the Ministry of Internal Affairs should be made after the FFMS has finished its investigation. In addition, the FFMS should have the legal authority to freeze assets of the pyramid scheme as needed to protect the investors’ assets. If a court action is needed before the assets of pyramids can be frozen, the assets will likely be dissipated before they can be frozen. Good Practice A.2 Code of Conduct for the Natural and Legal Persons Buying or Selling Securities, or Offering to Do So. a. Securities Intermediaries and CIUs should have a voluntary Code of Conduct. b. Securities Intermediaries and CIUs should publicize the Code of Conduct to the general public through appropriate means. c. Securities Intermediaries and CIUs should comply with the Code and an appropriate mechanism should be in place to provide incentives to comply with the Code. Description The FFMS does not have a code of conduct for the securities sector. This is left to the self-regulatory organizations (SROs): the National Securities Market Association (NFA), the National Association of Stock Market Participants (NAUFOR) and the 66 Russian Federation Securities Sector National League of Management Companies (NLU). NFA and NLU have basic codes in place. NAUFOR is currently working on developing an extensive code of conduct which will also deal with broker practices. This code is almost completed. However, membership in NAUFOR is not mandatory and thus its advanced and modernized code will not apply to all participants in the securities market. Recommendation The development of modernized codes of conduct and practice such as NAUFOR’s should be encouraged. Good Practice A.3 Other Institutional Arrangements a. The judicial system should provide an efficient and trusted venue for the enforcement of the laws and regulations on investor protection. b. The media should play an active role in promoting investor protection. c. The private sector, including voluntary investor protection organizations, industry associations and, where permitted, self- regulatory organizations should play an active role in promoting investor protection. Description a. The judicial system is available to investors. Small claims can be handled through the federal system of small claims courts (known as “justices of the peace”). b. The financial media are quite active in Russia in informing investors of the characteristics and risks of the market. c. The law provides for SROs in the securities industry, although they are not mandatory. SROs are quite active, and the most important are : - The National Association of Stock Market Participants (NAUFOR). This is the largest SRO with over 400 members covering all types of securities market participants, including brokers, dealers, trust managers and depositaries. NAUFOR was founded in 1995, and in 1997 became the first officially recognized SRO in the securities market. - The National Securities Market Association (NFA) is primarily made up of banks that engage in brokerage and other securities business. NFA was established in 1996 and currently has around 250 members. - The National League of Management Companies (NLU) is composed of professional securities market participants who manage investment funds and unit investment funds. It was established in 2001. Membership in the SROs is not mandatory and therefore their power to sanction members for misconduct or violations of the Code of Conduct has a limited impact. Even so, they provide a large benefit to the securities market by providing code of practices for participants in the market. Recommendation The government should make membership in the SROs mandatory and then give the FFMS the authority to supervise them. If not, the FFMS should elaborate on its own regulations to provide a Code of Conduct which will have the force of law. SECTION B DISCLOSURE AND SALES PRACTICES Good Practice B.1 General Practices There should be disclosure principles that cover an investor’s relationship with a person buying or selling securities, or offering to do so, in all three stages of such relationship: pre-sale, point of sale, and post-sale. a. The information available and provided to an investor should inform the investor of the choice of accounts, products and 67 Russian Federation Securities Sector services; the characteristics of each type of account, product or service; and the risks and consequences of purchasing each type of account, product or service. b. A securities intermediary or CIU should be legally responsible for all statements made in marketing and sales materials related to their products. c. All marketing and sales materials should be in plain language and understandable by the average investor. d. Securities intermediaries and CIUs should disclose in all advertising, print, television and radio, the fact that they are regulated, and by whom. e. A natural person acting as the representative of a securities intermediary or CIU should disclose to an investor whether he is licensed to act as such a representative and by whom he is licensed. Description a. There are disclosure rules promulgated by the FFMS, but they are limited in scope and need to be expanded. b. The Law on Advertising creates legal responsibilities for securities brokers when they are advertising or soliciting for sales in securities. In addition, the Law on Investment Funds/Trusts also creates additional legal responsibilities for asset managers. However, enforcement of the Law on Advertising is not in the hands of the FFMS, but the FAS. c. There is no specific provision for this in the securities laws. d. Yes. Securities brokers and mutual funds are required to state their registration. e. There is no provision for this in the securities laws. Recommendation The implementation and enforcement of advertising and marketing rules for the securities market should be responsibility not only of the FAS but also the FFMS. FFMS is the expert agency and can best fashion and enforce the rules. Risk disclosure for complex instruments such as options should be placed more strongly in the laws and regulations now that options, futures and margin trading are allowed. Good Practice B.2 Terms and Conditions Before commencing a relationship with an investor, a securities intermediary or CIU should provide the investor with a copy of its general terms and conditions, and any terms and conditions that apply to the particular account. Insofar as possible, the terms and conditions should always be in a font size and spacing that facilitates easy reading. The Terms and Conditions should disclose: a. Details of the general charges; b. The complaints procedure; c. Information about any compensation scheme that the securities intermediary or CIU is a member of, and an outline of the action and remedies which the investor may take in the event of default by the securities intermediary or CIU; d. The methods of computing interest rates paid or charged; e. Any relevant non-interest charges or fees related to the product; f. Any service charges; 68 Russian Federation Securities Sector g. Any restrictions on account transfers; and h. The procedures for closing an account. Description The main provisions in this area are included in Article 6 of the Law on Protecting Investors' Rights, and the Decision on Endorsing the Rules for Brokering and Dealing Activities on the Securities Market of the Russian Federation (Decision of the Federal Securities Market Commission of the Russian Federation No. 9 of October 11, 1999). The law does not have specific procedures for the contents of the contract between a securities broker and an investor. There are some general provisions for fair dealing, but they are not specific. Many in the industry consider this to be an issue that is contractual in nature between the broker and the investor and not in need of additional regulation. Recommendation More detailed regulations are needed in this area in order to standardize the rights and duties of the securities brokers and investors across the industry. It should not be left up to individual negotiations. All investors and brokers should have the same rights and duties. Good Practice B.3 Professional Competence Regulators should establish and administer minimum competency requirements for the sales staff of securities intermediaries and CIUs and collaborate with industry associations where appropriate. Description There are no competency exams for sales staff which are administered by the FFMS or other organizations. Some large entities give training and exams to their staff but it is not mandatory. Nonetheless, the law and regulations contain provisions regarding qualifications of specific securities markets professionals which the securities brokers are required to adhere to: - Article 42.14 of the Law on the Securities Market; - Regulations on the Financial Market Specialists approved by Order of the FFMS No. 05-17/pz-n of April 20, 2005, which deals with qualifications demands made on the financial market specialists; - Decision of the Government of the Russian Federation No. 715 of December 5, 2005, which states that the Ministry of Finance may establish additional qualification demands on the special official persons of professional securities market-makers and of organizations carrying out the management of investment funds or of non-government pension funds, who are responsible for the observation of the rules for internal control and for the programs for its implementation, in agreement with the FFMS. However, such a requirement does not seem to have been issued. Recommendation Qualification exams should be required, and if the FFMS does not administer the exams, it should delegate this responsibility to the SROs. Good Practice B.4 Know Your Customer (KYC) Before providing a product or service to an investor, a securities intermediary or CIU should obtain, record and retain sufficient information to enable it to form a professional view of the investor’s background, financial condition, investment experience and attitude to risk in order to enable it to provide a recommendation, product or service appropriate to that investor. Description There is no “know your customer” rule in the FFMS regulations. NAUFOR is currently working on introducing it into their new Code of Conduct. Recommendation A KYC rule should be put into FFMS regulations. 69 Russian Federation Securities Sector Good Practice B.5 Suitability A securities intermediary or CIU should ensure that, taking into account the facts disclosed by the investor and other relevant facts about that investor of which it is aware, any recommendation, product or service offered to the investor is suitable to that investor. Description There is no “suitability” rule in the FFMS regulations. NAUFOR is currently working on introducing it into their new Code of Conduct. Recommendation A suitability rule should be put into FFMS regulations. Good Practice B.6 Sales Practices Legislation and regulations should contain clear rules on improper sales practices in the solicitation, sale and purchase of securities. Thus, securities intermediaries, CIUs and their sales representatives should: a. Not use high pressure sales tactics. b. Not engage in misrepresentations and half truths as to products being sold. c. Fully disclose the risks of investing in the financial product being sold. d. Not discount or disparage warnings or cautionary statements in written sales literature. e. Ensure their advertising and sales materials and procedures do not mislead the customers. f. Not exclude or restrict, or seek to exclude or restrict, any legal liability or duty of care to an investor, except where permitted by applicable legislation. Legislation and regulations should provide sanctions for improper sales practices. Description The Law on the Securities Market deals with sales practices in its Articles 34-37. The FFMS regulations and decisions covering this issue are: - Decision No. 9 of October 11, 1999 on Endorsing the Rules for Brokering and Dealing Activities on the Securities Market of the Russian Federation - Decision No. 44 of November 5, 1998 on Preventing the Conflict of Interests in the Event of Pursuance of Professional Activity in the Securities Market (as amended). - Decision No. 18 of September 22, 2000 on Endorsing the Rules of Pursuance of Brokerage Activity in the Securities Market through the Use of Clients' Funds (as amended). However, these FFMS regulations and decisions contain mostly general provisions related to misrepresentation in sales practices. In addition, brokers and mutual funds have a responsibility not to use misleading advertising under the Law on Advertising. Detailed sales practice rules are not included in the FFMS regulations. Recommendation More detailed sales practice rules should be put in the FFMS regulations. SECTION C CUSTOMER ACCOUNT HANDLING AND MAINTENANCE Good Practice C.1 Segregation of Funds Funds of investors should be segregated from the funds of all other market participants. Description The law and regulations require that the funds be segregated. This provision is 70 Russian Federation Securities Sector included in Article 3.3 of the Law on the Securities Market and in the Regulations on the Requirements to Separate Monetary Funds of a Broker and Monetary Funds of His Clients and Ensure the Clients' Rights When Using the Clients' Monetary Funds in the Broker's Own Interests, endorsed by Decision of the Federal Securities Market Commission No. 03-39/ps of August 13, 2003. However, there are no detailed regulations setting forth how the segregation should operate. Recommendation Detailed segregation regulations should be enacted by the FFMS. Good Practice C.2 Contract Note Investors should receive a detailed contract note from a securities intermediary or CIU confirming and containing the characteristics of each trade executed with them, or on their behalf. The contract note should disclose the commission received by the securities intermediary, CIU and their sales representatives. Description The FFMS regulations provide that a broker should inform a client of actions taken on its behalf, but the specific contents are not indicated. These regulations include the Decision on Endorsing the Rules for Brokering and Dealing Activities on the Securities Market of the Russian Federation, and Article 9 of the Law on the Securities Market, which states that a trading organizer is obligated to submit the information to any interested person (i.e. a customer). In addition, Decision No. 32 of the FFMS of December 11, 2001, as amended on February 4, 2004 sets forth detailed contents of a contract note that should be given to a customer investor. Recommendation No recommendation. Good Practice C.3 Statements An investor should receive periodic, streamlined statements for each account with a securities intermediary or CIU, providing the complete details of account activity in an easy-to-read format. a. Timely delivery of periodic securities and CIU statements pertaining to the accounts should be made. b. Investors should have a means to dispute the accuracy of the transactions recorded in the statement within a stipulated period. c. When an investor signs up for paperless statements, such statements should also be in an easy-to-read and readily understandable format. Description Under FFMS regulations, the broker is supposed to provide investors with statements, which according to industry practices is generally done each month. Decision No. 32 sets out in detail the contents of the statements. There are no specific provisions in the regulations providing for a procedure by which a customer can dispute the accuracy of a statement, nor regarding paperless statements. The main regulations issued by the FFMS on this topic are: - Decision No. 9 of October 11, 1999 on Endorsing the Rules for Brokering and Dealing Activities on the Securities Market of the Russian Federation - Decision No. 109n of December 11, 2001 on Endorsing the Regulations on the Reporting Performed by Professional Participants in the Securities Market (as amended) - Decision No. 32 of December 11, 2001 on the Procedure for the Keeping of Internal Record of Transactions, in Particular, Time Transactions and Transactions in Securities by the Professional Participants in the Securities 71 Russian Federation Securities Sector Market Pursuing Brokerage, Dealership Activity and the Activity of Managing Securities (as amended) Recommendation More specific regulations as to the procedure for contesting the accuracy of statements should be placed in the FFMS regulations, as well as provisions for paperless statements. Good Practice C.4 Prompt Payment and Transfer of Funds When an investor requests the payment of funds in his or her account, or the transfer of funds and assets to another intermediary or mutual fund, the payment or transfer should be made promptly. Description No problems have arisen in this area, since a customer can simply withdraw his or her funds from the old account and then deposit them in a new one. However, there is no regulation that requires a securities broker to promptly transfer or permit withdrawal of funds. Recommendation A specific legal requirement for transfer of funds would eliminate any uncertainty regarding the duty of the securities broker to do so. Good Practice C.5 Investor Records A securities intermediary or CIU should maintain up-to-date investor records containing at least the following: a. A copy of all documents required for investor identification and profile; b. The investor’s contact details; c. All contract notices and periodic statements provided to an investor; d. Details of advice, products and services provided to the investor; e. All correspondence with the investor; f. Details of all information provided to the investor in relation to the advice, products and services provided to the investor; g. All documents or applications completed or signed by the investor; h. Copies of all original documents submitted by the investor in support of an application for the provision of advice, products or services; i. All other information concerning the investor which the securities intermediary or CIU is required to keep by law; and j. All other information which the securities intermediary or CIU has obtained regarding the investor. Details of individual transactions should be retained for a reasonable number of years after the date of the transaction. All other records required under a) to j), above, should be retained for a reasonable number of years from the date the relationship with the investor ends. Investor records should be complete and readily accessible. Description Decision No. 32 of the FFMS sets forth the requirements for record keeping by securities brokers and requires that the records be maintained for five years regarding the accounting of a client’s account. Although some items above are not stated specifically in the regulation, such as correspondence with the investor, it would be difficult to do the accounting of the investor ’s account without them. Recommendation It would be helpful if the FFMS regulations provided some more specificity as to the exact documents that will be maintained for five years, such as correspondence with the investor. 72 Russian Federation Securities Sector SECTION D PRIVACY AND DATA PROTECTION Good Practice D.1 Confidentiality and Security of Customer’s Information Investors of a securities intermediary or CIU have a right to expect that their financial activities will have privacy from unwarranted private and governmental scrutiny. The law should require that securities intermediaries and CIUs take sufficient steps to protect the confidentiality and security of a customer’s information against any anticipated threats or hazards to the security or integrity of such information, and against unauthorized access to, or use of, customer information. Description Existing FFMS regulations, such as the Rules for Brokering and Dealing Activities on the Securities Market, require brokers to have a system to maintain client’s records confidentially. The Law on Personal Data also requires the information to be maintained in a confidential manner. Recommendation No recommendation. Good Practice D.2 Sharing Customer’s Information Securities intermediaries and CIUs should: a. Inform investors of third-party dealings in which they must share information regarding the investors’ account, such as legal enquiries by a securities regulator or enquiries of a credit bureau, unless the law provides otherwise. b. Explain how they use and share investors’ personal information. c. Allow an investor to stop or "opt out" of certain information sharing, such as selling or sharing account or personal information to outside companies that are not affiliated with them, for the purpose of telemarketing or direct mail marketing, and inform the investors of their option. Description The FFMS regulations are not specific regarding the sharing of customer information. Recommendation The regulations should be strengthened to clearly set out the obligation of the securities broker or CIU to provide investors with information on sharing of information and any opt-out provisions. Good Practice D.3 Permitted Disclosures a. The law should state specific procedures and exceptions concerning the release of customer financial records to government authorities. b. The law should provide for penalties for breach of investor confidentiality. Description The FFMS regulations are not specific on procedures for release of customer financial records to the government or on the penalties for breach of confidentiality. Recommendation The FFMS regulations should provide for the procedures and the law should provide for the penalties. SECTION E DISPUTE RESOLUTION MECHANISMS 73 Russian Federation Securities Sector Good Practice E.1 Internal Dispute Settlement a. An internal avenue for claim and dispute resolution practices within a securities intermediary or CIU should be required by the securities supervisory agency. b. Securities intermediaries and CIUs should provide designated employees available to investors for inquiries and complaints. c. Securities intermediaries and CIUs should inform their investors of the internal procedures on dispute resolution. d. The securities supervisory agency should provide oversight on whether securities intermediaries and CIUs comply with their internal procedures on investor protection rules. Description There are no specific FFMS regulations requiring internal dispute resolution. Recommendation The FFMS regulations should include provisions on internal dispute resolution. Good Practice E.2 Formal Dispute Settlement Mechanisms There should be independent dispute resolution services for resolving disputes that investors have with their intermediaries and CIUs. a. A system should be in place that allows an investor to seek third- party recourse, such as an ombudsman or arbitration court, in the event a complaint with their intermediary or CIU is not resolved to their satisfaction in accordance with internal procedures, and it should be made known to the public. b. The ombudsman or equivalent institution should be impartial and independent from the appointing authority and industry. c. The enforcement mechanism of the decisions of the ombudsman or equivalent institution and the binding nature of the decision on intermediaries and CIUs should be in place and publicized. Description NAUFOR and NFA have arbitration courts set up in their organizations. Contracts for customers on the Russian Trading System Stock Exchange (RTS) and the Moscow Interbank Currency Exchange (MICEX) have arbitration clauses that refer disputes to the two SROs respectively. The existence of these procedures is disclosed to customers through their agreements, but the arbitration courts are not used that extensively. The NFA has been lobbying to have the MICEX arbitration court become a more powerful and comprehensive court but nothing had been done to effectuate this as of the date of this Report. Although these tribunals are not independent of the industry, the Mission was not advised of complaints that they were considered biased. The decisions of a tribunal as to the members of the SRO are not appealable, which also apparently extends to the customer under the rules of the arbitration court. If membership to the SROs were made mandatory, the binding effect of these decisions will be more certain. The arbitration tribunals do not provide an inexpensive means for investors to obtain redress for small claims and thus have the same difficulties as courts for small investors. Recommendation An inexpensive means for investors to obtain redress for small claims should be created by the establishment of an ombudsman, by converting an existing tribunal into a low-cost decision-making venue or by some other means. SECTION F GUARANTEE AND COMPENSATION SCHEMES Good Practice F.1 Investor Protection 74 Russian Federation Securities Sector a. There should be clear provisions in the law to ensure that the regulatory authority can take prompt corrective action on a timely basis in the event of distress at a securities intermediary or CIU. b. The law on the investors guarantee fund should be clear on the funds and financial instruments that are covered under the law. c. There should be an effective mechanism in place for the pay-out of funds and transfer of financial instruments by the guarantee in a timely manner. d. The legal provisions on the insolvency of securities intermediaries and CIUs should provide for expeditious, cost effective and equitable provisions to enable the timely payment of funds and transfers of financial instruments to investors by the insolvency trustee of a securities intermediary or CIU. Description There is no guarantee and compensation scheme for securities in Russia. Most developed capital markets have compensation schemes to cover the narrow area of investor losses due to bankruptcy of a broker-dealer holding funds on behalf of an investor. However there are very few retail customers in Russia. The workings of such a scheme and the timing of implementation need to be carefully considered before being put in place. Recommendation No recommendation. SECTION G INVESTOR EDUCATION AND FINANCIAL LITERACY Good Practice G.1 Financial Education through the Media a. Print and broadcast media should be encouraged to actively cover issues related to retail financial products. b. Regulators and/or industry associations should provide sufficient information to the press and broadcast media to facilitate analysis of related issues. Description MICEX has an extensive program for placing news articles and analysis in the media. A sophisticated financial press exists in Russia. Recommendation No recommendation. Good Practice G.2 Information Resources for Investors a. Financial regulators should devise, publish and distribute information resources for investors that seek to improve awareness by providing independent information on the costs, risks and benefits of financial products and services. b. Non-governmental organizations should be encouraged to provide investor awareness programs to the public regarding financial products and services. Description Both MICEX and RTS provide extensive information to investors. NAUFOR and the other SROs also do this, although the exchanges are the most active. The FFMS has resources available for retail investors on its website (www.ffms.ru) and also organizes seminars and conferences. The FFMS has set up an expert working group to focus on ways of improving financial literacy and investor awareness. Recommendation No recommendation. 75 Russian Federation Securities Sector 76 Russian Federation Insurance Sector Russian Federation: Consumer Protection in the Insurance Sector Introduction The Russian insurance sector is in transition from being a tax-driven activity of the financial and industrial groups to taking its legitimate long-term role in society and the economy. The “real” insurance sector is underdeveloped, reflecting Russia’s communist past and the events immediately following the collapse of the Soviet Union. However, the insurance sector is now showing signs of entering a rapid catch-up phase, with the real growth rate averaging between 10 percent and 20 percent in recent years. It could soon be one of the top two or three emerging insurance markets. The insurance sector is undergoing a rapid consolidation. The number of insurers has decreased from a peak of more than 3,000 to 918 in 2006, 857 in 2007 and 786 by mid-2008. Although the law currently restricts the role that foreign insurers can take (both in terms of share of employed capital and permitted classes of insurance)82, this has not to date been a hindrance to foreign entry in practice. Growth of the insurance sector has been driven by non-life insurance policies. Starting from 2003, the dollar value of premium incomes for non-life insurance has shown an average annual growth of 33 percent. The Russian non-life market was ranked at 14th place in the world for 2007, below Brazil and above Belgium. In 2007, life insurance premiums recovered after three years of decrease, growing almost 50 percent relative to 2006. Figure 2: Insurance Premium Incomes (in million US$) 16,000 Life 14,000 Non-life: property and liability Non-life: personal accident and health 12,000 10,000 14,844 8,000 14,128 4,868 11,331 6,000 10,224 3,548 9,033 7,446 7,418 4,000 5,373 5,327 3,894 895 880 2,000 588 - 2003 2004 2005 2006 2007 Source: Ministry of Finance, graph from AXCO Report 2008. However, insurance penetration is still low and Russia, especially in terms of life insurance coverage. Russia is placed at number 56 among 88 emerging markets in terms of insurance penetration (total premium income as percentage of GDP) in 2007. Less than one percent of the 82 There is a partial waiver for EU-based insurers. 77 Russian Federation Insurance Sector population has some form of life cover and less than three percent has non-life insurance coverage. Both indicators are below the average of European countries. Table 16: Insurance Penetration in European Countries (in percentage) Total Life Non-life Country Ranking Insurance Insurance Insurance Western Europe United Kingdom 2 15.7 12.6 3.0 Netherlands 4 13.4 4.7 8.7 Ireland 7 11.6 9.3 2.4 Switzerland 8 10.3 5.7 4.6 France 9 10.3 7.3 3.0 Central and Eastern Europe Slovenia 26 5.7 1.8 3.8 Poland 36 3.7 1.9 1.8 Czech Republic 37 3.7 1.5 2.2 Hungary 38 3.5 2.0 1.6 Croatia 43 3.3 0.9 2.4 Slovakia 45 3.1 1.4 1.7 Bulgaria 51 2.7 0.4 2.3 Russia 56 2.4 0.1 2.4 Estonia 58 2.3 0.8 1.5 Latvia 59 2.2 0.2 2.0 Lithuania 60 2.0 0.7 1.3 Romania 67 1.8 0.3 1.4 Total Europe 8.0 5.0 3.0 Source: Swiss Re, “World Insurance in 2007: Emerging Markets Leading the Way”, Sigma No. 3, 2008 The insurance market is geographically concentrated in urban areas. Official data shows that insurers are geographically dispersed when analyzed according to number of insurers, but retail insurance premiums are more concentrated with insurers based in the two main urban areas. (Table 17). Table 17: Geographical Distribution of the Insurance Market (in percentage) MOSCOW ST. PETERSBURG OTHER Number of insurers by location in 2006 * 45 6 49 Total premium income by location in 2007 * 54 10 36 * The distribution of total premium income indicates the percentages in the Central District, which includes Moscow, and the region around St. Petersburg. The distribution of number insurers refers to the percentages in the cities of Moscow and St. Petersburg. Source: AXCO Report 2008 The importance of long-term life insurance premiums has significantly increased in the last five years. A comparison of data according to contract type shows the clear past impact of special life insurance contracts designed for tax-effective salary payments and a recent trend towards a 78 Russian Federation Insurance Sector healthier industrial structure based on longer term savings contracts (Table 18). Recent projections by Pricewaterhouse Coopers point to a trebling of life insurance premiums between 2006 and 2010. Whether these projections are achieved will depend to some extent on the role of the life insurance sector in private pension provision. Table 18: Distribution of Life Insurance Premiums per Term of Contract (in percentage) TERM OF CONTRACT 1996 2001 2006 Term of 1 year 53 3 15 Term of 5 years 8 1 27 Term more than 5 years 7 2 40 Periodic payment contracts 32 94 18 Source: FSIS Once tax schemes are stripped out, the life sector is shown to be dominated by two insurers, AIG and Rossgostrakh. The latter has been able to build on its large and well distributed historic distribution network, although under a more decentralized organizational structure than under communism. Insurance contracts are still based in part on the traditional short term savings model, reflecting the still largely unprofessional nature of the agency force. However Rossgostrakh is making efforts to upgrade both intermediary quality and service range. AIG, one of the first of the global insurers to enter Russia, has been following its standard eastern European strategy, based on universal life contracts. Its primary market is the emerging middle class in the population centers. Bancassurance is being piloted but volumes are insignificant. A number of other Russian life insurers have indicated a desire to find strong foreign partners in order to reassure potential policyholders. Table 19: Top Life Insurance Companies by Adjusted Premium (in million US$) LIFE INSURER ADJUSTED PREMIUM AIG Russia 41.1 Rosgosstrakh 38.8 Allianz 6.7 Soglasie-Vita 3.3 SOGAZ-Life 2.9 Ceska Poji 2.9 VSK 2.8 Source: Expert RA. Latest data available: December 2005. Nominal premiums show intermittent real growth in the non-life sector, as seen in Table 20. Expert RA, a leading local rating company, estimated that only 63 percent of property and liability premiums represented genuine risk transfer in 2005. A senior manger from Rossgossrakh 79 Russian Federation Insurance Sector has been quoted as estimating that 68 percent of 2006 non-life premiums were real83. However after allowing for tax-scheme business there is evidence that “real” non-life premiums have shown consistent healthy growth for some time. A 2005 OECD report, quoting a number of estimates of legitimate insurance premium growth, estimated 30 percent “plus” nominal growth rates in 2001 and 2002 and more than 50 percent in 2003, following the introduction of compulsory motor third party liability (MTPL) insurance. Table 20: Evolution of Non-Life Insurance Premiums (in billion RUB) TYPE OF NON-LIFE INSURANCE 2001 2002 2003 2004 2005 2006 2007 Personal 29.3 32.1 41.5 52.9 64.0 76.8 89.1 Property 58.1 90.1 125.7 153.1 185.6 227.9 270.9 Liability 9.2 12.2 12.9 12.2 16.2 16.4 20.1 MTPL - - 24.9 49.2 53.7 63.9 70.4 Total Non-compulsory Non-Life Insurance 96.6 134.4 205.0 267.4 319.5 385.0 450.5 State medical transfer and other compulsory - - 78.0 102.0 145.8 201.1 290.6 insurance Total Non-Life Insurance 96.6 134.4 283.0 369.4 465.3 586.1 741.1 Source: FSIS, IMF, Axco Russia appears to have successfully implemented a mandatory third party motor insurance arrangement. This experience, almost unique in the developing world, has allowed for more than 90 percent of eligible vehicles in regular use being insured. Russian insurers issue approximately 35 million MTPL policies each year and in 2007 settled 1.7 million claims. The average premium is approximately RUB 2,000 and the average claim amount RUB 23,000. Aside from the considerable boost this has provided to insurance revenues, the implementation of MTPL was necessary as Russia has one of the worst accident rates in the world. The rate of accidents is approximately 240,000 road accidents per year. The traffic safety board of the Ministry of Internal Affairs has estimated that the annual cost of road accidents in Russia amounts to 2.5 percent of GDP. Driving under the influence of alcohol plays a major part in this hidden disaster. The association of auto insurers has developed several codes of practice. The MTPL system is managed by the Russian Association of Motor Insurers (RAMI), a self-regulatory organization to which all insurers writing MTPL policies must belong. RAMI has developed a register of insurance intermediaries against whom complaints have been made. It has also been actively developing a number of codes of practice including: – Rules of professional conduct entitled “Improving the level of service in the MTPL market”, – Rules covering the review of claims made by victims and the payment of compensation. 83 Malakut, a leading Russian insurance broker is on record as stating that 80 percent of all insurance premiums arose from tax or capital transfer schemes before the official crack down started in 2004. 80 Russian Federation Insurance Sector Russia is currently not a member of the Council of Bureaux (the Green Card system) but is preparing to join in January 2009. This will raise the level of professionalism required of Russian MTPL insurers. Legal Framework The key relevant laws for consumer protection in the insurance market are: – The Civil Code of the Russian Federation, Chapter 48; – Law on the Organization of Insurance Business in the Russian Federation (hereinafter Insurance Law): Law of the Russian Federation No. 4015-1 of November 27, 1992 as amended; – Law on the Protection of Consumers’ Rights: Law of the Russian Federation No. 2300-I of February 7, 1992, as amended; – Law on Personal Data: Federal Law No. 152-FZ of July 27, 2006; – Law on Information, Information Technologies and Protection of information: Federal Law No. 149-FZ of July 27, 2006; – Labor Code of the Russian Federation: Federal Law No. 197-FZ of December 31, 2001. Other relevant regulations for consumer protection are: – Decision on the Regulations on the Federal Service of Insurance Supervision: Decision of the Government of the Russian Federation No. 330 of June 30, 2004, as amended; – Order on Some Questions Bearing on the Application of the Law of the Russian Federation on the Protection of the Rights of Consumers: Order of the Ministry of the Russian Federation for Antimonopoly Policy and Support of Entrepreneurship No. 160 of May 20, 1998, as amended. Institutional Arrangements The Federal Service for Insurance Supervision (FSIS) was set up in 2004 as the federal supervisory authority for insurance activities. However, it has no regulatory authority. The regulatory function has remained with the Ministry of Finance (MOF) Financial Affairs Department. Consumer affairs are handled by the Complaints and Claims Section within FSIS. The All Russian Insurance Association (ARIA) and its affiliated regional bodies is the organization that represents the insurance companies. This body is primarily intended to represent the insurance sector’s interests at the political level (its Chairman is a member of the State Duma). The Russian Association of Motor Insurers (RAMI) carries out the standard governance and data gathering roles for mandatory motor insurance. RAMI has already established a number of codes of practice for its members, including several codes dealing with consumer protection issues. Associations have also been established for actuaries (Russian Guild of Actuaries) and insurance brokers. The supervisory infrastructure was significantly strengthened with the 2004 amendments to the Insurance Law. These amendments were complemented by the appointment of a trusted and respected Chairman to head the Federal Service for Insurance Supervision (FSIS). 81 Russian Federation Insurance Sector However, there are still a number of key areas where the supervisory authority needs to be strengthened and given more authority. The regulatory function has remained with the MOF Financial Affairs Department, although a dedicated insurance regulatory unit no longer exists. There is some evidence that the regulatory function has become less able to react quickly to needs following the separation of functions, although the relevant MOF officers are highly regarded. On the other hand, FSIS has been effectively constrained in its function by not being able to issue orders of a purely technical nature. Thus, the current supervisory infrastructure is facing an important challenge regarding consumer protection issues. The major challenge is to continue to provide a supporting environment for healthy growth and consolidation, while ensuring that the consumer protection and prudential overview regimes and infrastructure keep pace with developments. The supporting industry infrastructure is lagging the development of the insurance sector in a number of areas. These areas include the actuarial profession, the accounting and auditing professions, legal awareness of the sector’s peculiarities, consumer protection mechanisms and professional and vocational training for insurance operatives. 82 Russian Federation Insurance Sector Good Practices: Insurance Sector SECTION A CONSUMER PROTECTION INSTITUTIONS Good Practice A.1 Consumer Protection Regime The law should recognize and provide for clear rules on consumer protection in the area of insurance and there should be adequate institutional arrangements for the implementation and enforcement of consumer protection rules. a. There should be specific legal provisions in the law, which creates an effective regime for the protection of consumers of insurance products and services. b. There should be a general consumer agency or specialized agency, responsible for implementing, overseeing, enforcing consumer protection, and data collection and analysis (including complaints, disputes and inquiries). c. The legal system should provide for a role for the private sector, including voluntary consumer protection organizations and self- regulatory organizations. Description The principle that asymmetric power in business-to-consumer (B2C) contractual relationships must be allowed for in civil actions has been recognized in the practice of the Russian Constitutional Court. In addition under Russian law, consumer protection regulation cannot be delegated to ministries or subsidiary agencies or services. The Constitution and Civil Code provide the ultimate ruling law for contract and tort matters, but default to other laws when silent or under specific delegations. The de facto status of B2C legal interpretation has been summarized as follows: “The legal basis for protection of the weak party is provided by the Civil Code and the Law on Protection of Consumer Rights, supported by regulatory acts issued by federal agencies. However, there are all grounds to believe that due to a wide range of imperfections, these legal provisions provide insufficient protection of the weak party in the insurance business. So far, these issues cannot be alleviated in judicial practice. The weak party protection approach is often misapplied by the courts of law, and sometimes that concept unjustifiably limits the rights of insurance companies. The principle is not applied on a wide scale, which means that it is too early to talk about establishment of any clearly defined doctrines in that area” 84. In contrast Russia has a relatively well developed legal environment to deal with “equal power” business-to-business (B2B) contractual and tort obligations, and to ensure that a competitive market exists. Aside from the Civil Code, it has the Arbitration Tribunal and Court system (more than 900 courts) and an anti- monopoly statute and associated regulatory body. The Ministry of the Russian Federation for Antimonopoly Policy and Support to Entrepreneurship was responsible for consumer protection until 2004, when it ceased to exist. The Ministry’s functions were inherited by the Federal Antimonopoly Service (FAS), which continues to be active in ensuring that markets function properly. Russia has developed a formal consumer protection system for sales of goods and 84 M. Yefremova, State University, Department of Civil and Business Law 83 Russian Federation Insurance Sector delivery of services, as envisaged by the Consumer Protection Law, as well as supporting entities including the Federal Service for Supervision of Consumer Protection and Welfare (CPS) and various non-governmental organizations. Chapters I, III and IV of the Consumer Protection Law have a number of wide- ranging provisions relating to suitability of products and services and relevant sanctions. The application of the general chapters (I and IV) to insurance does not appear to be in contention. In particular Article 3 requires that consumer rights be included in the state educational standards and programs of general education and vocational training – although this has yet to be implemented. However there is considerable disagreement as to the applicability of Chapter III (Protection of the Consumers' Rights in Case of the Performance of Works or Rendering of Services) to insurance services. On the basis of Article 39 of the Order of the Ministry for Antimonopoly Policy interpreting the Consumer Protection Law (Order No. 160 of May 20, 1998 as amended on March 11, 1999), insurance consumer protection is only regulated by the general provisions of the Consumer Protection Law, plus the relevant specialized laws, but not by Chapter III of the Law. While this may violate constitutional provisions about equality of treatment, the Supreme Court appears to have supported this interpretation on other grounds (which it has been argued may be inconsistent with the relevant enactment law and sections of the Civil Code). Laws covering the use of personal information and information systems (Law on Personal Data; Law on Information, Information Technology and Protection of Information) and advertising (Law on Advertising) have been passed. Insurance sector B2C contract law and regulation is largely missing from the Russian body of civil and consumer protection law. There are only specific insurance B2C contract legal provisions in the Civil Code (Chapter 48), the Insurance Law and Decisions of the Government of the Russian Federation. The FSIS has an obligation to regularly hear policyholder complaints under Decision No. 330 of 2004, and has set up an appropriate administrative response (this has been delegated to territorial offices given a rapidly increasing volume of complaints). However, the FSIS appears to have no powers to enforce relevant determinations, since the Insurance Law (Art. 35) specifically states that disputes need to be resolved in an appropriate legal forum or through conciliation. Recommendation Modern rules on B2C insurance contracts and responsibilities for insurance intermediaries need to be introduced to the Russian law. This would probably be most effectively achieved through special insurance contracts and agents and brokers laws (possibly using the EU Mediation Directive as a guide in the latter case) to supplement the Civil Code. Alternatively this reform could be effected through amendments to the Insurance Law. Possible approaches are shown below: - Eastern European Countries with separate contracts law: Germany, Czech Republic, Austria, Latvia (most applicable to Russia) - Major countries with separate insurance contracts law: UK, Australia - Major countries with insurance contracts section in Insurance Law: China, India, US, Brazil, Russia, Canada - Civil Code/ Law of Obligations only: Italy, Turkey In addition, given the likely rapid growth of the retail insurance market, alternative dispute resolution mechanisms need to be legislated for consumers with insurance- related complaints, and claims-related complaints in particular. These would have the joint role of filtering out cases that can legitimately be referred to the courts and providing a mechanism for resolving very small claims. 84 Russian Federation Insurance Sector Good Practice A.2 Contracts There should be a specialized insurance contracts section in the general insurance or contracts law, or ideally a separate Insurance Contracts Act. This should specify the information exchange and disclosure requirements specific to the insurance sector, the basic rights of insurer and policyholder and allow for any asymmetries of negotiating power or access to information. Description Specific insurance contracts provisions are included in the Civil Code (Chapter 48), the Insurance Law and several Decisions of the Government. With the exception of some provisions under the “personal insurance” (life and disability) heading, this is largely based on generic B2B concepts, including matters such as: when the contract takes effect, over- and under-insurance, subrogation, the basic requirements of an insurance contract’s wording, obligations to provi de accurate and complete information at the time the contract is being proposed and obligations to minimize harm and report in a timely fashion once a claim event occurs. Variations on the B2B approach to cater for B2C information and power asymmetries are not included in either the Civil Code or the Insurance Law. These variations should include: allowing for some underinsurance before applying average, limitations on the right of an insurer to avoid a claim on technicalities (including non-relevant and non-fraudulent non-disclosure), requirement to make proposals and contracts easier to read and comprehend, proper notice of cancellation or non-renewal of a contract, avoidance of warranty clauses and inclusion of cooling-off periods for certain contracts. There has been at least one case of insurance contracts (with virtually no possibility of paying out) being bundled with other services and the provider relying on the adhesion principle (i.e. that the consumer is assumed to be entering into a single indivisible contract) to ensure that the contractual terms remained in force. Theoretically Art. 428 of the Civil Code protects the consumer in these situations if normal contractual rights have been abused under clearly unfair wordings. In practice the complexity of insurance contracts and limited recourse appear to limit the effectiveness of the Civil Code in this situation. Recommendation The body of insurance law should include modern B2C insurance contracts provisions. This may ultimately require the amendment of certain articles in the Civil Code, but significant progress towards a modern approach could be made through relevant amendments to the Insurance Law, or alternatively, a special insurance contracts law could be produced. Good Practice A.3 Other Institutional Arrangements a. The judicial system should provide credibility to the enforcement of the rules on consumer protection. b. The media and consumer associations should play an active role in promoting consumer protection. Description The main judicial systems dealing with insurance contractual matters are the Arbitration Court system (commercial disputes) and the Federal and Regional Courts of General Jurisdiction (personal actions). In the case of personal actions below a value threshold (200 times the monthly minimum wage), they are handled by special regional or state small claims courts ruled over by Justices of the Peace who have full judicial status. At present these state courts appear to supplant the alternative dispute resolution (ADR) mechanisms that would be found in some industrial countries. 85 Russian Federation Insurance Sector In November 2003 the Higher Arbitration Court issued a Letter clarifying the rulings for 25 representative cases of insurance disputes brought before it and laying out recommendations for the arbitration courts85. However this does not need to be taken into account by the Courts of General Jurisdiction as these rely on a wider body of law than the Arbitration Court system (which relies largely on the provisions of the Civil Code). Under the Law on the Arbitration Courts in the Russian Federation, judges are required to encourage disputants to seek conciliation in terms of the Russian Law (Art. 138). Regarding commercial disputes, the Chamber of Commerce and Industry of the Russian Federation set up a Panel of Mediators in Conciliation Proceedings and established its rules of procedure in May 2006 (Order No. 32 of the President of the Chamber of Commerce and Industry). In terms of B2C insurance contracts, there is no evidence of an active ADR system currently in place, and given that a proposed mediation law will make conciliation purely voluntary for both parties, this situation is unlikely to change. Russian print and on-line media has been prepared to run stories relating to financial sector B2C matters. However there is generally little knowledge of the insurance sector, reflecting its relatively recent re-emergence in retail markets. There is an effective umbrella consumer organization (KonfOP) that was originally established to assist in the drafting of the Consumer Protection Law. Its primary role continues to be policy and advocacy. Recommendation An effective ADR system for B2C insurance disputes needs to be developed in Russia. This could be based on the existing system. SECTION B DISCLOSURE AND SALES PRACTICES Good Practice B.1 Sales Practices a. All insurance intermediaries should be licensed and proof of licensing should be readily available to the general public, including through the internet. b. Insurers should be held responsible for product-related information provided to consumers by their agents (i.e. those intermediaries acting for the insurer). c. Consumers should be made aware of whether the intermediary selling them an insurance contract (known as a policy) is acting for them or for the insurer (i.e. in the latter case they have an agency agreement with the insurer). d. If the intermediary is a broker (i.e. acting on behalf of the consumer) then the consumer should be advised at the time of initial contact with the intermediary if commission will be paid by the underwriting insurer. The consumer should have the right to require disclosure of commission paid to an intermediary for long term savings contracts. The consumer should always be advised of the amount of commission paid on single premium investment contracts. e. An intermediary should not be allowed to identically fill broking and agency roles for a given general class of insurance (i.e. life 85 See Informational Letter of the Presidium of the Higher Arbitration Court of the Russian Federation No. 75 of November 28, 2003 on the Review of the Case-Law In Respect of the Disputes Connected with Execution of Insurance Contracts 86 Russian Federation Insurance Sector and disability, health, general insurance, credit insurance). f. Sanctions, including meaningful fines and, in the case of intermediaries, loss of license, should apply for breach of any of the above provisions. Description Agents and brokers are defined in the introductory sections of the Insurance Law (Art. 4.1, Art. 8) but there is no subsequent reference to agents. The definition of “natural person” agents refers to civil law contracts and is largely regulated by Chapters 49 through 51 of the Civil Code. Legal person agents are defined as representing the insurer. According to Article 971 of the Civil Code: “Under the contract of agency one party (agent) shall undertake to perform certain legal actions on behalf and at the expense of the other party (principal). The rights and obligations under the transaction completed by the agent shall accrue directly for the principal” According to the Insurance Law, the agents’ rights and obligations appear to be defined by the contract (the policy), the rules of the insurer and any official explanatory documents issued by the insurer, rather than any supplementary statements of the agent (Arts. 3.3 and 17.1). Where an agent is required by circumstances to act outside the contractual terms (and always in the interests of the principal) he or she is obliged to advise the principal as soon as feasible. It is not clear from the law where liability to the policyholder lies if the diversion from contract adversely affects the policyholder. The definition of broker is somewhat different to most jurisdictions (where the broker is assumed to be acting for the insured in terms of advice and policy selection) in that this assumes a “conclusion of contract” role. However the Insurance Law does prohibit brokers from acting for both parties at the same time. Insurance brokers need to be licensed and registered. Brokers are not permitted to act as agents or to pursue insurance underwriting or reinsurance underwriting activities (Art. 8 of the Insurance Law). There is no explicit requirement under Russian law regarding disclosure of commission for insurance products and services. Recommendation All insurance intermediaries should be registered on a register open to the public. Insurance agents should be tied to one insurer for each class of insurance sold, and they should have some liability for the policies they sell. The insurance company is ultimately responsible for the actions of its agents but should be able to seek restitution from the agent for the consequences of any misrepresentation and malfeasance by the agent. Insurers should be responsible for the verifiable statements of their agents and for undertakings provided in official sales material. Brokers should be able to accept commission from insurers, but if they do this, it should be disclosed to the policyholder. In addition policyholders buying single- premium and long-term savings contracts should be allowed to request details of the commission to be received by the agent or broker. Good Practice B.2 Advertising and Sales Materials a. Insurers should ensure their advertising and sales materials and procedures do not mislead customers. Regulatory limits should be placed on investment returns used in life insurance value projections. b. Insurers should be legally responsible for all statements made in 87 Russian Federation Insurance Sector marketing and sales materials they produce related to their products. c. All marketing and sales materials should be easily readable and understandable by the general public. Description The Law on Advertising has a specific section dealing with financial services, including insurance (Art. 28). Advertising is defined as “information distributed by any means, in any form and by any media to any non-specific group of persons…” (Art. 3). Under this Law (Art. 28(1)) promises of future performance cannot be made if they cannot be verified at the time of sale. It is not clear however that this prohibition covers benefit illustrations. The law also requires an opt-in approach for mass mailings and prohibits automatic mailing systems. Art. 4(3) of the Consumer Protection Law requires that any service provided is “fit for use in accordance with” any specific purposes notified to the provider of the service. Art. 8 states that consumers “shall be entitled to request any necessary and adequate information” relating to the services being sold. In addition this information shall be “brought to the consumers attention in a clear and understandable form…”. Art. 10 dictates that the government shall specify the “list and methods of bringing information to the consumer’s attention…”. Under Art. 13 certain consumer organizations may receive 50 percent of any fines levied as a result of their successful representations on behalf of consumers. Art. 16 bars tied sales and involuntary cross-selling. Art. 17 specifies that consumer rights are to be protected by the court and actions may be on an individual or a class action basis. Art. 32 affirms a consumer’s right to cancel a service at any time (subject to appropriate compensation for the supplier). Under Art. 44 a local authority may suspend the sale of a product or service “unaccompanied with accurate and sufficient information” and file claims with the courts on behalf of consumers. The Civil Code and Insurance Law are both silent regarding the obligations of insurers regarding sales and promotional materials and the way in which such materials should be presented. Recommendation Benefit illustrations under life contracts, if permitted, should be capped according to realistic future earnings prospects – one common approach is to use a proportion of the benchmark bond rate. Insurers should be bound by the undertakings in their sales and marketing material as well as by the contents of the proposal and policy documents. The Consumer Protection Law should derogate suitability requirements and authorities to the Insurance Law or any special insurance contracts or brokers and agents (mediation) laws that may come into effect. Good Practice B.3 Key Facts Statement A Key Facts Statement should be attached to all sales and contractual documents, disclosing the key factors of the insurance product or services in large print. Description The Civil Code and Insurance Law do not include any reference to a Key Facts Statement. The statutes do specify the minimum information that should be included in an insurance contract, by main type of contract (Art. 940 of the Civil Code and Chapter II of the Insurance Law). In addition the Civil Code requires that insurance contracts be delivered in written form and that the consumer is made aware if it includes the rules of the insurer. Under Art. 940(3) of the Civil Code insurers may employ standard insurance policy wordings. Recommendation The industry associations should develop Key Facts Statements and encourage their use by the financial institutions that are members of the associations. An 88 Russian Federation Insurance Sector easily readable and comprehensible Key Facts Statement should appear at the front of all B2C proposal and policy documents. Good Practice B.4 Know Your Customer The sales intermediary or officer should be required to obtain sufficient information about the consumer to ensure an appropriate product is offered. Formal “fact finds” should be specified for long-term savings and investment products and they should be retained and be available for inspection for a reasonable number of years. Description There is no requirement for insurers or their intermediaries to seek information from prospective policyholders before advising on service needs. Recommendation There should be a requirement for sales intermediaries or officers to obtain sufficient information about the consumer before offering a service. Good Practice B.5 Cooling-Off Period There should be a reasonable cooling-off period associated with any traditional investment or long-term life savings contract, after the policy information is delivered, to deal with possible high pressure selling and mis-selling. Description Cooling-off periods for long-term savings contracts are not required. Recommendation Cooling-off periods should be introduced for longer term savings contracts so that consumers can reverse the effects of high-pressure sales techniques (including multi-level sales). Typically these apply for up to 14 days after the contract becomes effective or a shorter period after the contract (policy) is sent out. Good Practice B.6 Professional Competence a. Sales personnel and intermediaries selling and advising on insurance contracts should have sufficient qualifications, depending on the complexities of the products they sell. b. Educational requirements for intermediaries selling long term savings and investment insurance products should be specified, or at least approved, by the regulator or supervisor. Description According to the Insurance Law, the head of a brokerage firm or the sole trader needs to satisfy minimum academic and experience qualifications. However there is no requirement that any intermediary have qualifications aligned with the complexity of the service being sold or offered. Recommendation According to the Insurance Law, both agents and brokers should have to pass tests relevant to the complexity of the service being sold or offered. In the case of agents, and for less complex financial services (such as motor insurance), the educational processes and subsequent tests could be given by the individual insurers. For more complex services (such as life insurance with a savings component), the educational requirements and tests could be the responsibility of the industry association (ARIA) or the FSIS. Good Practice B.7 Disclosure of Financial Situation a. The regulator or supervisor should publish annual public reports on the development, health, strength and penetration of the insurance industry either as a special report or as part of their disclosure and accountability requirements under the law governing it. b. Insurers should be required to disclose their financial information to enable the general public to form an opinion with regards to 89 Russian Federation Insurance Sector the financial viability of the institution. c. If credible claims paying ability ratings are not available, the regulator or supervisor should periodically publish sufficient information on each insurer for an informed commentator or intermediary to form a view of the insurer’s relative financial strength. Description FSIS publishes an annual report including a commentary on the state of the insurance sector. The current Chairman also has a policy of maintaining an active education program and regularly publicises through the mass media actions taken against insurers breaching the insurance law and regulations. FSIS also maintains a comprehensive website including quarterly updated flow information (premiums and claims) from all insurers operating in Russia. However there is little balance sheet data available to the general public to assess the financial strength of insurers. All insurers are required to publish their audited annual financial statements in the mass media. Some of the larger insurers provide semiannual balance sheet data online but this is not always updated and can be difficult to download. Few insurers are rated by domestic or international credit rating agencies on either claims paying ability or creditworthiness. Most insurers use Russian accounting and auditing standards, although insurers will be expected to adopt International Financial Reporting Standards by 2012. Recommendation FSIS or ARIA should publish, at least annually, sufficient balance sheet information about each insurer for intermediaries, advisors and the business media to form a broad view as to the financial strength of each insurer. SECTION C CUSTOMER ACCOUNT HANDLING AND MAINTENANCE Good Practice C.1 Customer Account Handling a. The customer should receive periodic statements of the value of their policy in the case of insurance savings and investment contracts. For traditional savings contracts this should be at least yearly, however more frequent statements should be produced for investment linked contracts. b. Customers should have a means to dispute the accuracy of the transactions recorded in the statement within a stipulated period. c. Insurers should be required to disclose the cash value of a traditional savings or investment contract upon demand and within a reasonable time. In addition a table showing projected cash values should be provided at the time of delivery of the initial contract and at the time of any subsequent adjustments. d. Customers should be provided with renewal notices a reasonable number of days before the renewal date for non-life policies. If an insurer does not wish to renew a contract it should provide a reasonable notice period. e. Claims should not be deniable or adjustable if non disclosure is discovered at the time of the claim but is immaterial to the proximate cause of the claim. In such cases the claim may be adjusted for any premium shortfall or inability to recover reinsurance. f. Insurers should have the right to cancel a non life policy at any time (other than after a claim has occurred – see above) if material non disclosure can be established. g. Rules should be in place ensuring the safe handling and 90 Russian Federation Insurance Sector transmission of policyholder funds by intermediaries. Description The Civil Code is largely silent on how a B2C policyholder should be treated between policy issuance and occurrence of any claim. Standard non-life B2B rights and obligations, such as the ability to cancel or assign a policy and the need to disclose a substantial increase in risk factors, are covered (with a standard exemption from the latter for life and disability, or “personal insurance”). Insurers may cancel a contract where there has been non disclosure relevant to the risk (Art. 944(3)). There is no concept of materiality in Chapter 48 of the Civil Code. The Insurance Law requires as a default that a 30-day notice be provided by either the insurer or the policyholder if they plan to seek cancellation of the policy. Cancellation by the insurer is only allowed if there is a specific provision in the insurance contract (Art. 23(2)). Contracts may be declared invalid if there has been willful non disclosure (Art. 944(3) of the Civil code). However if the insurer issued the contract in the absence of requested information, this lack cannot be used to subsequently claim the contract is invalid (Art. 944(2)). Rules for denial of a claim are also listed in Article 21 of the Insurance Law and under this provision the contract may include “other grounds for rejection of an insurance payment, subject to any overriding Russian law”. While it is not a legal requirement, most responsible life insurers will quote the cash value of a policy upon request. There appear to be no explicit rules covering intermediaries’ handling of policyholder funds. Recommendation The Insurance Law should specify that traditional life insurance savings contract policyholders will receive statements of value at least annually (possibly after the first 2 years). If investment-linked contracts are introduced to the Russian market, valuations should be available online and through the mass media at least weekly. Non-life insurance policy wordings should be set by the professional association (and recommended for all association members) and any variation should be formally disclosed through an attached derogation statement. Policies for retail customers should not permit denial of a claim or arbitrary cancellation of a B2C insurance contract for reasons other than material non-disclosure and other rules already in the Civil Code. In addition a claim under a B2C insurance contract should not be deniable after it has occurred if the cause of the claim was not related to a non-disclosed risk factor, although a premium adjustment may be justified. Rules should be in place requiring the use of separate bank accounts for policyholder funds while they are being held by intermediaries, and the establishment of appropriate audit trails. SECTION D PRIVACY AND DATA PROTECTION Good Practice D.1 Confidentiality and Security of Customer’s Information Consumers have a right to expect that their financial activities will have privacy from federal government scrutiny and others. The law should require insurers to ensure that they protect the confidentiality and security of customer’s information against any anticipated threats or hazards to the security or integrity of such information, and against unauthorized access to, or use of, customer information that could result in substantial harm or inconvenience to any customer. 91 Russian Federation Insurance Sector Description Privacy is guaranteed under a wide range of Russian statutes including the Constitution (Art. 23), the Criminal Code and the Administrative Code. The generic laws covering data protection are the Law on Personal Data; the Law on Information, Information Technologies and Protection of information and the Labor Code. Under the Labor Code employers are forbidden to disclose employees’ personal data to third parties for commercial purposes without obtaining the prior written consent of the employee concerned. The Law on Personal Data is comprehensive and generally requires the permission of the affected individual if their data is to be processed by the data holder (Arts. 6 and 9). Holders of personal data are required to maintain its confidentiality (Art. 7). Individuals have the right to access their personal data and to have such data blocked or destroyed if it is inaccurate or unnecessary to the objectives of the database holder (Art. 14). Art. 15 directly addresses the use of personal data for cross-selling purposes and specifies that this may be done only with the consent of the individual concerned. Such waivers appear to be a common feature of consumer financial contracts and agreements in Russia. Most of the above provisions have exceptions and most of these appear to be reasonable. However there is one exception (Art. 6(6)) which appears to offer a loophole for purveyors of data. This exception applies when “data processing is effected for purposes of professional journalist activity or for purposes of scientific, literary or other creative activity provided that in doing so no violation is committed of the rights and freedoms of the subject of personal data”. The Law on Information, Information Technologies and Protection delegates most provisions regarding personal information to the Law on Personal Data. However under Art. 9(8) it is illegal to demand private information from an individual unless that information flow is envisaged by the Federal Law of Russia. Under Art. 16 (4) the holder of information is subject to a series of requirements including prevention of unauthorized access, detection of unauthorized access and overall monitoring of the level of protection of information. Art. 17 confirms that individuals may take action in the courts for the “judicial protection of their rights” including seeking damages. The Law on Personal Data specifies that data protection standards are to be set by the Government of Russia and that the federal executive body responsible for the protection of the rights of individuals regarding personal databases shall be operating in the “sphere of technologies and communications”. In practice this would appear to mean the newly merged communications and mass media supervisor. Databases are required to be compliant with the law by 2010. The Civil Code (Art. 946) also has articles requiring that policyholder data be held confidential by the insurer. However it is not clear that this extends to intermediaries in general, and brokers in particular. In practice the private data of Russian citizens covering such matters as passport details, vehicle registration, real estate and taxation are readily available via the internet or street sales of compact discs. Recommendation Consumers should be made aware if he or she is signing a data processing waiver in a key facts page attached to an insurance proposal and contract. It should be made clear in the Insurance Law that the data protection and confidentiality provisions apply to insurance brokers and agents. Good Practice D.2 Sharing Customer’s Information a. Insurers should explain how they use and share customers’ 92 Russian Federation Insurance Sector personal information. b. Insurers should be committed not to sell or share account or personal information to outside companies that are not affiliated with the insurer for the purpose of telemarketing or direct mail marketing. c. The law should allow a customer to stop or "opt out" of certain information sharing within or between financial groups, and the insurers should be required to inform the customers of their option. d. The law should prohibit the disclosure of information of customers by third parties. Description The Law on Personal Data effectively covers insurers’ responsibilities as the Civil Code and Insurance Law are rather parsimonious on this issue. The Russian law requires a formal opt-in for data sharing and has provisions for revoking any authorities to share data that have been granted. Under Art. 18(3) of the Law on Personal Data, private data not received directly from the individual cannot be processed unless the individual concerned is provided with details of the entity using the data and their legal rights regarding the disposition of that data. Recommendation No recommendation. Good Practice D.3 Permitted Disclosures a. The law should state specific procedures and exceptions concerning the release of customer financial records to government authorities. b. The law should provide for penalties for breach of insurer secrecy. Description The Law on Personal Data specifies exceptions under which private data may be processed without the permission of the individual concerned. These include cases where data is released to official entities. With the exception of the case noted in D.1, these are reasonable. Penalties for misuse of data by insurers or their agents are not specified in the Insurance Law. The Law on Data Protection does not specify the sanctions which apply to breaches of this Law, referring instead to the civil, administrative and criminal laws. Recommendation The exception noted in D.1 should be amended to ensure that the user of the data is bound by restrictions applying to the source of the data, including government sources. SECTON E DISPUTE RESOLUTION MECHANISMS Good Practice E.1 Internal Dispute Settlement a. An internal avenue for claim and dispute resolution practices within the insurer should be required by the supervisory agency. b. Insurers should designate employees to handle retail policyholder complaints. c. Insurers should inform their customers of the internal procedures on dispute resolution. d. The regulator or supervisor should provide oversight on whether insurers comply with their internal procedures on consumer protection rules. 93 Russian Federation Insurance Sector Description According to the Insurance Law, consumer disputes in Russia need to be handled through the courts or a mediation board (Arts. 21(4) and 35). There is no requirement that insurers set up internal dispute resolution mechanisms and most consumer complaints are referred to the territorial offices of FSIS or to the Russian Association of Motor Insurers. These bodies can only advise and apply suasion to the insurers involved, but have no resolution authority. Recommendation Insurers should be required to have internal and auditable dispute resolution and recording processes in place. Good Practice E.2 Formal Dispute Settlement Mechanisms a. An intermediate system should be in place that allows consumers to seek third party recourse before going to court. This could be an ombudsman or complaints and inquiries bureau. b. The role of an ombudsman or equivalent institution vis-à-vis consumer complaints should be in place and made known to the public. c. The ombudsman or equivalent institution should be impartial and independent from the appointing authority and industry. d. The enforcement mechanism of the decisions of the ombudsman or equivalent institution and the binding nature of the decision on insurers should be in place and publicized. Description No ADR system exists in practice for B2C insurance disputes. The FSIS (or ARIA or RAMI) can advise a complainant if they believe their case has merit but cannot resolve the matter. At best they can refer the individual to a consumer protection organization including an office of the Consumer Protection Service that can assist in taking a case to the relevant court. Survey data relating to securities indicate that only a small proportion of the Russian population is aware of the existence of financial sector supervisory bodies. Recommendation A formal ADR mechanism should be established to resolve smaller and straightforward disputes and inquiries. SECTION F GUARANTEE AND COMPENSATION SCHEMES Good Practice F.1 Guarantee Schemes and Insolvency a. With the exception of schemes covering mandatory insurances, guarantee schemes are not to be encouraged for insurance because of the opaque nature of the industry and the scope for moral hazard. Strong governance and supervision are better alternatives. b. Nominal defendant arrangements should be in place for mandatory insurances such as motor third party liability insurance. c. Assets covering life insurance mathematical reserves and investment contract policy liabilities should be segregated or at the very least earmarked, and long-term policyholders should have preferential access to such assets in the event of a winding- up. Description The only guarantee scheme in place covers compulsory motor third party insurance. This covers both nominal defendant situations (when the guilty driver cannot be identified) and insurer bankruptcy. This is administered by RAMI under an appropriate code of practice, including rules for allocating the costs to the 94 Russian Federation Insurance Sector relevant insurers. Recommendation No recommendation. SECTION G CONSUMER EDUCATION AND FINANCIAL LITERACY Good Practice G.1 Financial Education through the Media a. Print and broadcast media should be encouraged to actively cover issues related to retail financial products. b. Regulators and/or industry associations should provide sufficient information to the press and broadcast media to facilitate analysis of issues related to financial products and services. Description An active financial media is developing in Russia (Vedomisti, Ekspert) including a dedicated television outlet (RBC) with associated print media. Both the supervisor and industry associations are active in raising awareness of the sector and ongoing developments. Recommendation No recommendation. Good Practice G.2 Formal Consumer Dissemination and Assistance a. The government and regulators should put in place formal consumer information dissemination and assistance to improve consumer awareness and knowledge. b. The government should develop a strategy for including financial education as part of the general education curriculum. Description Under Art. 3 of the Consumer Protection Law, consumer protection information is required to be included in state education curricula. To date this does not in fact appear to have occurred in practice. Recommendation A national policy in the area of financial education with a strong consumer protection component is urgently needed. See Banking Section, Good Practice G.3 95 Russian Federation Insurance Sector 96 Russian Federation Private Pensions Sector Russian Federation: Consumer Protection in the Private Pensions Sector Introduction Russia recently reformed its state pension system. The labour pension was revised in part due to growing fiscal pressures and in part due to the need to generate a close link between contribution levels and final benefits. The system has seen a constant stream of adjustments (partly reflecting fiscal pressures) and benefits and contributions are subject to very complex rules with more than 50 applicable laws, regulations and decisions. The Russian pension system consists of two parts: (1) mandatory pensions and (2) voluntary supplementary pensions. All members of the working population are covered by mandatory pensions, which are funded by a payroll tax (the Unified Social Tax) and paid by employers. The mandatory pensions consist of: (1) a nominal flat payment (or demogrant), (2) a salary and service component insured by the state and (3) a funded component, whose benefits depend on the investment earnings of the contributions. Pension participants may choose the manager of the funded component. If no decision is taken, the funds are managed by the state asset management company (which is part of state-owned Vnesheconombank). However participants may instead switch to one of 126 privately-held non-state pension funds (NPFs) or one of 55 asset- management companies (AMCs).86 In addition, employees may choose to participate in voluntary pensions, which supplement the mandatory pensions. Voluntary pensions are provided through employers, which can sponsor investments in either group life insurance contracts, open NPFs or most commonly, individual employer-sponsored NPFs, which may be defined-benefit (DB) or defined-contribution (DC) plans. Total investments in privately managed pensions (either through the mandatory or voluntary pensions) remain relatively low. In the mandatory pension system, only 2.5 million participants had invested an estimated RUB 67 billion as of April 2009. Investments were higher under voluntary arrangements, with 6.75 million participants investing about RUB 463 billion. With a total working population of 65 million, fewer than 15 percent have invested funds under private management. Mandatory Pensions The Unified Social Tax is collected by the Ministry of Finance (taxation department) but is transferred to the Pension Fund of the Russian Federation (PFR). The PFR falls under the supervision of the Ministry for Health Care and Social Development. The PFR is responsible for allocating contributions and any accumulated investment earnings to individual accounts. It also makes pension payments for participants who have not opted into a NPF. For mandatory pensions, the investment options are limited. The state management may invest only in certain state guaranteed securities, although there have been recent moves to expand the range of approved investments. NPFs also have very limited investment authority (Art. 36.15 of the NPF Law). Rather than following an investment-linked approach, the system applies an annual crediting rate, thus rendering real time numbers irrelevant except at the year’s 86 Open NPFs are generally owned by banks or insurance companies but may also be employer-sponsored. AMCs may be owned by banks or insurers, or the related NPF, or may be independent. 97 Russian Federation Private Pensions Sector end, when statements are issued. The dramatic fall in asset values in late 2008 is testing this approach and is seen as the major issue currently facing the privately managed pension sector. The private sector players (National Association of Non-State Pension Funds and League of Asset Management Companies) intend to apply for a waiver on accounting rules so that asset values can be “smoothed” so as to avoid public concern. The funded component of the mandatory system has had a difficult genesis. The main difficulties it faced were: the number of initial participants of the funded mandatory pillar being significantly reduced for fiscal reasons (people born before 1967 were excluded); late production and posting of relevant documentation in the first year of operation; and the choice of relatively low, age-differentiated and phased-in contribution rates (the upper limit of which is six percent). In addition the education budget that was set aside to support the launch was not fully applied. Furthermore surveys (e.g. by Russian Centre of Public Opinion Studies) have demonstrated that a significant majority of the working population still do not understand their options to switch the manager of the funded component. Furthermore switching can be a complex process. The right to switch is explained on the back of the annual PFR statements sent to participants. However an application must be made through the PFR or an approved transfer agent. This agent may be an employer (for its own employees) or a licensed credit institution or a private pension fund. Transfer agents have formal agreements with the PFR and are required to act as conduits and factual advisors on the system. Switching is allowed once a year but can take up to 12 months to take effect. A number of AMCs and NPFs are operating below break-even in their pension business and are not sustainable in the medium-term. About 92 percent of eligible participants in the funded component have remained with the state asset manager, which has a very conservative investment policy. Given the financial turmoil of late 2008, this conservatism is likely to continue for a period. The situation is exacerbated by the fact the PFR has been consistently slow in transferring funds to NPFs and AMCs. As of October 2008, the contributions from 2007 had yet to be transferred, possibly reflecting cash flow constraints in the PFR. The market reaction has been lackluster: since the original tender, not one AMC has applied to join the system. Unfortunately the law does not contemplate mechanisms to facilitate consolidation of NPFs or AMCs (as opposed to liquidation or transfer to PFR). As a result, the achievement of an efficient industry structure is not as easily managed as it could be if the relevant supervisor had appropriate powers. In addition, NPFs lack sufficient governance arrangements to handle pensions. In principle, NPFs are stand-alone entities subject to trustee overview. However the trustees have little authority in practice (see Art. 3 of the NPF Law). One outcome of this turbulent and complex genesis is that despite the reform’s intentions, the current level of pension accumulation in Russia remains low. Russia currently has a state pension that is very modest for any person on a western income (one percent to two percent replacement rate), or even those at intermediate levels (25 percent to 30 percent replacement rate). For the foreseeable future an adequate retirement income for such people will have to be generated through voluntary supplementary funding arrangements. 98 Russian Federation Private Pensions Sector Voluntary Supplemental Pensions Voluntary pensions (i.e. supplemental pensions) have been in existence since the early 1990s but still remain small in terms of liabilities outstanding. The multinational pension benefits firm, Mercer, estimates that only six percent of surveyed multinationals and large local companies provided voluntary supplementary pension arrangements in 2003 although they expect that this will rise to 90 percent by 2011. Participants in voluntary pensions generally invest in NPF contracts. While there are approximately 238 voluntary-form NPFs operating, more than 80 percent of funds are in the top 10 largest pension funds, with approximately 50 percent held by the NPF sponsored by the state- controlled gas company, Gazprom. To date the insurance sector’s direct involvement in private pension provision has been very limited. The insurance industry is lobbying hard to introduce investment-linked contracts (which would remove the minimum investment return guarantees that have applied to date) and it is proposed that individuals will also be able to supplement mandatory pensions managed through the PFR. Some independent NPFs are establishing agency arrangements with banks. For example, the National Non-State Pension Fund and the Bank ZENIT recently signed an agreement whereby bank clients may select a private pension program and effect a pension agreement in a branch office. Voluntary-fund NPFs are required to guarantee zero losses on voluntary pension contracts in any given calendar year87. This means that the sponsor effectively assumes market and credit risk, leading in turn to overly conservative investment policies. The bulk of voluntary pensions are provided through occupational plans, some of which were established on a defined benefit basis. However there is a growing trend for these to be converted to defined contribution plans, as is happening in the U.S. and Western Europe, and for most new plans to be defined contribution arrangements. Any move to international accounting standards would probably hasten this process as companies would otherwise need to reflect any funding shortfalls in their balance sheets. Life insurance contracts and NPFs currently operate on an ETT tax basis88 for long term savings, subject to tax allowance caps (12 percent of payroll allowed to employer). This has created an anomaly in the system since funded mandatory pensions paid from the PFR are considered to be social pensions and are thus tax-free. This presumably means that NPF participants will have an incentive to switch back to the PFR as they approach retirement. Employer contributions to supplementary long term savings are subject to the Unified Social Tax (i.e. a payroll tax) and this is seen as a dampening factor on the development of supplementary pension arrangements. The supervisory authority for voluntary pensions (and privately-managed mandatory pensions) is the FFMS,89 which also supervises the securities sector. However voluntary fund NPF contracts are subject to balance sheet risks (rather than the consumer and operational risks that characterize securities) and have some of the characteristics of insurance contracts. NPFs are subject to regular actuarial overview, with full annual valuation reports being issued to the governing bodies and the FFMS. 87 This is clear for voluntary funds but less clear for mandatory funds – which have the benefit of a state guarantee. 88 ETT corresponds to the following cash-flow treatment of pensions under personal income tax: pension contributions are tax-exempt (E), capital incomes of pension funds are taxed (T), and pension benefits are taxed (T). A tax-free roll- up rate is allowed before investment returns are taxed. 89 The FFMS also has reporting responsibilities to the PFR for mandatory pensions. 99 Russian Federation Private Pensions Sector Sales and business practices of NPFs and AMCs should also be strengthened. Intermediaries (including bank staff) should be required to be registered and appropriately trained if they are selling individual voluntary pension contracts. Cooling-off periods on voluntary pension funds would reduce the incentive for aggressive marketing practices. Furthermore consumers should be able to easily compare offers by different NPFs and AMCs. There is no generally used information system available so that pension participants may compare asset managers, although this was intended to be a part of the launch in 2004 (through Interfax). An online service (Investfund.ru) is available but is little known by the general public. The first open NPF annuities are due to be issued in 2013 but participants lack sufficient information to make informed decisions. Although payouts will begin in less than five years, no rules or regulations have been set to ensure that participants receive the information needed to make decisions suitable for their needs and priorities. In particular it is not clear what longevity and reinvestment guarantees are being offered de facto by NPFs—although all NPFs are required to establish special longevity reserves from participants' funds. Admittedly given the recent trends of mortality in Russia particularly of males (and possibly high volatility in mortality levels), any longevity guarantee is in practice extremely difficult to price. Payout arrangements for voluntary pensions tend to be opaque across the board and offer few if any guarantees. Questions about payout options are also the major source of pension complaints received by the FFMS. Consistent regulations on investment criteria are also needed. A standardized set of investment rules reflecting investment opportunities and appropriate risk/ return trade-offs is needed. Rules for privately-managed funds are set by Decision No. 63 issued in February 2007, allowing the funds to invest up to 30 percent of reserves in the securities of OECD countries. However the rules are different for state-managed funds. Banks and insurers are still not permitted to directly manage approved pension funds —but should be. This is a potential source of market inefficiency and a source of increased risk where capital and longevity guarantees are involved, as only insurers tend to have relevant formal risk based solvency requirements. Greater emphasis should be placed on data privacy. A consumer should be made aware if he or she is signing a data processing waiver, preferably in a key facts page attached to a pension proposal and contract. It also should be made clear in the law that the data protection and confidentiality provisions apply to all the entities participating in the pensions system. Dispute resolution systems should also be improved. The law requires that NPFs establish (and publish) procedures by which participants can submit disputes but the procedure is not specified. In practice the disclosure usually advises the consumer to go to the NPF’s website, which may not include detailed instructions on how to submit a complaint. In addition, the FFMS is required to consider complaints and petitions of individuals and firms arising from perceived breaches of the law. In practice, the main recourse of FFMS on behalf of aggrieved participants is to undertake lawsuits. Financial education should also be a priority in pensions. Total privately managed assets in the mandatory supplementary pension sector are still modest but they have the potential to grow rapidly if the population is properly educated and under competitive pressures in skilled labor markets—and sufficient consumer protection provisions put in place. 100 Russian Federation Private Pensions Sector Legal Framework and Institutional Arrangements There are three main entities involved in the supervision and governance of the privately managed pension system. These institutions are the PFR, the FFMS and the National Association of Non-State Pension Funds, which covers more than 90 percent of funds and 80 percent of participants. Standards set by the Association are binding on non participants. There are more than 50 laws, regulations and proposed regulations covering funded pensions, reflecting the highly politicized nature of the pension sector. The main statutes and regulations are: – Law on Individualized (Personalized) Record - Keeping in the System of Obligatory Pension Insurance: Federal Law No. 27-FZ of April 1, 1996 – Law on Non State Pension Funds: Federal Law No. 75-FZ of May 7, 1998 (as amended) – Law on Mandatory Pension Insurance in the Russian Federation: Federal Law No. 167-FZ of December 15, 2001 (as amended) – Law on Labor Pensions in the Russian Federation: Federal Law No. 173–FZ of December 17, 2001 – Law on Investment of Funds for Financing the Funded Part of Labor Pensions in the Russian Federation: Federal Law No. 111-FZ of July 24, 2002 (as amended) – Law on Modification of the Federal Law “About Investment Funds” and Separate Acts of the Russian Federation (Art. 2): Federal Law No. 334–FZ – Decision on the Procedure for Non State Pension Funds Making agreements with Depositories and on the Peculiarities of Activities of the Depositories Servicing Non-State Pension Funds: Decision No. 383 of April 28, 2000 – Decision on an Authorized Federal Executive Body Responsible for Public Regulation of the Activities of Non State Pension Funds for Non State Pension Provision, Mandatory Pension Insurance, and Occupational Pension Insurance and Monitoring the Activity: Decision No. 669 of November 4, 2003 – Decision on Rules for the Notification by the Non – governmental Pension Fund effecting Compulsory Pension Insurance of the Ministry of Labor and Social Development of the Russian duration and the Pension Fund of the Russian Federation about Newly concluded Contracts of Compulsory Pension Insurance: Decision No. 798 of December 30, 2003 (as amended) – Decision on Rules for the Placement of Means from the Pension Reserves of Non- government Funds and for Controlling their Placement: Decision No. 63 of February 1, 2007 Key Recommendations The Review’s key recommendations are the following: – The financial structure of NPFs should be made more robust. This could be made by establishing risk-based capital requirements (that would in turn modify investment policies). 101 Russian Federation Private Pensions Sector – The Russian public should be properly educated as to the workings of the supplementary pension system. This education should include information on the risks and returns available. – Alternative dispute arrangements should be made available to pension fund participants. This could be initially handled through the industry body subject to adequate independence and governance, possibly working with one of the official entities with a strong territorial presence. – Pension fund managers should be required to have specific internal dispute resolution processes in place. These processes should be communicated to participants. – Individuals selling or advising on voluntary private pension funds should be formally trained. Their knowledge should be examined, and then they should be registered. – The nature of annuities provided by NPFs should be disclosed to participants at the time they enter the fund. Ideally annuities would be provided by specialized insurers or by the PFR solidarity fund (which could solve certain tax anomalies) and the range of options should be small and transparent. – FFMS and FSIS could enhance their cooperation under the private pension and investment- linked life insurance headings. – NPFs should have a higher level of seniority than unsecured creditors in the event of a bank failure. – Fund managers should be required to provide more frequent reporting to participants for both mandatory and voluntary pensions. This reporting should be more timely than is presently specified. Costs could be reduced by providing on-line information. – Other requirements that apply to mandatory pensions should also apply to voluntary contracts, such as simplified language. – The industry bodies should begin to jointly work on a broad, standards-based, code of conduct. – Cooling-off periods should apply to voluntary individual pensions. 102 Russian Federation Private Pensions Sector Good Practices: Private Pensions Sector Note: Unless otherwise stated all references to articles in a law refer to the Federal Law on Non- State Pensions Funds No. 75-FZ of May 7, 1998 (as amended up to December 6, 2007) SECTION A CONSUMER PROTECTION INSTITUTIONS Good Practice A.1 Legal System The legal system should recognize and provide for clear rules on consumer protection in the area of private pensions and there should be adequate institutional arrangements for implementation and enforcement of consumer protection rules. a. There should be specific legal provisions in the law which creates an effective regime for the protection of consumers who deal with pension entities. b. There should be a general consumer agency or specialized agency, responsible for implementing, overseeing, enforcing consumer protection, and data collection and analysis (including complaints, disputes and inquiries). c. The legal system should provide for a role for the private sector, including voluntary consumer protection organizations and self- regulatory organizations. Description The privately managed funded pension system is still evolving. Different institutional structures apply according to whether the pension fund is voluntary or mandatory and whether it is managed through the PFR or an NPF or an insurance company. However in all cases the assets are deemed to be the property of the managing institution and the participant is seen as holding a contract for delivery of defined services. The main law relevant to this diagnostic is the Law on Non – State Pension Funds, which covers the interface between fund participants and annuitants and NPFs. This lays out the general rules under which the private market operates (for example an individual may only hold one mandatory pension account at any one time) Overall responsibility for the financial aspects of the mandatory funded pension arrangements - including selection of specialized depositories and approved asset management companies - rests with the Ministry of Finance (MOF), although FFMS retains authority for enforcement of investment regulations. The key supervisory body for NPFs and asset management companies is the securities supervisor, the Federal Financial Markets Service (FFMS). FFMS has a territorial network of more than 80 offices and is probably best suited to this role, although FSIS has stronger actuarial skills and could perhaps play a joint role with defined benefit plans and voluntary pensions written through NPFs where the zero return guarantee applies. Unfortunately the sanctions available to the FFMS are limited: for example to remove a license the service has to seek a court order. The supervisory authority (FFMS) is authorized to take court action on behalf of the Russian Federation against private pension fund managers. There is no provision for non-governmental consumer organizations to act on behalf of pension fund participants, although all Russians have recourse to the 103 Russian Federation Private Pensions Sector courts (see Insurance section). Non commercial actions involving individuals (real persons) are handled by the Courts of General Jurisdiction. Below a value threshold (200 times the monthly minimum wage) actions are handled by special regional or state courts ruled over by Justices of the Peace who have full judicial status. At present these state courts appear to supplant the ADR mechanisms that would be found in some industrial countries. A Code of Ethics for the private entities operating in the pension system has been promulgated by the FFMS. Such a code is required under Art. 36.2 for firms managing mandatory pension funds, although it refers purely to the requirements of the NPF Law. Art. 36.25 further specifies that a model professional ethics code endorsed by the Government is to be adopted. The industry body (National Association of Non-State Pension Funds) sees a need for a broader code, based on agreed standards, to emerge from the industry itself once a greater degree of maturity is attained. Laws covering the use of personal information and information systems (Personal Data; Information, Information Technology and Protection of Information, 2006) and advertising (Advertising, 2006) have been passed. Recommendation The enhanced consumer protection requirements for mandatory pensions should apply to voluntary pensions. An ADR mechanism should be available for retail financial services. An industry-based Code of Business Behaviour should be developed covering consumer protection issues, including disclosure at point of sale and recourse mechanisms. Good Practice A.2 Other Institutional arrangements a. The judicial system should provide credibility to the enforcement of the rules on consumer protection. b. The media and consumer associations should play an active role in promoting consumer protection. Description The courts have had very little involvement in the Russian pension system to date. Most voluntary pensions are employer-based, obligatory pensions are subject to well defined rules and the retail individual pension market is only at a nascent stage of development. Russian print and on-line media has been prepared to run stories relating to financial sector consumer matters. However there is generally little knowledge of and trust in the private pension sector, with the great majority of pensioners opting to stay with the PRF and the state management company. There is an effective umbrella consumer organization (KonfOP), originally established to assist in the drafting of the Consumer Protection Law. Its primary role continues to be policy and advocacy, and it believes that the financial sector comes under its mandate. Recommendation See Good Practice A.1 SECTION B DISCLOSURE & SALES PRACTICES Good Practice B.1 Disclosure principles cover the consumer’s relationship with the pension entity in all three stages of such relationships: pre-sale, point of sale, and post sale. The nature, clarity and information available and provided to the consumer need to inform the consumer of choice of accounts products and services. 104 Russian Federation Private Pensions Sector Description The stages of the pension value chain where sales practices have been applied in practice are the (industrial) marketing of employer-based voluntary pension funds and the beginnings of a voluntary individual pension sector, with NPFs forming partnerships with retail banks. Retail sales of voluntary pensions are still at a nascent stage with approximately 50 out of 450 NPFs focusing on this market. Retail marketing/ sales to participants of the mandatory (second pillar) funded system with a view to their switching to privately managed arrangements is theoretically illegal (se B.4.), although there is potential for this to happen through the Transfer Agent system at the individual operative level (e.g. HR managers). There is no generally used information system available to Russian workers in order that they may compare asset managers, although this was intended to be a part of the launch in 2004 (through Interfax). An online service (Investfund.ru) is available but is little known by the general public. Art. 35.3 covers the broad disclosure rules that a fund must adopt. These require that the prospective consumer is warned that returns can be volatile, and that they should study the fund statutes and rules before committing. There are no disclosure rules about the annuitization of NPF voluntary accumulations and a wide range of different practices have emerged, many of which remain opaque to plan participants. This is the major source of complaints received by FFMS. Recommendation Rules should be developed to cover point-of-sale practices for retail sales of voluntary pensions (also see requirements under B.3) and annuities should be the subject of specific structural and disclosure requirements under the NPF Law. Possibly the annuitization stage for all pension funds should be handled by specially licensed insurance companies or the PFR solidarity fund. Good Practice B.2 Formal Product Disclosure a. There should be clear rules on solicitation and issuance of pension products. b. Pension entities should ensure their advertising and sales materials and procedures do not mislead the customers. c. The pension entity should be legally responsible for all statements made in marketing and sales materials related to their products. d. All marketing and sales materials should be easily readable and understandable by the average public. e. A key-facts document should be presented by the pension entity before the employee signs a contract, disclosing the key factors of the pension scheme and its services. Description Art. 35.1 lays out the detailed information that must be provided from time to time according to the requirements of the FFMS. In practice this is an annual requirement, although certain information is required quarterly (as specified by the Government for mandatory funds under article 36.2). The information consists of: a. Details of the Fund, its management company and its custodian. b. Balance sheet, Profit and loss statement, and audit and actuarial opinions. c. Investment returns. d. Allocation of funds to operating expenses e. Aggregate information regarding participants and annuitants (pensioners). f. Asset (reserve, etc.) accumulations g. Any contractual changes with managers or custodians. 105 Russian Federation Private Pensions Sector Under Art. 35.2 a fund is obliged to supply upon request its statutes and the rules relating to all the forms of pension it services: its balance sheet, profit and loss statement, audit and actuarial opinions as of the last reporting date; the names of the management company(ies) and custodian; forms of contract for each pension scheme managed; other materials required by the law, statutes and rules. Art. 35.3 requires that all information disclosed must be fair, complete and accurate and sustainable in writing; must not claim state endorsement; and must not project past results into the future. The FFMS has the right to demand refutation of promotional material and to prohibit the dissemination of information not complying with the law and regulations. Art 36.4 requires that for mandatory funds “contracts … shall be concluded in a simple form in writing”. In addition, no NPF engaging in mandatory fund management may refuse an application to join that fund. NPFs are required to set up Internet sites containing their business name in the domain name. Recommendation No recommendation. Good Practice B.3 Special Disclosures a. Pension entities should disclose information relating to the products they offer including, investment options, risk and benefits, fees and charges, restrictions on transfers, fraud protection over accounts, fee on closure of account. b. Clients should also be provided with meaningful, written information on essential terms of the agreement with the pension entity c. Information on planned fee changes should be notified to the consumer a “reasonable period” before the date of change. d. Pension entities should inform upfront the nature of any guarantee arrangements covering the pension products. e. Customers should be informed upfront on the time, manner and process of disputing information on the statements and transactions. Description See Good Practice B.6 Recommendation See Good Practices B.6 and B.1 Good Practice B.4 Selling Pension Products a. Marketing personnel and officers selling and approving transactions should have sufficient qualifications and competence, depending on the complexities of the products they sell. b. Pension entities should examine important characteristics of the customer such as their age and financial position before recommending a particular pension product. Description Privately managed mandatory funds can only be accessed through a transfer agent registered with the PFR. The process involves the participant signing a contract with a private fund manager (AMC or NPF) and then applying to the PFR for the transfer of funds (and administration if relevant) through a registered transfer agent. No commissioned intermediary is supposed to be involved in this process (Art. 36.27). The PFR has been slow in transferring funds to the private system and in practice it appears that there is no clear statement in the law requiring transfers to occur within a defined time frame. 106 Russian Federation Private Pensions Sector There appear to be no rules regarding intermediary qualifications for non-state pension funds. Recommendation Intermediaries (including bank staff) should be required to be registered and appropriately trained if they are selling individual voluntary pension contracts. The law should be changed to require the PFR to transfer funds to the private AMCs and NPFs designated by Russian workers within a defined time frame. Good Practice B.5 Disclosure by the Pension Entity a. All pension entities should disclose information regarding their financial position and profit performance. b. Regulator or supervisor should publish annual public reports on the developments in, health of, and strength of the pensions industry either as special report or as part of their disclosure and accountability requirement under the law governing it. Description Reporting by funds is covered under Art. 32.1. This specifies that the reporting year is the calendar year. The actuarial valuation of liabilities is carried out at the end of the reporting year and forms an “integral” part of the NPF’s annual report. All reports have to be submitted to FFMS electronically. Under Art. 34 the FFMS is required to “publish in the mass media data on the formation of, and financial results of, the growth of pension reserves and savings” according to rules established by the Government. In practice FFMS maintains a comprehensive website and updates summary pension data quarterly. Recommendation No recommendation. Good Practice B.6 Contracts There should be consistent contracts for pension products and the contents of a contract should be read by the customer or explained to the customer before it is signed. There should be a cooling-off period associated with any voluntary pension product. Description The contents of contracts (agreements) are covered under Art. 12. Obligatory and voluntary pensions managed by an NPF must adopt the standard terms specified in the relevant law. All pension agreements must contain the following: a. Names of the parties to the agreement b. The nature of the agreement c. Rules on rights and obligations d. Rules regarding contribution payments e. The nature of the pension scheme f. The rules under which a pension becomes payable g. Rules on the payment of non state pensions h. Rules covering default under the parties obligations i. The term of the agreement j. Rules for amending or rescinding the agreement k. Rules for resolving disputes l. Relevant details of the parties to the agreement Agreements for mandatory funds are required to be in line with a model agreement endorsed by the Government. There is no cooling-off period specified for individual voluntary pension contracts entered into with an open NPF. Recommendation Cooling-off periods should apply to individual voluntary pension sales. 107 Russian Federation Private Pensions Sector SECTION C CUSTOMER ACCOUNT HANDLING AND MAINTENANCE Good Practice C.1 Statements a. Timely delivery of periodic statements and alerts pertaining to the accounts and at frequencies and in the form agreed between the customer and pension entity, are important. b. The customer should receive a regular streamlined statement for his or her account that provides the complete details of account activity in an easy-to-read format, making reconciliation easy. c. Customers should have a means to dispute the accuracy of the transactions recorded in the statement within a stipulated period. d. When customers sign up for paperless statements, the pension entity should ensure that the consumer is able to read and understand such online statements. Description In addition to allocating contributions the PFR is responsible for distributing switching documents annually, advising relevant participants of the termination of an asset manager, annually advising of contributions paid for each participant of the mandatory system and of overall investment results (the latter through the mass media in the early stages). All employed persons receive insurance certificates with identification numbers and these perform the role of master identifiers for the system as a whole. Under Art. 8 a fund is obliged to carry out a range of functions, including: a. Keeping accounts and informing depositors and participants (if different) of the state of said accounts b. Taking measures to ensure the “complete and timely” payment of contributions c. Provide information according to rules established by the FFMS. Under Art. 14 a fund is obliged to provide depositors and participants, at least annually, with “information on the state of their pension accounts”. Art.36.2 elaborates on this for mandatory funds and specifies that statements showing investment results should be sent by September 1 st at the latest. These statements are colloquially known as “letters of happiness”. Art. 36.14 lays out the duties of a third party management company. These include acting purely in the interests of the “insured person” (in terms of investments this means allowing for security, liquidity, profitability and diversification), setting up depository arrangements, establishing relevant separate bank accounts with complying credit organizations, adopting and complying with a professional ethics code, valuing assets daily, and reporting to the fund and FFMS according to the management agreement. Recommendation No recommendation. SECTION D PRIVACY & DATA PROTECTION Good Practice D.1 Confidentiality and Security of Customer’s Information Customers of pension entities have a right to expect that their financial activities will have privacy from federal government scrutiny and others. The law should require pension entities to ensure that they protect the confidentiality and security of customer’s information against any anticipated threats or hazards to the security or integrity of such information; and against unauthorized access to, or use of, customer 108 Russian Federation Private Pensions Sector information that could result in substantial harm or inconvenience to any customer. Description Art. 15 states that a fund “shall not be entitled to provide confidential data to third persons, save for the legal successors of participants and insured persons thereof, and organizations which under an agreement are engaged in keeping pension accounts, if such organizations are mentioned in the Fund’s rules”. More generally, privacy is guaranteed under a wide range of Russian statutes including the Constitution (Art. 23), the Criminal Code and the Administrative Code. The general laws covering data protection are the Law on Personal data (2006), the Law on Information, Information Technologies and Protection of information (2006) and the Labor Code. Under the Labor Code employers are forbidden to disclose employees’ personal data to third parties for commercial purposes without obtaining the prior written consent of the employee concerned. The Law on Personal Data is comprehensive and is discussed in the insurance section. The Law on Information, Information Technologies and Protection of Information delegates most provisions regarding personal information to the Law on Personal Data. However under Art. 9(8) it is illegal to demand private information from an individual unless that information flow is envisaged by the Federal Law of Russia. Under Art. 16(4) the holder of information is subject to a series of requirements including prevention of unauthorized access, detection of unauthorized access and overall monitoring of the level of protection of information. Art. 17 confirms that individuals may take action in the courts for the “judicial protection of their rights” including seeking damages. The Law on Personal Data specifies that data protection standards are to be set by the Government of Russia and that the federal executive body responsible for the protection of the rights of individuals regarding personal databases shall be operating in the “sphere of technologies and communications”. In practice this would appear to mean the newly merged communications and mass media supervisor. Databases are required to be compliant with the law by 2010. Recommendation Consumers should be made aware if he or she is signing a data processing waiver in a key facts page attached to an insurance proposal and contract. It should be made clear in the law that the data protection and confidentiality provisions apply to all the entities participating in the pensions system. Good Practice D.2 Sharing Customer’s Information a. Pension entities should inform the consumer of third party dealings for which the pension entity must share information regarding the consumers account. b. Pension entities should explain how they use and share customers personal information and they should be committed not to sell or share account or personal information to outside companies that are not affiliated with the pension entity for the purpose of telemarketing or direct mail marketing. c. The law should allow a customer to stop or "opt out" of certain information sharing and the pension entities should inform the customers of their option. d. The law should prohibit the disclosure of information of customers by third parties. Description Article 15 also extends the privacy rules applying to an NPF to third parties with 109 Russian Federation Private Pensions Sector which the Fund has service supply agreements (e.g. asset managers and third party administrators). The Law on Personal Data requires a formal opt-in for data sharing and has provisions for revoking any authorities to share data that have been granted. Under Art. 18(3) of the Law on Personal Data, private data not received directly from the individual cannot be processed unless the individual concerned is provided with details of the entity using the data and their legal rights regarding the disposition of that data. This should apply to banks and (potentially) other entities with large retail client bases appointed as fund agents that could engage in switching activity. Recommendation No recommendation. Good Practice D.3 Permitted Disclosures a. The law should state specific procedures and exceptions concerning the release of customer financial records to government authorities. b. The law should provide for penalties for breach of secrecy laws. Description Art. 15 states that “such information may be passed to third persons solely upon the request of investigative, judicial and tax bodies, as well as of the authorized Federal body (the FFMS), in the instances established by the laws of the Russian Federation”. The Law on Personal Data also specifies exceptions under which private data may be processed without the permission of the individual concerned. These include cases where data is released to official entities. Most of these exceptions appear to be reasonable. However there is one exception which appears to offer a loophole for purveyors of data (Art. 6(6)). This exception applies when “data processing is effected for purposes of professional journalist activity or for purposes of scientific, literary or other creative activity provided that in doing so no violation is committed of the rights and freedoms of the subject of personal data”. Recommendation The exception noted above should be amended to ensure that the user of the data is bound by restrictions applying to the source of the data, including government sources. SECTON E DISPUTE RESOLUTION MECHANISMS Good Practice E.1 Internal Dispute Settlement a. An internal avenue for claim and dispute resolution practices within the pension entity should be required by the supervisory agency. b. Pension entities should provide designated employees available to consumers for inquiries and complaints. c. The pension entity should inform its customers of the internal procedures on dispute resolution. d. The regulator or supervisor should provide oversight on whether pension entities comply with their internal procedures on consumer protection rules. Description Under Art. 12 the pension agreement (normally entered into with an employer but possibly also with an individual under the obligatory system) must disclose the procedures for resolving disputes. However the nature of this procedure is not specified and in practice the disclosure normally advises to go to the NPF ’s 110 Russian Federation Private Pensions Sector website, which often does not include detailed recourse instructions. Law No. 334 requires that all NPFs establish internal control systems including steps to handle and record complaints. FFMS issued the relevant draft rules in mid 2008 and these were in process of being registered as of October 2008. Recommendation Require specific internal complaints processes in pension fund managers, and ensure that these are properly communicated to fund participants. Good Practice E.2 Formal Dispute Mechanisms A system should be in place that allows consumers to seek third party recourse in the event they cannot resolve an issue with the pension entity. Description Under Art. 34 the FFMS is required to consider complaints and petitions of individuals and firms (legal entities) arising from perceived breaches of the relevant law. While they may apply administrative sanctions for systemic breaches (including closing the fund to new business), in practice the FFMS’ main recourse on behalf of aggrieved plan participants is to undertake lawsuits. Recommendation Appropriate ADR mechanisms for retail financial services should be implemented, ideally using an established infrastructure with adequate territorial presence. Alternatively the industry body could establish a process, with suitable governance and independence, to handle pension complaints. SECTION F GUARANTEE, COMPENSATION SCHEMES AND SAFETY PROVISIONS Good Practice F.1 Guarantee and compensation schemes are less common in the pensions sector than in banking and insurance. There are more likely to be broader fiduciary duties and custodian arrangements to ensure the safety of assets. a. There should be a basic requirement in the law that pension entities must seek to safeguard pension fund assets. b. There should be adequate depository or custodian arrangements in place to ensure that assets are safeguarded. Description Funds are strictly prohibited under Art. 14(2) from giving or accepting guarantees or accepting other potential liabilities not associated with its fund management activities or to pledge assets or set up subsidiaries or issue securities. NPFs rank 5th (including after the relevant depository) in any winding-up of a bank in which they hold deposits. Funds are required to maintain stability reserves (called insurance reserves) in respect of voluntary pension business. The basis of these reserves is established by FFMS. In addition each fund must be reviewed by an independent actuary at least annually. Governmental guarantee arrangements are not in place and the system relies on the sponsors of individual funds subscribing minimum initial capital of RUB 30 million, which is only recoverable through fees. However the law contemplates groups of funds voluntarily setting up guarantee arrangements (Art. 23). Two NPFs set up a joint arrangement some time ago and the industry association is currently examining options to extend this concept. All pension-related cash flows are processed through separately identified bank accounts (according to their nature) and pension fund assets are held by approved depositories with which asset managers interact on a daily basis. All accounts managed by the PFR are handled by one depository selected by tender. Depositories are required to advise MOF and FFMS of any irregularities. NPFs are 111 Russian Federation Private Pensions Sector required to work with one authorised (special) depository [which must not be an associated company]. NPFs and special depositories are subject to annual independent audit and the PFR is audited by the state auditor. Asset managers and special depositories are required to hold professional indemnity insurance underwritten by approved insurers (in fact 2 insurance pools have been established for this purpose). Recommendation Establish guarantee arrangements only once the system has matured and strong supervisory oversight and governance is in place. In the interim NPFs should rank higher as creditors if a bank in which they have deposits should fail. SECTION G CONSUMER EDUCATION & FINANCIAL LITERACY Good Practice G.1 Financial Education through the Media a. Press should be encouraged to actively cover issues related to retail financial products. b. Regulators and/or industry association should provide sufficient information to the press to facilitate analysis of related issues. Description An active financial media is developing in Russia (Vedomisti, Ekspert) including a dedicated television outlet (RBC) with associated print media. However there appears to be a general mistrust of private sector financial mechanisms in Russia and this will not have been helped by recent market turmoil. Recommendation No recommendation Good Practice G.2 Formal Consumer Dissemination and Assistance a. The government and regulators should put in place formal consumer information dissemination and assistance to improve consumer awareness and knowledge. b. Public education on consumer awareness in the area of pensions by non governmental organization should be encouraged. c. The government should develop a strategy for including financial education as part of the general education curriculum. Description Some NPFs have an educational element in their advertising. The World Bank’s Social Protection sector is working with the FFMS to develop a consumer literacy program, with a particular emphasis on long term financial planning. Recommendation A national policy in the area of financial education with a strong consumer protection component is urgently needed. See Banking Section, Good Practice G.3 112 Russian Federation Credit Reporting System Russian Federation: Consumer Protection in the Credit Reporting System Introduction Credit reporting is a highly concentrated industry and at the same time a rapidly expanding business in Russia. As of June 2008, the State Register of Credit Bureaus at the Federal Financial Markets Service (FFMS) had registered 31 credit bureaus. The industry is highly concentrated: the five largest players in the field store 95 percent of all credit histories available to the financial services industry in Russia.90 The other credit bureaus are small and distributed across regions, some of which hold less than one hundred thousand credit reports. Russian legislation enabled two major banks in Russia to establish their own credit bureaus, which are not accessible for other financial institutions (so-called “pocket bureaus”) and are therefore not subject to competition. Since many consumers conduct operations in multiple banks, not all of them are “locked-in” because their credit report is not accessible to other lenders. Russia is likely to develop a mid-sized credit reporting system as has occurred in some other European countries. Once the credit reporting market matures, the size of the bankable population will reach an estimated 50-60 million persons (whereas the total population of Russia is currently some 140 million persons). This bankable population would warrant a mid-sized credit reporting system. For the time being, however, the bureaus that operate in Russia have not reached half of the estimated total coverage. Some of the market players have only operated for 2 years with “hit rates” varying from 30-60 percent. Full coverage is likely to be reached soon and indeed in one or two years the system may store a credit file on every credit-active Russian. Since the effective date of the Law on Credit Histories (1 September 2005), all banks must send credit reports to at least one credit bureau. The number of credit headers in the credit reporting system has significantly increased since 2006. The CBR reports statistics on credit headers based upon information from the Central Catalogue of Credit Histories (CCCH). CCCH is a catalogue that helps consumers locate their credit report in any credit bureau. Credit bureaus began to furnish information to the CCCH in March 2006. In April of the same year the number of headers reached over one million and it has progressively increased since then (see Table 21). More than 99.6 percent of the total number of credit reports corresponds to individuals. Further, the CBR reports that in 2007, the CCCH received and processed more than 275,000 inquiries (an approximate increase of 50 percent relative to 2006), of which 215,000 were associated with location of credit reports and 60,000 with creation, change and cancellation of credit report codes. The CBR states that there is good cooperation with the credit bureaus’ supervisor (FFMS). Once bureaus are registered, they can be linked directly to the CCCH. The CCCH section of the CBR website is constantly updated with answers provided to frequently asked questions about the system. Despite increasing formalization of data sources in banks’ risk-management practices, there is still an active black market of personal information on individuals. Russia has made strides to reduce the volume of information traded on the black market for personal information. One of the main steps has been the adoption of the Law on Personal Data, but the extensive period of implementation might hamper effective enforcement. Banks and other financial institutions are 90 These credit bureaus are the National Bureau of Credit Histories (NBCH), BCH Experian-Interfax, Global Payments Credit Services (GPCS), BCH Infocredit, Russian Standard. Foreign players that invested in Russia include Experian (BCH Experian-Interfax) and TransUnion/CRIF (NBCH) as well as Equifax (GPCS). 113 Russian Federation Credit Reporting System now more hesitant to use information from informal sources than was the case a few years ago, but the black market is still active. Table 21: Number of Credit Headers in the Central Catalogue of Credit Histories Mar-06 Apr-06 Jul-06 Oct-06 Jan-07 Dec-07 Number of Credit Headers (millions) 0 1 7 10 14 35 Source: CBR, 2006 Annual Report and 2007 Banking Supervision Report Highly personal data – ranging from police, telecom to passport data – is peddled on the black market. Personal data is peddled on websites and in CD-ROMs in street markets. The databases include passport details, road police records, credit card data, debtor lists, tax records, telecom and transportation data, as well as car registrations. The information can be used to compile highly intrusive personal profiles. Such data trade at prices ranging from RUB 1,000 to 5,000. Some of these databases contain personal information on more than 4.5 million persons. Risk-management practices of banks and other financial institutions ought to be effectively modernized. Some banks still use Security Departments that compile information from informal sources or “security agencies” which aggregate such data. This obsolete practice is widespread in the financial services industry. The black market trade has led to requests from banks – the primary clients of credit bureaus – to link up to systems such as the Federal Migration Service and Russian Federal Road Safety Service (traffic police), and other public sources. Profiles aggregated from informal sources are typically not disclosed to consumers (this is an industry practice as well). Transparency in sharing of personal information is a necessary pre-condition for consumer protection. The intended creation of a data sharing system that links up public and private databases risks creating a non-transparent and secretive information sharing structure with considerable privacy risks for individuals. This is especially the case if data are compiled from sources that remain hidden and inaccessible for the consumer and that are of unknown and untested quality. Further, this information sharing risk that information stored for specified and legitimate purposes will be used for other incompatible purposes (Council of Europe (COE) Convention No. 108, Art. 5(b)). The centralization through the CCCH of the CBR only partially increases transparency. The Russian credit reporting system is not transparent for consumers, and out-of-court recourse mechanisms are not well developed. Essentially, the Russian credit reporting system remains non-transparent for consumers. Considering that it will soon affect the lives of some 50 to 60 million Russians, the government should consider steps to increase the transparency of the system. Greater transparency is fundamental to creating a credit reporting system that increases efficiency in financial markets. The increased efficiency in turn will positively contribute to the government’s objective of turning Moscow into an international financial center similar to New York, London or Dubai. Consumers are rarely informed about information sharing practices and are generally unaware of their legal rights. Essentially, consumers are not informed of data sharing practices by banks or other lenders at the point of sale, and typically do not know what rights they have in respect of this information. Furthermore, there is no centralized industry association, no ombudsman and no code of conduct that deals with these matters. Credit bureaus are hesitant to deal directly with consumers on many occasions because they are currently in the process of 114 Russian Federation Credit Reporting System building their systems and seek to avoid additional costs of doing business. As the industry matures, consumer protection requirements should be successively increased as credit reporting will affect the daily life of more and more Russians. Legal Framework The main statute that regulates credit reporting is the Law on Credit Histories. The Law on Credit Histories (Federal Law No. 218-FZ of December 30, 2004 as amended) has created greater legal certainty for the operations of credit bureaus in Russia. Their supervision has been delegated to the FFMS, which already conducts audits under the law. The Law covers the relationships between the participants of the credit reporting system, and regulates several topics such as the content of credit reports, transfers of personal data to the credit bureau, issuance of credit reports, storage and protection of information, rights of data subjects, rights and obligations of credit bureaus, among others. The Law also established the CCCH located at the CBR. The law indicates the information items that are allowed to be included in a credit report. By Art. 4 of the Law on Credit Histories, this information encompasses: identifiers; outstanding amounts of loans; repayment dates and amounts, including interest and penalties; as well as facts on whether courts have considered a dispute. Furthermore, a credit report contains the source of data provided, and who has used the report. A bank must submit information to at least one credit bureau, but may sign contracts with several of them. The latter practice is increasingly the trend in Russia. General consent provisions are essentially not making the credit reporting system more transparent. The Law on Credit Histories requires consent clauses to be applied: a reporting institution may only send or receive information to/from the credit bureau with the written consent of the data subject. Consent given by a consumer simultaneously involves consent for all other transactions that the credit bureau conducts with third parties “in accordance with the law” (Art. 5). The consent clauses used, however, do not adequately inform the consumer about the information sharing practices. Typically, they are very general. For instance, they may state that the consumer allows the bank to receive the report from “some or every credit history bureau.” Sometimes banks explain to consumers that they may contact the CCCH to locate their credit report; however, this is not an obligation. The consumer typically neither knows what credit bureau receives/discloses the information nor what other transactions are conducted with the data. The law also lays down what consumer protection rights exist as discussed below, as well as applicable supervisory functions. Under the law, credit bureaus can currently provide credit reports only for a narrow range of purposes. The law states the only purposes for which credit information can be collected. At present there are two types of reporting institutions: entities that extend credit (primarily banks) and telecom providers (post-paid services). Credit bureaus can provide scoring and risk rating services, identity verification and fraud services, as well as portfolio monitoring and consultancy. However, they are not allowed to conduct marketing with the information they receive, or to provide services to the insurance industry or other potentially interested parties. The law obliges credit bureaus to register with the “State Register of Credit Bureaus” which is accessible at the FFMS website.91 Registrations may be rejected in certain circumstances, such as in the event that one shareholder holds more than 50 percent of the equity in the bureau. 91 By June 2008, the register was available at http://www.fcsm.ru/catalog.asp?ob_no=24284&print=1 115 Russian Federation Credit Reporting System Legislation on credit reporting also includes specialized rules that are enforced by the FFMS. In addition to the Law on Credit Histories, there are a number of other statutes which clarify certain specific additional matters regarding credit reporting. An overview of these rules is presented in Table 22. Table 22: Overview of Rules for Credit Reporting Institution Regulation Government of Decision No. 501 on the Federal Executive Authority Authorized to Exercise the Functions Russia of Control and Supervision over Credit Bureaus (August 10, 2005) Decision No. 435 on Adopting Provisions for Granting Additional (Restricted) Portion of the Credit History to Subjects of Credit Histories, to Courts (Judges), and to Pre-trial Investigation Authorities (July 16, 2005) FFMS Order No. 05-52/pz-n on Regulations on the Requirements of Financial Condition and Business Reputation of Participants in Credit Bureaus (October 27, 2005 as amended) Order No. 05-88/pz-n on Endorsing the Procedure for Conducting a Tender for Gratuitous Transfer of Credit History Reports (December 22, 2005) Order No. 05-87/pz-n on Endorsing the Procedure for Conducting an Auction Sale of Credit History Reports (December 22, 2005) Order No. 07-89/pz-n on the Approval of the Administrative Regulations of the FFMS on the Fulfillment of the State Function Involved in Keeping the State Register of Credit Bureaus (August 14, 2007) The main statute that regulates data privacy protection is the Law on Personal Data, which is currently neither enforced nor implemented by market players . The proposal of the law was submitted to the State Duma on July 8, 2006 and approved by the Federation Council on July 14, 2006. The Law on Personal Data (Federal Law No. 152-FZ of July 27, 2006) has been effective since 26 January 2007. Article 25(1) states that personal data included in systems before that date are to be processed in accordance with this new Law after its entry-into-force. However, Art. 25(3) states that personal data information systems created before that date must be brought into compliance no later than January 1, 2010. Systems that process personal data before and after that date must send a notification to the competent authority in charge of registering database operators. The Law on Personal Data makes extensive provisions that are not yet fully enforced. The Law applies to state authorities, and other legal as well as natural persons. It lays out essential principles for processing personal data, such as the requirement that data processing be consistent with its intended original purposes, and that the processing of data not be in excess of what is necessary, as well as the unacceptability of combining databases which have been created for purposes that are incompatible with one another. Processing requires consent in most instances, but there are sweeping exemptions, most of which reflect the EU Directive on Processing of Personal Data. One of these exemptions applies in the event the processing is required for the fulfillment of a contract to which the individual is subject. The Law requires consent for data processing with exceptions. The Law further requires proof of consent and prescribes the content of such consent (such as name, identification number, purpose of processing, list of data processed, operations performed on the information). Special categories of data such as health, ethnic origin, political views, religious and philosophical convictions or biometric data receive special protection. Criminal convictions may be processed by state authorities or other parties according to procedures determined in accordance with 116 Russian Federation Credit Reporting System federal laws. Individuals have the right to access the data, and to know of the existence of a database, the methods used to create it, the parties that have had access to the information and the list of the data actually processed. This access can be restricted, however, if information is processed for purposes of state security or the protection of public order. Russia has committed to transposing international data protection standards. In December 2005, the President signed the Law on the Ratification of the Council of Europe Convention for the Protection of Individuals with Regard to Automatic Processing of Personal Data. In 2006, the Russian government adopted the aforementioned Law on Personal Data (which is intended to transpose at least partially the COE Convention No. 108 of January 1981 for the Protection of Individuals with Regard to Automatic Processing of Personal Data). The COE Convention No. 108 applies to the public and private sector, and describes duties concerning data quality, special categories of information, as well as data security, among other matters. In addition, privacy rights are granted by the Russian Constitution in Art. 24, where it explicitly states that it is forbidden to gather, store, use and disseminate information on the private life of any person without his or her consent.92 In terms of information regulation, the main statute is the Law on Information, Information Technologies and Protection of Information93. This Law regulates the exercise of the right to search, receive, transfer, produce and disseminate information. It stipulates the right to access information, prescribes rules for information systems and provides for regulation in the area of information technology. Altogether consumers are often unaware of these rights, enforcement is lagging and the judicial system appears unprepared to deal with such cases. A host of subsidiary legislation exists that contains privacy provisions and confidentiality clauses. This includes: – Decree of the President of Russia No. 2334 of December 31, 1993 on Additional Guarantees of Private Citizens’ Rights to Information (with the Amendments and Agenda of January 17, 1997, September 1, 2000); – Decision of the Government of the Russian Federation No. 504 of August 15, 2006 on Licensing an Activity for the Technical Protection of Confidential Information; – Decision of the Government of the Russian Federation No. 532 of August 31, 2006 on Licensing the Development and/or the Production of the Means of Protecting Confidential Information; – Decision of the Government of the Russian Federation No. 773 of December 14, 2004 on the Approval of the Rules for Making the Payment for the Furnishing of Information about Registered Rights, the Issuance of Copies of Agreements and of Other Documents Expressing the Substance of Unilateral Transactions Effected in a Simple Written Form. Together, the laws create a complex system of rights and obligations with overlapping scope and non-transparent enforcement in the area of data protection. While a host of rights for data subjects exists, there are sweeping exceptions. Also, the law is not effectively enforced. In particular, market participants appear to be unfamiliar with their obligations and are only slowly changing relevant systems and business procedures. Non-transparent risk management procedures at financial institutions, as well as leakages of personal information into the (albeit declining) 92 Art. 4 of the Law on Personal Data states that if an international treaty of the Russian Federation prescribes rules other than those provided by the law, the rules of the treaty apply. 93 The Law on Information, Information Technologies and Protection of Information (Federal Law No. 149-FZ of July 27, 2006) repealed the Law of Information, Informatization and Protection of Information (Federal Law No. 24-FZ of February 20, 1995). 117 Russian Federation Credit Reporting System black market for trade of personal information, are likely to inhibit the government’s avowed aim of making Moscow a world class financial hub. Institutional Arrangements and Enforcement Agencies The Federal Financial Markets Service (FFMS) is the main authority supervising credit bureaus under enforcement of the Law on Credit Histories. The FFMS is a federal body of the executive branch, within the jurisdiction of the Government of the Russian Federation, and is of equal rank to the Federal Antimonopoly Service. The FFMS oversees financial markets, including exchanges and pension schemes, and it has been empowered to oversee credit bureaus. Its main supervisory functions in these latter respects are: registration of credit bureaus, determination of financial position and reputation of participants in any credit bureau, the conduct of audits of credit bureaus, the provision of information to credit bureaus so as improvement of their practices, and interaction with the CCCH. As part of the CBR, the CCCH has no supervisory authority over credit reporting in the private sector. The FFMS conducts audits of credit bureaus, assessing document flow, as well as the quality of data, and compliance with the law. There is, however, no public document regarding these procedures. The Law on Personal Data is enforced by the Federal Service for the Supervision of Mass Media, Communications and Protection of Cultural Heritage (FSS). The FSS (Rossvyazohrankultura in Russian) was set up in 2007, as a result of the merger of the Federal Service for the Supervision of Mass Media and the Protection of Cultural Heritage (Rosokhrankultura) and the Federal Service for the Supervision of Communications (Rossvyaznadzor).94 The FSS licenses telecommunication providers and regulates the mass media. It also has the task of registering owners and operators of databases containing personal information. The FSS employs several means to protect the rights of data subjects. These include inspecting information, requiring measures of data operators in order to block or destroy information, bringing lawsuits before the courts, communicating with licensing authorities on suspension of licenses, and reviewing inquiries from data subjects for legitimacy of data processing operations. The FSS is required to keep a registry of data processors and publish an Annual Report. Reorganization of government bodies prolongs the process of enforcing the Law on Personal Data. The reorganization described above which merged two authorities to create the FSS has put data protection in the hands of a body which is was formerly responsible for telecommunication and radio frequencies, and mass media. This authority has created a portal where companies are supposed to register. However, the registration tool was not yet online by June 2008. In addition, the FSS does not post any materials for consumers, except for a section of Frequently Asked Questions (FAQ). This website could also feature a forum where individuals could discuss data protection problems and get advice from a lawyer qualified in these matters. Both authorities in charge, FFMS and FSS, could develop a more active stance for consumer protection. There is a lack of guidance on compliance with the Law on Personal Data and a lack of understanding of obligations by market participants. By June 2008, the FSS had not formulated any recommendation (accessible on its website) aimed at helping market participants 94 The Decree of the President of the Russian Federation No. 320 of March 12, 2007 set up the mandate of this agency, which is responsible to the Government of the Russian Federation. 118 Russian Federation Credit Reporting System to cope with the implementation of the new law. Furthermore, there was then no information available to educate the public on the implementation of the law and – most important – the rights and obligations of consumers. Technical security of systems for processing personal information is licensed by two agencies. The governmental document “Provision on the personal data security, when processed in the personal data information systems” (November 20, 2007) empowers the Federal Service for Technical and Export Control (FSTEC) as well as the Federal Security Service (FSB) to issue licenses for the technical security of information systems that store and process personal information. The procedures are established in the Government ’s Decision No. 504 of August 15, 2006 and Decision No. 532 of August 31, 2006. There are a number of other authorities that potentially could be engaged in the protection of consumers’ interests in credit reporting. The Federal Service for the Oversight of Consumer Protection and Welfare (CPS) is the authority in charge of the Consumer Protection Law, which does not include provisions dealing with data protection. And the Federal Antimonopoly Service (FAS) is the body in charge of enforcing the Law on the Protection of Competition. Supervisory functions are thus split among different institutions. All of these bodies have taken on tasks of receiving complaints. The Central Catalogue of Credit Histories is a “roadmap” to locate credit reports. Due to the fragmentation of the credit reporting system in Russia, where several credit bureaus compete, the CBR has set up a centralized database that provides credit report header information. The CCCH is regulated by Section 4 of the Law on Credit Histories and a number of specific directives issued by the CBR (see Table 23). The CCCH provides information on credit bureaus holding individual profiles and temporarily stores databases if credit bureaus are liquidated. According to Article 10 of this Law, all credit bureaus must provide the title section of credit histories from natural and legal persons to the CCCH.95 The Catalogue provides its services free of charge to the public (users of credit bureaus and data subjects after identification). It is accessible through several channels such as the CCCH website96, credit institutions, credit bureaus and post offices. Table 1: Overview of Rules established by the CBR Institution Regulation CBR Directive No. 1610-U on the Procedure for Filing Inquiries and Soliciting Information from the Central Catalogue of Credit Histories by a Subject of a Credit History and a User of a Credit History by Means of Contacting the CBR Webpage” (August 31, 2005) Directive No. 1611-U on the Procedure for and Forms of Disclosure of Information listed in the Titles of Credit Histories, and Codes of Subjects of Credit Histories listed in the Central Catalogue of Credit Histories” (August 31, 2005) Directive No. 1612-U on the Procedure for Filing Inquiries and Soliciting Information from the Central Catalogue of Credit Histories by a Subject of the Credit history and a User of the Credit History by means of contacting a Credit Organization” (August 31, 2005) Directive No. 1635-U on the Procedure for Filing Inquiries and Soliciting Information from the Central Catalogue of Credit Histories by a Subject of the Credit History and a User of the Credit History by means of contacting a Credit Bureau” (November 29, 2005) 95 The header information contains name, address, place of birth, passport number (or different ID number), tax ID number and insurance number. 96 The website can be accessed at http://ckki.www.cbr.ru 119 Russian Federation Credit Reporting System Letter No. 32-T on Recommendations for Cooperation between Territorial Branches of the Central Bank of Russia and Credit Organizations (Branches) with the Automated System “Central Catalogue of Credit Histories” (March 27, 2007) Directive No. 1821-U for Filing Inquiries and Soliciting Information from the Central Catalogue of Credit Histories by means of contacting a Post Office” (April 25, 2007) Role of Private Sector Organizations So far at least, no credit bureau association has been created and there is thus no organization to establish a code of conduct or other ethical code, or to provide recommendations on business practices for credit bureaus. Although Art. 9(3) of the Law on Credit Histories permits the formation of associations for the protection of association members’ interests, stiff competition and the unequal interests of large and small credit bureaus, as well as disparate regional players, have meant that no such associations have yet been established. Experiences from other countries show that such an association can be beneficial. From a public point of view, the establishment of an industry association would be helpful, especially if it informed the public about credit reporting activities in a centralized form and established an office of ombudsman to deal with complaints and disputes. In addition, public comments and statements on draft regulations could be collected and published by such an association. At the moment, lobbying is conducted through unequal individual access to regulatory authorities. There is, in addition, no consumer association that acts in the interest of consumers. Russia has no consumer association that deals with private sector problems in terms of data management, security breaches and illegal data trade. Also, there is no association that advances consumer interests in credit reporting. Although an increasing number of Russian citizens are apparently disturbed by privacy breaches, the authorities do not take an active role to counteract these practices. The FFMS, for instance, does not have any webpage that is dedicated to the protection of consumers’ interests. Furthermore, there is no obvious dispute or complaint mechanism which is centralized between authorities in charge of credit reporting and data protection. Consumer Protection in Credit Reporting The main rights for consumers are to consent to information processing, to dispute and to obtain a free credit report once a year. The Law on Credit History stipulates some basic rights for consumers in the credit reporting system. For instance, the consumer has to consent to the transfer of information to a credit bureau. The subject of the credit report may also, once a year, obtain a credit report for free. An individual has the right to dispute information and there are timeframes for the settlement of disputes. However, there are no provisions dealing with what happens if a dispute cannot be settled or information cannot be verified. Special categories of information (such as nationality, race, etc) are protected under the Law on Personal Data but this Law is not yet applied and enforced. The Law on Credit Histories also states obligations of credit bureaus. Credit bureaus must be registered in the State Registration of the FFMS and notify the FSS of operations as information processors. They may collect information specified in the law, including positive and negative information. Once a year they have to provide the consumer with a credit report for free: Many–but by no means all credit bureaus–provide this service on their websites (some however simply state that such service is not available). Furthermore, a credit bureau can redirect a consumer’s request to a bank and must not further inquire once this has been done. Credit bureaus increasingly link up to public databases, which creates the risk of using unrelated 120 Russian Federation Credit Reporting System information for incompatible purposes. They may provide credit risk and scoring services, but, at present, they only provide financial service providers with this information. The law assigns only incomplete obligations to reporting institutions. The Law on Credit Histories could be reformed as it assigns only incomplete obligations and responsibilities to reporting institutions. Banks must inform consumers that they are required to report information to a credit bureau. And banks now typically condition their services to consumers to the receipt of this consent in writing. But the consumer is not informed about the particulars of the transfer. If a credit report is, for example, used to decline a consumer, the bank is under no obligation to disclose any pertinent document and information to the consumer. Also, the consumer is neither informed that credit scoring is conducted with the information nor informed of the factors that impact the score. Banks typically compile highly intrusive consumer profiles. Banks ought to disclose privacy statements, obtain informed consent, provide the consumer with sufficient information on data sharing, hand the consumer a key information brochure about credit reporting, provide the consumer with opt-out options of corporate (affiliate) information sharing and provide the consumer with written statements on how complaints are treated. Consumer Empowerment Regulators in Russia are currently not playing an active role in this respect. Neither the FSS nor the FFMS have published educational material on how to protect personal information or how to manage a credit report. At the FFMS’ website, credit bureaus can register online. There are links to legislation, but there is no material for consumer education. The FSS posts FAQ, but no information material for consumers. Also, the registration system for companies is not up and running such that as of June 2008, it was not possible to register online as information processor. Although not being a regulator, the CBR provides the catalogue of credit histories (CCCH). There is a FAQ and citizens can register online for inquiry. A concerted effort coordinated among these institutions can increase the transparency of information sharing in Russia. Recommendations Regulators could play a more active role in consumer education and protection in credit reporting. Russia will develop a mid-sized credit reporting system which will cover an estimated 50-60 million persons within the next 1-2 years. Although the industry is currently developing and stabilizing operations, with increasing market coverage, consumer protection measures ought to be modernized. The authorities could strengthen efforts in developing information material for consumers, including public educational material97 and discussion forums. In addition, it is advisable to collect statistics on dispute settlements across industry players (to identify those with data quality problems) and to classify disputes in order to monitor the efficient functioning of the system. Provision of guidance and clarification on the implementation of the Law on Personal Data is needed. Russia has allowed its industry a grace period of six months to implement the data protection rules stipulated by the new law. However, the law also states that information systems have to comply by January 1, 2010 and registration is lagging. The long implementation period and a dysfunctional recourse mechanism for aggrieved consumers (see below) leads to leakage of personal information into the marketplace with no real sanctions applicable to the parties 97 On how to manage a credit report, where to get a credit report for free and the basic rights and obligations. 121 Russian Federation Credit Reporting System responsible for such leakages. This inevitably impairs the development of efficient financial markets, where market participants can base decisions and transactions on an information base that is of high-quality and reliable. Obsolete banking risk management practices should be rectified by regulations or recommendations from the Central Bank and FFMS. Banks in Russia still use a number of informal data sources and base their lending decisions on information of unknown sources and quality. This practice ought to be stopped by implementing a package of measures, including an across-the-board prohibition on the use of such information sources, coupled with the requirement for a description of legal, formal information sources to be used for proper risk management, as well as the obligations to disclose to the consumer all data used in the decision to lend or not and to inform the consumer at the point-of-sale of each reason why credit was declined. Furthermore, the practice by state authorities to sell data generated and compiled in fulfilling state functions for purposes other than those originally intended ought to be stopped. This is contrary to the COE Convention, which Russia signed, and contrary to the Law on Personal Data. Other approaches need to be developed where information may be used for fraud prevention, but only after informing the consumer. The black market poses a risk to the newly established credit reporting system in Russia. A strong and operational credit reporting system is a key component for financial sector development. However, the black market and trade in illegally appropriated personal information could negatively affect the operations of credit bureaus. Information from this market might be used by imposters and fraudsters to gain access to the credit reporting system under false pretences. In addition, credit bureaus might have an incentive to “shop” themselves on this market and to mix their formal information with informal sources. There is need for a systematic study of the demand for, and supply of, personal information, as well as data volume and sources, in the black market. Although quality and volume of information traded in this market has declined recently, banks still regularly use data from these sources. Regulators and enforcement agencies, especially the FFMS and the Department K in the Ministry of Internal Affairs could study systematically how the information traded on the black market can be used to manipulate information in the credit reporting system. In addition, sources as well as supply and demand should be studied, before any public-private inter-linkages are created which pose considerable privacy risks for individuals. The fragmented credit reporting system poses high costs on consumers and is neither transparent nor consumer-friendly. Consumers who are unfamiliar with credit reporting will find it cumbersome to maintain and manage good credit reports in Russia’s credit reporting system. Firstly, consumers ought to be informed by regulators, banks and credit bureaus that several credit bureaus store their personal profiles and collect information either from overlapping or diverging sources. Secondly, they ought to be taught the legal implications that credit reports and decisions based upon them might have. Although there is just one industry player who currently provides scoring services, other market players are now committed to introducing it. It must be explained that credit bureaus will inevitably use different scoring models and reflect the consumer’s credit risk with varying scores. These scores will, in the near future, determine the access, prices and conditions of a number of financial services for consumers. Transparency at the point of sale should be increased, and banks and other reporting institutions should provide more fulsome information to the consumer. The consumer today receives only a minimum of information in very general terms whether about credit reporting, information sharing or privacy policies. The consent clause typically only states that information 122 Russian Federation Credit Reporting System is to be shared with credit bureaus and that they will share it “with third parties, as permitted by law.” This is too general to give any meaningful information to the consumer. The proposed association of credit bureaus could, however, play a valuable role in these respects, developing standardized model clauses on information sharing to be used by the association members. The clauses should inform consumers about the institutions that receive the information, the processing operations that are performed, other receivers of the information and their rights of access, as well as rectification and recourse mechanisms for consumers. Information sharing clauses should be standardized across institutions and industries. Information sharing clauses ought to include facts such as: the name or the names of credit registers to which the data is transmitted; the items that are transferred to the register regarding compliant and non-compliant behavior; legal statutes legitimizing the transfer; the names and addresses of the parties to which the credit register further distributes the information; cross- border data sharing (destination organizations); for what purposes this information is transferred; the fact that scores are calculated based upon the information, where applicable; the most important basic rights and where to contact the credit registers. In addition, an information brochure with the key facts about the credit reporting system should be provided to the consumer on presentation of an information sharing clause and all information sharing clauses should include a written acknowledgment by the consumer that such brochure has been duly delivered and received. A consumer-friendly out-of-court dispute settlement mechanism ought to be introduced for credit reporting. At present, an aggrieved consumer can complain to the credit bureau and be referred to the bank. If the dispute cannot be solved in the bank, the credit bureau must not conduct any further investigations and the consumer can only complain to the FFMS or directly go to court. The FFMS will ask the credit bureau to inquire, which may in turn refer the consumer to the bank. This is obviously inefficient: all parties that perform operations upon personal data compiled ought to have investigative responsibilities. For example, a credit bureau is not a mere repository. Rather, it merges personal data from different sources and also has a responsibility for data quality. The notion that any credit bureau is a mere repository is obsolete. Responsibility of due diligence and professional care in the financial service industry should be strengthened. At present, banks and credit bureaus have only minimum obligations to investigate mistakes, Banks are not obliged to send correct information, and it is not forbidden to re-submit erroneous information under the Law on Credit Histories. Furthermore, regulators ought to strengthen and streamline consumer dispute settlement mechanisms across the board. 123 Russian Federation Credit Reporting System Good Practices: Credit Reporting System A proper assessment of the credit reporting system and the environment in which it operates is critical to determine whether or not some of the principles listed below are relevant for the country. Good business relationships between participants of the credit reporting system (credit registers, including public registries and private credit bureaus) and the public are a key issue for the development of the financial sector. There has to be mutual trust and confidence which is facilitated by consumer-friendly industry practices. In the absence of transparency in credit reporting, consumer awareness/protection and dispute resolution mechanisms, the credit reporting system will be less efficient. SECTION A CONSUMER PROTECTION INSTITUTIONS Good Practice A.1 Consumer Protection Regime The law should provide for clear rules on consumer protection in the area of credit reporting. There should be adequate institutional arrangements for the implementation and enforcement of data protection rules. a. There should be specific legal provisions in the law which create an effective regime for the protection of consumers in credit reporting; b. There should be a general consumer agency or specialized agency responsible for implementing, overseeing and enforcing the protection of personal data. This role should be clearly defined; c. The authority should monitor complaints, disputes, inquiries and have a register which lists the names of credit registers; and d. The authority should be able to conduct audits in credit registers, including regular reviews of data quality and completeness in credit registers; The legal system should provide for a role for the private sector, including voluntary consumer protection organizations and self- regulatory organizations. Description The different statutes applicable to information privacy in Russia create a complex system of obligations, rights and consent provisions with broad exceptions. Although there is a clearly identifiable authority in credit reporting, there seems to be little implementation effort and oversight with regard to data protection in general. a. Legal Framework There are two main statutes that are applicable to credit reporting, the Law on Personal Data (Federal Law No. 152-FZ of July 27, 2006) and the Law on Credit Histories (Federal Law No. 218-FZ of December 30, 2004). The Law on Personal Data regulates the scope and principles of data processing, confidentiality, accessible sources, consent and special data categories, biometric data, trans-border data flows, obligations of operators as well as automated decisions among other aspects. The scope of this law includes data processing activities by the State, legal entities and natural persons. The Law on Credit Histories covers the content of credit reports, transfers of information to the credit bureau, issuance of credit reports, storage and protection of information, rights of data subjects, rights and obligations of credit bureaus, as well as the Central Catalogue of Credit Histories (CCCH) located at the Central 124 Russian Federation Credit Reporting System Bank of Russia (CBR). This law regulates the relationships between the participants of the credit reporting system in Russia. The Law on Credit Histories became effective as of 1 September 2005. The Law on Personal Data, however, was enacted in July 2006, became effective as of 26 January 2007 (6 months later), but requires information systems created before that day only to be compliant by January 2010. Oversight and enforcement therefore are at the moment not effective. In addition to the aforementioned legislation, the Law on Information, Information Technologies and Protection of Information (Federal Law No. 149-FZ of July 27, 2006) applies in general to information technologies and production and dissemination of information. Other statutes and decisions that apply to information relations are: Decree of the President of Russia No. 2334 of December 31, 1993 on Additional Guarantees of Private Citizens' Rights to Information (as amended); Decision of the Government of the Russian Federation No. 504 of August 15, 2006 on Licensing an Activity for the Technical Protection of Confidential Information; Decision of the Government of the Russian Federation No. 532 of August 31, 2006 on Licensing the Development and/or the Production of the Means of Protecting Confidential Information; Decision of the Government of the Russian Federation No. 773 of December 14, 2004 on the Approval of the Rules for Making the Payment for the Furnishing of Information about Registered Rights, the Issuance of Copies of Agreements and of Other Documents Expressing the Substance of Unilateral Transactions Effected in a Simple Written Form. 98 b. Enforcement Agencies Two different bodies are in charge of the enforcement of the principles relating to credit reporting. Federal Financial Markets Service (FFMS) – The FFMS is the oversight of financial markets, including exchanges and pension schemes. It is also the supervisory agency for the enforcement of the Law on Credit Histories. This agency holds the State Register of Credit Bureaus, 99 where 31 credit bureaus had been registered as of June 2008. Federal Service for the Supervision of Mass Media, Communications and Protection of Cultural Heritage (FSS) – The FSS is the oversight of the Law on Personal Data. It underwent major restructuring in March 2007, when the Federal Service for the Supervision of Communications (Rossvyaznadzor) ceased to exist and was merged with Federal Service for the Supervision of Mass Media and Protection of Cultural Heritage (FSS). In addition, the Federal Service for Technical and Export Control (FSTEC) and the Federal Security Service (FSB) have been charged in 2007 with the responsibility of monitoring the technical security of information systems that process personal data. The Federal Service for the Oversight of Consumer Protection and Welfare (CPS) is the authority in charge of the Consumer Protection Law, which does not include provisions of data protection. The CBR holds the CCCH, but has no supervision authority over credit reporting. The CBR oversees banks and non-bank credit institutions. Once the Law on Personal Data is implemented, there will be overlap in the area of consent of data subjects, obligations of processors (if they are credit bureaus), the right to appeal and access, and provisions in regards to automated decisions. 98 The titles might vary according to the source of translation. This source is the Garant. 99 By June 2008, the register was available at www.fcsm.ru/catalog.asp?ob_no=24284&print=1 125 Russian Federation Credit Reporting System c. Disputes, Complaints and Inquiry Monitoring Art. 14 of the Law on Credit Histories determines that the competent authority (FFMS) can audit credit bureaus based upon a plan or in the event of written requests by subjects to credit reports. The FSS can consider complaints and applications from citizens or legal entities with respect to the processing of personal information (Law on Personal Data, Art. 23(5)). Complaints are currently not collected in a centralized manner and are not analyzed. Neither the FFMS nor the FSS have set up online tools to handle complaints. Further, there are no standardized forms which consumers could use to hand in a complaint. Credit bureaus log dispute information, but do not classify them as they see this of being of no value to them. Cases are typically referred back to the bank (or other reporting institution). d. Audits and Information Quality According to Art. 14(2) and (4) of the Law on Credit Histories, the supervisory agency can act upon requests and conduct audits, where the subject matter of the audit is the quality of the information provided by the credit bureau (including accuracy) and whether participants of the exchange adhered to the rights and obligations. This is already conducted by the FFMS. The FSS, on the other hand has only started to register companies that conduct operations of personal data processing. e. Voluntary Organizations There is no industry association – Art. 9(3) of the Law on Credit Histories allows the formation of associations for the protection of interests of their members. However, there are currently no industry associations. Talks were unsuccessful. An industry association, however, could play a role in the formulation of policy recommendations and in informing the public about credit reporting. There is no consumer association – There is no consumer association dealing with the problems that exist with privacy leakages. No general consumer association covers privacy and no specialized association deals with data protection. Thus, there is no central advocacy for consumers in a country with an active hacker scene and an active black market of personal trade. Recommendation The FFMS ought to concentrate on three main fields: (i) data confidentiality, (ii) efficient solution of consumer disputes and (iii) data quality in credit reports. Data confidentiality and quality: These aspects can be supported by well- planned data protection audits. Such audits can either be functional (vertical) and involve compliance checks in specific areas or departments, or be horizontal within a specific operation chain (from beginning to end). The FFMS could publish its audit procedures in the form of handbooks and derive good practices for the supervised entities.100 Assessing the quality of information in credit reports will involve not only an audit but also advanced statistical knowledge. Information on credit report errors (origin, frequency and type) remains limited for Russia. For instance, an audit assesses: 100 See, for example UK Information Commissioner (2001), The Complete Data Protection Audit Manual, available at http://www.ico.gov.uk/upload/documents/library/data_protection/detailed_specialist_guides/data_protection_complete _audit_guide.pdf. 126 Russian Federation Credit Reporting System a. How well variables are populated (completeness of information reported); b. Whether information was mistakenly attributed to the wrong individual; c. Whether credit reports contain outdated information. Of special importance is the validation of credit scoring models as conducted in the US by the Comptroller of the Currency.101 This should be done, once they are introduced by a greater number of market players in Russia. The models’ validity, reliability, and accuracy is checked including the satisfaction of minimum statistical requirements in terms of in-sample performance and out-of-time performance. In addition, FFMS and FSS could coordinate on developing a common methodology for an audit which monitors compliance with both statutes (the Law and Credit Histories and the Law on Protection of Personal Data). Voluntary Organizations: Such associations typically play an important role in other countries in terms of lobbying and policy formulation, as well as public education. However, the set-up should not be publicly directed. For the time being, the Association of Russian Banks as well as the Association of Regional Banks of Russia could play a more active role in informing consumers about credit reporting. Good Practice A.2 Code of Conduct for Credit Registers a. There should be a principles-based code of conduct for credit registers that is devised in consultation with the industry and consumer protection associations, and is monitored and enforced by a statutory agency. b. Credit registers should publicize the code of conduct to the general public through appropriate means. c. The statutory code could be augmented by voluntary codes on matters such as facilitating dispute resolution, identity fraud protection and proper management of the credit report. Description There is currently no code of conduct, no industry association and no consumer association. Recommendation Codes of conduct help to inform the public on credit reporting and can serve to create additional trust in the system, under certain circumstances. A Code of Conduct of credit bureaus could be located at the FFMS and credit bureaus subscribe to it. With this Code, they pledge to adhere to fair principles in processing information and to not use information from informal sources. It could be drafted together with the industry and outside consultants. There are several international examples of Codes of Conduct, such as: – Australia: Credit reporting code of conduct; – Italy: Code of conduct and professional practice applying to information systems managed by private entities with regard to consumer credit, reliability, and timeliness of payments; – South Africa: Credit Information Ombud’s Association Code of Conduct; – Hong Kong: Code of Practice on Consumer Credit Data.102 They are typically a compromise of industry and government in the case where more detailed regulations ought not to be imposed. They may cover data processing as well as fair principles in credit scoring. 101 Dennis Glennon, Issues in Credit Scoring Model Development and Validation , Risk Analysis Division, Economics Department, The Office of the Comptroller of the Currency, Presentation. 102 Guidelines of development of efficient industry codes are given by the Australian Competition and Consumer Commission. Practices to draft codes are given here: http://www.accc.gov.au/content/index.phtml/itemId/658186 127 Russian Federation Credit Reporting System Good Practice A.3 Interagency Consultation and Cooperation Where oversight and enforcement of credit register laws are the responsibility of several authorities, there should be clear rules for interagency consultation and cooperation. There should be regular meetings between experts in charge, located at different agencies. Description Interagency consultation is not required by law. The Law in Credit Histories, the Law on Personal Data as well as the Law on the Protection of Competition are silent on inter-agency coordination and interaction. Recommendation A common “Working Group on Credit Registers” could be founded, which would consist of members of the FFMS (for credit bureaus), CBR (for banking industry), FAS (for competition matters). This group could find ways to improve the credit reporting system’s transparency. SECTION B DISCLOSURE AND SALES PRACTICES Good Practice B.1 Regulatory Status Disclosure In all of their advertising, whether by print, television, radio or otherwise, credit reporting agencies should disclose: (a) that they are regulated, and (b) the name and address of the regulator. Description A legal entity may only start to operate as credit bureau after the registration with the State Register of Credit Bureaus at the FFMS. Legal entities (except for the aforementioned registered ones) are prohibited from using the term “credit bureau” according to Art. 15, part 4 (State Register of Credit Bureaus). Recommendation No recommendation. Good Practice B.2 Obligations of Credit Registers a. Credit registers should have the duty to register or obtain a license from the regulator. b. Credit registers should disclose consumer reports for clear purposes (such as granting of credit). The disclosure of credit reports for other purposes should be limited to cases where informed consumer consent was obtained in advance. c. Reasonable fees are required for disclosure to consumers. d. Disclosure of credit reports should be in understandable form and should include credit scores as well as the four main factors that in general have an impact on the score. e. Fair reaction times when addressing consumer requests and firm time limits for consumer disputes should be established. f. Credit registers should have a policy of accepting reputable businesses as partners (clients) and conducting internal checks of clients’ compliance with disclosure obligations as defined by the law. g. Credit registers should refrain from negatively taking into account any of the consumer rights granted in calculating credit scores or for otherwise inferring creditworthiness. h. The number of inquiries by an individual on credit should be evaluated in a way where it allows for comparison shopping without negatively impacting on the credit score. i. Credit bureaus should have adequate measures in place to prevent and fight identity theft. 128 Russian Federation Credit Reporting System Description According to the Law on Credit Histories, credit bureaus have the following obligations: a. Credit bureaus must register with the State Register of Credit Bureaus under supervision of FFMS and they must notify this registration to the FSS. Further, they must obtain licenses from the FSTEC and from the FSB. b. The purposes for which credit reports can be issued are not directly prescribed (see Art. 6). Art. 9(2) states that credit bureaus may develop scoring services and rating products. c. Except for providing consumers with a credit report once a year free of charge, the law is silent on costs for the provision of credit reports. Prices for consumer reports have in the past decreased in Russia, but remain high in international comparison (ranging from US$ 12-25 in Russia). d. The law is silent on this subject matter. e. The law is silent on the matter of reacting to consumer inquiries. It only specifies time frames for the reaction to disputes. f. Regarding client acceptance policy103, the FFMS issued the “Regulations on requirements to the financial conditions and business reputation of participants in credit bureaus”. The credit bureaus do not publish their client acceptance policy. g. The law is silent on this subject matter. h. The law is silent on this subject matter. i. The Ministry of Internal Affairs administers a database with information on stolen passports. After reporting a stolen passport to the local police, the information is transferred to this database and is accessible for credit bureaus that provide identity fraud services. Recommendation Clear and narrow purposes: Regulators should consider opening the range of purposes so as to include the insurance industry. Inclusion of debt collection agencies should only be considered after this industry is fully regulated and under strong supervision. Debt collection agencies are known to be one of the major factors in contributing low-quality and erroneous information in other countries. Otherwise the law should directly state clear and narrow purposes for which information can be shared. Disclosure of credit scores: Credit scoring has only recently been introduced by the credit reporting industry in Russia. However, once fully operational, consumers ought to have the right to see the latest calculated score, the range of scores possible, the average score of the population and the four main factors that impact on the score. This information can be easily visualized. Depending on the score calculated, some of the most important factors are: history of payment of amounts owed (35 percent contribution to score), amount owed (30%), length of credit history (15%), new credit (10%) and types of credit used (10%). This allows consumers to learn how they could potentially improve their score, which is of benefit to the financial services industry. Exertion of rights: Authorities ought to amend the law or provide clarification on a crucial aspect of granting rights to individuals: Data that is derived from using rights, such as self-inquiries, credit inquiries at lenders or initiated disputes ought not to be scored so as to avoid negatively affecting the credit score. Credit bureaus might use such data such that it negatively impacts on the creditworthiness of a person or brings about fraud suspicion. Further, individuals might want to compare different credit offers and inquire at different banks (“comparison shopping”). This is of utmost importance for competition. These matters should not be scored or otherwise be used for inference of creditworthiness. 103 Client denotes the business which is a reporting institution. 129 Russian Federation Credit Reporting System Good Practice B.3 Key Information Brochure A key information brochure should be distributed to consumers by all participants of the credit reporting system. Description Some credit bureaus and credit institutions publish information for consumers about their rights regarding the credit reporting system. One credit bureau also stated that they have developed an information brochure for their clients to be distributed to consumers. In addition, the CBR maintains a section on the Central Catalogue of Credit Histories which contains instructions on how consumers can obtain access to their credit information. This is very useful but more could be done. Recommendation In an emerging financial market it is of great importance to educate the public on the credit reporting system. The main contact point with the credit reporting system is at the point of sale, where the consumer is probably declined for credit. A professional association for credit bureaus, if created, should develop a key information brochure that is given to the consumer at the point of sale, specifically when he or she has been declined for credit. While the explanation of the main reasons and the information taken into account for the decision is the clerk’s task, other explanations should be summarized in a small easy-to-read brochure. This brochure would explain: a. What a credit report and a credit score is, b. What the credit reporting system is (visualization of data flows between market participants in a figure), c. Where more information on the system can be found (government websites), d. Where the consumer can access his or her credit report, e. How to resolve disputes. In addition, the brochure could provide the consumer with a fictive example of the categories of risk used by credit reporting agencies to classify individuals. This can be visualized such that it is easier to understand for a consumer. The brochure draft ought to be discussed with the consumer associations. Good Practice B.4 Preservation of Rights Participants of the credit reporting system (credit registers, reporting institutions and others) should not, in any communication or agreement with a consumer (except where permitted by applicable legislation), exclude or restrict, or seek to exclude or restrict: a. Any legal liability or duty of care to a consumer provided under the applicable law or regulations; b. Any duty to act with skill, care and diligence owed to a consumer in connection with the provision of the financial services or products; or c. Any liability arising from the failure to exercise the degree of skill, care and diligence that may reasonably be expected of it in the provision of the financial service or product. Description The Law on Credit Histories is silent on the preservation of rights. There are neither explicit administrative fines (for violations of law provisions) nor criminal sanctions (for severe and repeated breaches). Art. 16(2) states that a failure of the credit bureau to comply with the Law and instructions given by the authority can result in the exclusion from the State Registry through court proceedings. According to Art. 24 of the Law on Personal Data, persons guilty of violating this law will be subject to civil, criminal, administrative, disciplinary and other responsibilities. 130 Russian Federation Credit Reporting System Recommendation Preservation of rights should be part of the law and mentioned in any other documents for consumers (such as brochures). Any restrictions of liabilities that arise under the law should be void. Good Practice B.5 Accessibility of Credit Registers Credit registers tend to focus on corporate clients that generate high volumes and the main share of profit. Increasingly they are also recognizing consumers as clients. To strengthen the credit reporting system, credit registries should: a. Be accessible via electronic means and via phone, fax and/or local offices (where applicable) during regular business hours. Long waiting times for consumers (such as in waiting loops) should be avoided; b. Inform the public about their activity through the media, websites and information material; and c. Actively support education of the public about their activity. Description Russian credit bureaus maintain websites with information for the public on how they can be accessed. Most of them present FAQ and describe how the bureau and the credit report can be accessed. However not all of them make it easy to find the link for downloading free credit reports. Furthermore, credit bureaus demand that consumers either come in person or send in information for identification purposes. Regulators should study in what ways remote identification can be improved and made more secure. Only one international credit register states principles of operation. One credit bureau stated that it had developed a brochure which can be handed to the consumer. Recommendation Credit reporting agencies in Russia, once they reach higher coverage rates ought to play a more active role in the education of the public. Two market players already plan to introduce consumer-direct products. The industry should join forces to provide more information material to the public. For instance, together with the regulator they may develop a standardized information brochure which is given to the consumer. They might also develop a code of conduct with principles of fair data practices and advertise the code to the public. The companies should be held liable for breaching the code, once it exists. Good Practice B.6 Professional Competence Credit register staff should be subject to professional competence requirements. Access to credit reports should be restricted and unauthorized access should be avoided through special security measures. Description The Law on Credit Histories only determines in Art. 15 that as part of the registration process for the State Register of Credit Bureaus and as part of the application, the credit bureau must hand in information on the senior management and deputies of the credit bureau, as well as documents which confirm the financial situation and business reputation of the participants in the credit bureau. In addition, as part of the licensing requirements established by FSB and FSTEC, applicants have to hand in the applications and CVs of the business leaders. The 131 Russian Federation Credit Reporting System agencies will consider in their evaluation whether the staff of the license applicants has higher educational training.104 Recommendation Professional hiring standards are not demanded by the Law on Credit Histories, but recommended for licensing. Professional standards could become part of an industry Code of Conduct. However, the authority could prioritize regularly the policy of access to the databases which ought to be allowed for dedicated personnel only. Further, the security audit ought to check in detail what other technical security measures apply for protection information. Good Practice B.7 Non-public and Inaccessible Databases Credit registers should not use databases that are not public and inaccessible to consumers (with regards to information stored about the data subject), such as databases from security services and federal ministries to which the consumer does not have access with respect of his or her own file. Description There is no legal requirement of using only information sources that are formal and where consumers do have means of recourse. If a consumer does not have access to his or her record in such a database, there is no means of legal recourse. Several industry players stated that they currently negotiate with state authorities to access information databases from Police, among others. These practices ought to be reconsidered by the authorities in the light of the COE Convention (ETS No.108 of 28 January 1981, enforced since 1.10.1985) as well as the Law on Personal Data. According to the COE Convention, the following basic principles shall be applied regarding the information that is processed: a. It shall be obtained and processed fairly and lawfully; b. It shall be stored for specified and legitimate purposes and not used in a way that is incompatible with those purposes; c. It shall be adequate, relevant and not excessive in relation to the purposes for which they are stored; d. It shall be accurate and, where necessary, kept up to date; e. It shall be preserved in a form which permits identification of the data subjects for no longer than is required for the purpose for which those data are stored. If a credit bureau uses databases that are hidden and inaccessible for consumers, this has a negative impact on consumer rights in terms of access and rectification. Further, this contradicts the openness and transparency principles found in international agreements. There are a number of databases with personal information that are offered in the “black market” in Russia. Types of information offered on this market include passport data, banks’ black lists, etc. Such databases are also offered online through websites. One of the most popular databases is the so-called KGB/FCB black list which is used by banks. Recommendation Illegal trade of personal information: The authorities in Russia ought to stop this trade and business practice immediately. Proper lending procedure in banks (due diligence) require that proper (formal) information sources are used. Good 104 Decision of the Government of the Russian Federation No. 504 of August 15, 2006 on Licensing an Activity for the Technical Protection Confidential Information; Decision of the Government of the Russian Federation No. 532 of August 31, 2006 on Licensing the Development and/or Production of the Means of Protecting Confidential Information. 132 Russian Federation Credit Reporting System practices also require the use of only databases which are accessible to consumers for self-inquiries. The supervisory authority should become more active in prosecuting and could simply look for advertisements in the market place to find entities that violate the law. Use and non-disclosure of information: One credit bureau stated that its fraud identification system uses databases that are not accessible for the consumer and that the fraud system itself and the information it contained would also not be accessible to individuals. Russian legislators ought to clarify that consumers have access to all databases in the private sector that store information on them. It must be possible for the consumer (upon proper identification) to check and review the information, otherwise a person will have no means of recourse at hand. This outside pressure will set the incentive to produce information of high quality. No secret databases should be used in the process, because this creates a strong imbalance of negotiation power against the consumer and leaves him or her without any tool for recourse or rectification, which impairs on the rights that have originally been granted to the consumer. SECTION C CUSTOMER INFORMATION HANDLING Good Practice C.1 Obligation of Reporting Institutions Law and industry practices should ensure that reporting institutions are subject to basic requirements that enable efficient functioning of credit reporting systems. Thus reporting institutions should: a. Inform the consumer of sharing personal information with a credit register prior to information sharing for the first time; b. Have a single-page Key Facts Statement, written in plain language, with respect to the credit reporting system; c. Explain how they use personal data, and be committed not to share such data with affiliated and unaffiliated companies without documented consumer consent; d. Have a written policy on how to treat consumer disputes with regards to personal information; e. Be obliged to fully disclose to the consumer the information they used for the credit decision; f. Maintain due diligence in credit reporting and thus, be obliged to report complete information that is up-to-date. Description According to the current legislation: a. There is no extra provision on this. The law states that the submission of information does not constitute a breach of bank secrecy; b. This is not required and it is not industry practice; c. Reporting institutions in Russia currently are not required to state privacy policies, therefore it is not industry practice. There are no legal requirements to provide the customer with opt-out choices either; d. There is no such a requirement; e. Banks are under no obligation to provide consumers with an explanation of why they have been declined credit. Typically, employees of the Security Department decline credit applications (based upon informal information source) and the answer given to applicants is “declined by security”; f. There is no legal requirement on this. The majority of banks in Russia do have a dispute settlement mechanism, but the policies are not stated to the public. 133 Russian Federation Credit Reporting System Recommendation Introduction of greater responsibilities for banks: Russian authorities should consider the introduction of greater responsibilities in terms of information sharing applicable to banks and other reporting institutions. The proposed association of credit bureaus could also play a valuable role developing standardized model clauses on information sharing to be used by the association members and improving the clarity of consumer disclosure. Responsibilities of reporting institutions should include: a. Better information to the consumer about information sharing, facilitation of informed consent; b. Handing out of key information brochure about information sharing; c. Statements of privacy policies: how personal information is treated and with whom it is shared and what rights exist to opt out of sharing with affiliated and non-affiliated parties for marketing purposes; d. Written statements of how consumer complaints are treated; e. Information of the consumer about adverse actions and on what basis these have been taken. One of the major problems for consumers seems to be that they are not informed by banks if a credit report or score leads to the decline of a consumer’s application. There ought to be the obligation of the service provider to inform the consumer about the main reason for decline. This is a matter of fairness and transparency. Informing a consumer “declined by security” or “the credit bureau declined you” are not sufficient, especially in a market where consumers have to gain more financial sophistication. Regulators should create some standard items that must be given to the consumer, including: a. Main reason (creditworthiness not sufficient); b. Basic information taken into account (credit report, score, other formal sources); c. Short explanation of score and credit report; d. Brochure on credit reporting system; e. Where information on credit report can be accessed (in the brochure). Good Practice C.2 Conditions of Credit Reporting Prior to transferring information for the first time to a credit register, participants of the credit reporting system (financial institutions and others), should provide the customer with a list of the terms and conditions of transferring information, including: a. The name or names of the credit registers to which the information is transmitted; b. Examples of information items that are transferred to the credit register on contract-compliant and non-compliant behavior; c. The legal statutes under which this transfer occurs; d. A statement that the transfer is an exemption from consumer confidentiality otherwise applicable to a consumer’s personal information; e. The names of parties to whom the credit register further distributes the information; f. Cross-border data sharing and destination organizations, where applicable; g. The purposes for transferring the information; h. The fact that scores are calculated based on the information; i. The most important basic consumer rights and contact details of 134 Russian Federation Credit Reporting System the credit registers; j. The fact that an information brochure is handed to the consumer with the key facts about the credit reporting system, where applicable. The terms and conditions of information transferring should be in adequate font size and easy-to-understand. A statement that information is transferred to a credit register “according to the law” is not sufficient. Description This is currently not required by law and it is not widespread business practice. One industry player has stated that “information boxes” of data sharing are included in the contract. Recommendation This information can be easily provided in an extra “information box” included in the contract. This information box could be standardized where possible across the industry. This is a change that would bring about far greater transparency of the credit reporting system with an impact on information quality. SECTION D PRIVACY AND DATA PROTECTION Good Practice D.1 Consumer Rights in Credit Reporting Laws and regulations should require basic consumer rights. These rights may include: a. The right of the consumer to consent to information sharing based upon the knowledge of the institution’s information sharing practices; b. The right to access the credit report and scores of the individual, subject to proper identification of that individual and free of charge (at least once a year); c. The right to correct factually incorrect information or to have it deleted; d. The right to mark (flag) information that is in dispute; e. The right to know to whom the information was disclosed; f. The right to stop marketing and other uses of credit information that are unrelated to the granting of credit; g. The right to have sensitive information especially protected (not included in credit report), such as race, political and philosophical views, religion, medical information, sexual orientation or trade union membership; h. The right to adequate retention periods such as those for positive information and negative information; i. The right to be informed in case of adverse action in credit decisions or less-than-optimal conditions/prices due to credit report information. In this process, consumers should be provided with the name and address of credit bureau. Description The two most important laws covering consumer protection in credit reporting are the Law on Credit Histories (effective by September 2005) and the Law on Personal Data (which demands compliance no later than January 2010): a. The right to opt in is established in Art. 5(4) of the Law on Credit Histories, which states that information on consumers can only be provided to the credit bureau with written consent. In Art. 9 of the Law on Personal Data, consent is defined. b. Art. 8 of the Law on Credit Histories holds that the subject of the credit report has the right to obtain a credit report from each bureau. Proper 135 Russian Federation Credit Reporting System identification is not required by law, but applied as industry practice. c. Under the Law on Credit Histories (Art. 3), an individual has the right to dispute information in a credit report. The credit bureau has 30 days after notification by the individual to review the information. If the mistake is confirmed, the credit bureau can make the change, otherwise the report is left untouched. Within 30 days, the consumer has to be informed in writing of the results of the investigation. Once disputed information is confirmed as correct, credit bureaus have no obligation to further pursue the matter. It is industry practice to forward consumer requests to the specific banks. d. During the time of the dispute, the information is flagged. e. The requirements on information content (Law on Credit Histories, Art. 4) contain also “users of credit reports,” which are disclosed to the data subject, but without specification of timeframe. f. The purposes for which credit reports can be issued are not directly stated by the Law on Credit Histories. Art. 9(2) states that credit bureaus may develop scoring services and rating products. Marketing and other services are not allowed under the law. g. Arts. 10 and 11 of the Law on Personal Data specify special categories of personal data, which include: ethnicity/nationality, political convictions, religious and philosophical beliefs, health status and sexual orientation (however, this law is not fully enforced yet). Since the Law on Credit Histories specifies the information to be included in the report, sensitive information categories cannot be included.105 h. Art. 7 of the Law on Credit Histories states that credit profiles are stored for 15 years starting from the last change of information on obligations of the borrower. The Law on Personal Data (Art. 5) stipulates that information should not be kept longer than for the purpose necessary. i. There is no duty on the side of the credit report users to inform the consumer in cases of adverse decisions when he applied for credit, or in cases where less-than-optimal conditions or prices are offered to him or her. Recommendation There is ample scope for improvement of consumer protection in credit reporting – either by amending and reforming the law, or by drafting regulations. The most important areas include: Consent should be expanded to informed consent, which explains to the consumer the most important aspects of information sharing. Art. 5 of the Law on Credit Histories states that the consumer must be informed by the reporting institution that this consent to information sharing includes the transfer of data to credit bureaus and to third parties (users) “in accordance to the law.” This unnecessarily obscures the transparency of data sharing as more information ought to be provided to consumers. 106 Further, authorities should ensure that institutions are not unduly bundling several consent clauses such as sharing information within the corporate group and credit reporting. Improvement of dispute settlement: Reinvestigation techniques should be monitored by the authorities. Currently, credit bureaus might simply ask banks to confirm whether they hold the disputed information, which does not solve an aggrieved consumer’s problems. Further, if the error is attributable to credit report merging mistakes, the bureau must take responsibility, where applicable. Information that cannot be confirmed within the timeframe of 30 days should be expunged from the report. 105 However, the passport number once stored will inform about nationality. 106 Only with informed consent can a consumer exert important information rights such as the withdrawal of consent for third parties to use the information. 136 Russian Federation Credit Reporting System Shorten data retention periods: Data retention periods in credit reports seem to be extremely long in Russia. Internationally, the practice is to store positive (payment) information for 2-3 years and negative information for 5-10 years. This is also more in line with Art. 5(2) of the Law on Personal Data, according to which data should only be stored as long as purposes require it. Credit information is required for creditworthiness estimation, but only as long as it is predictive. The predictive power of variables should determine their retention period. Increase professional duty of care of reporting institutions: The Law on Credit Histories incompletely regulates the credit reporting system insofar as there are little obligations of reporting institutions (in the case of contractual reciprocity these institutions report and withdraw information). Duties of care ought to be implemented, such as reporting accurate data, the prohibition of resubmitting erroneous information, and proper, standardized identification of individuals, etc. Duties to inform a consumer in adverse situations: One of the most important provisions is the duty to inform a consumer in cases where credit has been denied or has been granted at materially worse terms than for the average consumer. In this case, reporting institutions (banks and other financial institutions) should have the duty to inform the consumer and to provide him or her with the address of the CCCH where they can check for their report. SECTION E DISPUTE RESOLUTION MECHANISMS Good Practice E.1 Out-of-court Dispute Settlement a. A system should be in place that allows consumers to seek affordable and efficient third-party recourse in the event they can not resolve a dispute with a credit institution, credit register or third-party information source; b. An ombudsman or equivalent institution should review consumer complaints, and the institution should be known to the public; c. The ombudsman or equivalent institution’s impartiality and independence from the appointing authority and industry should be assured; d. The enforcement decisions of the ombudsman (or equivalent institution) on credit registers should be publicized. Description In Russia, no low-scale efficient third-party recourse mechanism exists specifically for credit reporting. Consumers can complain to the FFMS, the credit bureau or the bank. The credit bureau, however, typically forwards the complaint to the bank. If the complaint is not resolved, a consumer must go to court, which is the most expensive and longest procedure. There is no ombudsman or equivalent institution in Russia at the moment. Recommendation Once there is a credit reporting association, an ombudsman scheme could be considered. SECTION F CONSUMER EMPOWERMENT Good Practice F.1 Information Resources for Consumers Financial regulators should devise, publish and distribute information resources for consumers that seek to improve awareness by providing information on actively managing the credit report. 137 Russian Federation Credit Reporting System Description Regulators in Russia are currently not playing an active role in this respect. Neither the FSS nor the FFMS have published educational material on how to manage a credit report. FFMS: Credit bureaus can register online. There are links to legislation, but there is no material for consumer education. FSS: The Service posts FAQ, but no information material for consumers. Also, the registration system for companies was not up and running as of June 2008, and it was not possible to register online as information processor. CBR: Although not being a regulator, the CBR is in charge of the CCCH. There is a FAQ and citizens can register online for inquiries. Recommendation Public education can comprise several activities: Key information brochure: The brochure should explain to the consumer his or her privacy choices and which impact they have, as well as his or her rights and obligations as individuals. Examples can be found at the US Federal Trade Commission, which has. issued the following brochures: – Privacy Choices for Your Personal Financial Information – Building a Better Credit Report – Credit Repair: Self Help May Be Best – Disposing of Consumer Report Information? New Rule Tells How Score simulator: The authority could provide a simple score simulator, where the consumer can simulate whether closing two of his or her installment accounts would improve his or her credit score. This service could be web-based. If a consumer would like to know how the score changes directly, he or she would be referred to the reporting agencies that provide such services. Affordability assessments for consumers: The authorities (CPS, CBR and FFMS) could publish together a document of rules of thumb for the consumer: For example, explaining the following: “your housing costs should total no more than 28-32 percent of your monthly income before taxes. Add other long-term debts such as car and student loans, and your total should take no more than 36-41 percent of your monthly income before taxes.” (see US example) Online tool for rating credit bureaus: The authorities could provide an online tool, where consumers may discuss or rate credit reporting agencies in terms of their accessibility and consumer friendliness, data protection standards and transparency. This would give credit bureaus an incentive to compete also in these dimensions. Warnings of problems: The authority could also publish warnings on current problems with credit reports, based upon an evaluation of consumer complaints. Individual market players should not be named, but practices indicated. Good Practice F.2 Measuring Financial Capability In order to ensure that financial consumer protection and educational initiatives are appropriate, it is necessary to measure financial capability with large-scale surveys that are repeated periodically. These surveys should include questions on credit reporting and scoring. Description See Banking Section. Recommendation See Banking Section. 138 Russian Federation Credit Reporting System SECTION G COMPETITION AND CREDIT REPORTING Good Practice G.1 Anti-competitive Effects of Exclusionary Credit Reporting Regulation should prevent market developments where sharing information among banks is used as anti-competitive collusion. This is especially the case when a small number of dominant banks establish a credit bureau, constituting an exclusionary information sharing devise for these banks and where no outside credit institution can enter. Description There is no public credit register located at the CBR. Russian regulators intended to create a competitive credit reporting regime. In Art. 15 of the Law on Credit Histories, conditions are listed which lead to a rejection of an application of a credit bureau. This is the case, for instance, if a party holds more than 50 percent of the shares either as sole shareholder or though affiliated parties. Thus, there must be at least two shareholders per credit bureau, where the second one can be any type of business. In a swift reaction to the law, the two biggest banks, Sberbank and Russian Standard created each their own credit bureau (so-called “pocket credit bureaus”) to not share information with other banks. This is contrary to the original intention of creating an efficient data sharing mechanism among the most important market participants. The FAS was involved in the drafting of the law and endorsed a limit for shareholding of 10-20 percent, which was not supported by the final drafters of the law. Recommendation The current provisions should be changed to prevent exclusionary shareholding in a credit bureau. Further, shareholders’ names should be published and client acceptance policies by credit bureaus ought to be reviewed, such that bureaus are not used as an exclusionary devise. This will increase competition in financial services with a positive impact on customer mobility. Good Practice G.2 Review of Competition in Credit Reporting Given the key significance of the credit reporting system for the financial sector and consumer welfare - a. Competition authorities should monitor competition in that sector; b. Competition authorities that publish periodic assessments of competition of banking and non-bank credit institutions should integrate credit reporting in these assessments. Description The FAS has not looked into the subject matter, because there have yet to be any complaints in respect of banks. Recommendation There is currently no immediate need to act, but competition should be monitored in the future. 139 Russian Federation Credit Reporting System 140 Russian Federation List of Recommendations Annex 1: List of Recommendations Banking 1) Mechanisms need to be put in place to enhance coordination and cooperation among all institutions with an interest in consumer protection for financial services, including financial supervisors, financial institutions and non-governmental organizations. 2) There should be a centralized system in charge of collecting and monitoring the quality of data on complaints, disputes, inquiries and other elements relevant to consumer protection, as well as analyzing the data and providing it freely to the public. 3) The capacity of regulators needs to be enhanced so that they can effectively supervise and enforce the fair behavior of banking institutions and all others involved in the banking services industry. 4) Consideration should be given to amending the Law of the Central Bank to include consumer protection in banking services as an explicit mandate of the Central Bank. 5) There should be a principles-based code of conduct for banks that is devised and enforced by by the banking industry and publicized to the general public through appropriate means. 6) Banks should be required to gather, file and record sufficient information from the consumer in order to ensure that their recommendation, product or service is appropriate to that consumer. 7) Suitability rules should be enacted and enforced, and particular attention should be paid to the issuance of credit cards to suitable customers. 8) The provision of a cooling-off period for any loan agreement should be established as soon as feasible, making sure that there is no penalty that disincentives its application. 9) Article 428 of the Civil Code should be amended in order to do away with the practice of contracts of adhesion. 10) There should be legal provisions that protect consumers against unfair contractual terms and unfair commercial practices of banks. 11) Legislation should be amended in order to require banks to disclose that they are regulated by the Central Bank, including the name and address of the Central Bank. 12) The criminal law needs to be strengthened to deal effectively with false advertising and pyramid schemes of any kind. Also, law enforcement agencies, backed by the Ministry of 141 Russian Federation List of Recommendations Internal Affairs, need to find all companies running any such scheme and to shut them down. 13) The draft Law on Consumer Credit should be carefully reviewed regarding the disclosure of terms and conditions of loan agreements. The law should require that each loan agreement between a bank and a customer set forth a detailed schedule that itemizes the customer’s ongoing monetary obligations and discloses the penalties for pre-payments and for breaches of the loan agreement. The statute should also require that all sums in question be set forth in rubles and not in percentage terms. 14) The professional associations should develop Key Facts Statements and encourage the banks that are members of the associations to give consumers the Key Facts Statement at the point of sale of the contract. 15) The regulations of the Central Bank should incorporate additional requirements of information that banks should disclose in the periodic customer account statements. 16) There should be a legal provision that requires banks to notify customers of changes in interest rates and non-interest charges. 17) There should be legal requirements on updating and retaining customer records. 18) A law on debt collectors would be helpful so as to require, among other things, the licensing of collection agencies, the provision of services according to established parameters, and the provision of statistics to the regulatory agency. 19) The draft legislation on personal bankruptcies should be enacted. 20) Banks should be required to establish an internal complaints procedure. 21) There should be an affordable and efficient third-party recourse mechanism for consumers, in the event that their complaints are not resolved under internal banking procedures. Careful consideration should be given to the establishment of a statutory financial services ombudsman. 22) There should be increased efforts to broaden public awareness of the details of deposit insurance. 23) There is need of a national policy in the area of financial education with a strong component of consumer protection, and including elements of consumer education. Opportunities for basic financial literacy should also be explored, at least as a pilot program for students under 12 years of age in primary and intermediate schools. 24) Print and broadcast media should be encouraged by Government agencies and others to cover issues related to retail financial services. The Central Bank should fund programs or advertisements that explain consumers their rights and obligations.. 25) Banks should engage in initiatives to improve financial literacy of their customers. 142 Russian Federation List of Recommendations 26) Consideration should be given to the establishment of online gateways to a wide range of information, including all aspects of financial consumer protection legislation, educational materials and training courses, as well as counseling and advice. Non-Bank Credit Institutions 1) There should be a comprehensive legislative framework that standardizes and provides consistencies in terms of definitions, legal organization, activities and rules applicable to all cooperatives. 2) There is need for a governmental scheme for licensing, collecting information, regulating, supervising and sanctioning cooperatives. 3) There should be a central register of cooperatives that is publicly available to consumers. 4) Cooperatives should be required to have their financial statements available to the public. 5) Legislation should provide for rules on internal dispute resolution mechanisms for cooperatives. 6) There should be mechanisms to allow a financial regulator or supervisory agency to supervise non-bank credit institutions that provide financial services to households. 7) There is an urgent need to clearly distinguish fraudulent schemes from activities of legitimate cooperatives. 8) The government, financial institutions, civil society and media should work together in order to improve financial literacy, especially in low-income households. Securities 1) The FFMS should educate other governmental agencies as to its activities, so that they can assign complaints to the FFMS or other correct agencies. 2) The law should clearly bring pyramid schemes within the jurisdiction of specific governmental authorities. It would be better if the FFMS were to take the leading role in investigating pyramid schemes. The FFMS should be given increased powers to deal with pyramids, such as the authority to freeze assets of the operator of the pyramid scheme. 3) The FFMS should encourage membership in the SROs. The FFMS should supervise compliance of securities intermediaries with the SRO’s Code of Conduct. 4) The implementation and enforcement of advertising and marketing rules for the securities market should be responsibility not only of the FAS but also the FFMS.. 5) Risk disclosure for complex instruments should be placed more strongly in the laws and regulations, considering that options, futures and margin trading are now allowed. 143 Russian Federation List of Recommendations 6) There should be more detailed regulations regarding the contents of the contract between a broker and an investor, in order to standardize the rights and duties of brokers and investors. 7) Qualification exams for sales staff of securities intermediaries and CIUs should be introduced. 8) A KYC rule should be put into FFMS regulations. 9) A suitability rule should be put into FFMS regulations. 10) More detailed sales practice rules should be put in the FFMS regulations. 11) A detailed regulation on the procedures for segregation of investor funds should be enacted. 12) A more detailed regulation on contract notes should be in the FFMS regulations. 13) More specific regulations as to statements should be placed in the FFMC regulations. 14) The FFMS regulations on sharing customer’s information and permitted disclosure should be strengthened. 15) The FFMS should include regulations on internal dispute resolution. 16) A formal dispute settlement mechanism should be established. Consideration should be given to establishing an ombudsman or turning one of the tribunals into one. Insurance 1) Modern rules on B2C insurance contracts and responsibilities for insurance intermediaries need to be introduced to the law. This may require the amendment of certain articles in the Civil Code, but significant progress could also be made through amendments to the Insurance Law, or the enactment of a special law on insurance contracts, agents and brokers. 2) An effective alternative dispute resolution mechanism needs to be established for consumers with insurance-related complaints, and claims-related complaints in particular. This mechanism could be based on the existing system. 3) All insurance intermediaries should be registered on a register open to the public. Insurance agents should be tied to one insurer for each class of insurance sold and they should have some liability for the policies they sell. 4) Benefit illustrations under life contracts, if permitted, should be capped according to realistic future earnings prospects. 144 Russian Federation List of Recommendations 5) Insurers should be responsible for the verifiable statements of their agents, for undertakings provided in their sales and marketing materials as well as by the contents of the proposal and policy documents. 6) Brokers should be able to accept commission from insurers but if they do it, this should be disclosed to the policyholder. In addition policyholders buying single premium and long term savings contracts should be allowed to request details of the commission to be received by the agent or broker. 7) The Consumer Protection Law should derogate suitability requirements and authorities to the Insurance Law or any special contracts or brokers and agents (mediation) laws that may come into effect. 8) The industry associations should develop Key Facts Statements and encourage their use by the financial institutions that are members of the associations. An easily readable and comprehensible key facts statement should appear at the front of all B2C proposal and policy documents. 9) There should be a requirement for sales intermediaries or officers to obtain sufficient information about the consumer before offering a financial service. 10) Cooling-off periods should be introduced for longer term savings contracts so that consumers can reverse the effects of high pressure sales techniques (including multi-level sales). 11) Agents and brokers should have to pass tests relevant to the complexity of the service they are offering or selling. 12) FSIS or ARIA should publish, at least annually, sufficient balance sheet information about each insurer for intermediaries, advisors and the business media to form a broad view as to the financial strength of each insurer. 13) The Insurance Law should specify that traditional life insurance savings contract policyholders will receive statements of value at least annually. If investment-linked contracts are introduced to the Russian market, valuations should be available on line and through the mass media at least weekly. 14) Non-life insurance policy wordings should be set by the professional association (and recommended for all association members) and any variation should be formally disclosed through an attached derogation statement. 15) Policies for retail customers should not permit denial of a claim or arbitrary cancellation of a B2C insurance contract for reasons other than material non-disclosure and other rules already in the Civil Code. In addition a claim under a B2C insurance contract should not be deniable after it has occurred if its cause was not related to a non-disclosed risk factor, although a premium adjustment may be justified. 145 Russian Federation List of Recommendations 16) Rules should be in place requiring the use of separate bank accounts for policyholder funds while they are being held by intermediaries, and the establishment of appropriate audit trails. 17) A consumer should be made aware if he or she is signing a data processing waiver in a key facts page attached to an insurance proposal and contract. 18) It should be made clear in the Insurance Law that the data protection and confidentiality provisions apply to insurance brokers and agents. 19) The Law on Personal Data should be amended to ensure that the user of the data is bound by restrictions applying to the source of the data, including government sources. 20) Insurers should be required to have internal and auditable dispute resolution and recording processes in place. Private Pensions 1) The financial structure of NPFs should be made more robust. This could be made by establishing risk-based capital requirements, which would in turn modify investment policies. 2) The public should be properly educated as to the workings of the supplementary pension system. This education should include information on the risks and returns available. 3) Alternative dispute arrangements should be made available to pension fund participants. This could be initially handled through the industry body subject to adequate independence and governance, possibly working with one of the official entities with a strong territorial presence. 4) Pension fund managers should be required to have specific internal dispute resolution processes in place. These processes should be communicated to participants. 5) Individuals selling or advising on voluntary private pension funds should be formally trained. Their knowledge should be examined, and then they should be registered. 6) The nature of annuities provided by NPFs should be disclosed to participants at the time they enter the fund. Ideally annuities would be provided by specialized insurers or by the PFR solidarity fund (which could solve certain tax anomalies) and the range of options should be small and transparent. 7) FFMS and FSIS could enhance their cooperation under the private pension and investment-linked life insurance headings. 8) NPFs should have a higher level of seniority than unsecured creditors in the event of a bank failure. 146 Russian Federation List of Recommendations 9) Fund managers should be required to provide more frequent reporting to participants for both mandatory and voluntary pensions. This reporting should be more timely than is presently specified. Costs could be reduced by providing on-line information. 10) Other requirements that apply to mandatory pensions should also apply to voluntary contracts, such as simplified language. 11) The industry bodies should begin to jointly work on a broad, standards-based, code of conduct. 12) Cooling-off periods should apply to voluntary individual pensions. Credit Reporting 1) The FFMS ought to concentrate on three main fields: (i) data confidentiality, (ii) efficient solution of consumer disputes and (iii) data quality in credit reports. 2) The FFMS could publish its data protection audit procedures in handbooks and derive good practices for the supervised entities. 3) There should be an assessment of the quality of information in credit reports. Information on credit report errors remains limited for Russia. 4) The validation of credit scoring models should be done, once they are introduced by a greater number of market players in Russia. 5) The FFMS and FSS could coordinate on developing a common methodology for an audit which monitors compliance with both statutes (the Law and Credit Histories and the Law on Protection of Personal Data). 6) The Association of Russian Banks and the Association of Regional Banks of Russia could play a more active role in informing consumers about credit reporting. 7) A Code of Conduct of credit bureaus could be developed by the FFMS and credit bureaus subscribe to it. With this code credit bureaus would pledge to adhere to fair principles in processing information and to not use information from informal sources. It could be drafted together with the industry and outside consultants. The code of conduct would help to inform the public on credit reporting and to create additional trust. 8) A common “Working Group on Credit Registers” could be founded, with members of the FFMS (credit bureaus), CBR (banking industry) and FAS (competition matters). This group could find ways to improve the credit reporting system’s transparency. 9) Regulators should consider opening the range of purposes of the credit bureaus to include the insurance industry. Inclusion of debt collection agencies should only be considered after this industry is fully regulated and under strong supervision. Otherwise the law should directly state clear and narrow purposes for which information can be shared. 147 Russian Federation List of Recommendations 10) Once the credit scoring is fully operational, consumers ought to have the right to see the latest calculated score, the range of scores possible, the average score of the population and the four main factors that impact on the score. 11) Authorities ought to amend the law or provide clarification on a crucial aspect of granting rights to individuals: Data that is derived from using rights (such as self-inquiries, credit inquiries at lenders or initiated disputes) ought not to be scored. 12) Credit reporting agencies in Russia, once they reach higher coverage rates ought to play a more active role in the education of the public. Two market players already plan to introduce consumer-direct products. 13) The industry should join forces to provide more information material to the public, such as a standardized information brochure for consumers. Further, they might develop a code of conduct with fair data practices principles and advertise the code to the public. The companies should be held liable for breaching the code, once it exists. 14) Professional hiring standards are not extra demanded by the Law on Credit Histories, but recommended for licensing. Professional standards could become part of an industry Code of Conduct. However, the authority could prioritize regularly the policy of access to the databases which ought to be allowed for dedicated personnel only. Further, the security audit ought to check in detail what other technical security measures apply for protection information. 15) The authorities in Russia ought to stop the illegal trade of personal information immediately. The supervisory authority should become more active in prosecuting and look for advertisements in the market place to find entities that violate the law. 16) Consumers should have access to all databases in the private sector that store information on them. This is necessary for them to check and review their personal information upon proper identification. No secret databases should be used in the process of credit evaluation. 17) Russian authorities should consider the introduction of greater responsibilities in terms of information sharing applicable to banks and other reporting institutions. The proposed association of credit bureaus could also play a valuable role, developing standardized model clauses on information sharing to be used by the association members, and improving the clarity of consumer disclosure where information is shared with third parties. 18) Financial service providers should inform the consumer about the main reason for decline of a consumer’s application. There should be some standard information that must be given to the consumer, including main reason, information taken into account, short explanation of score/credit report and brochure on credit reporting system (including reference to where information on credit report can be accessed). This information can be easily provided in an extra “information box” included in the contract. 148 Russian Federation List of Recommendations 19) A professional association for credit bureaus, if created, should develop a small and easy- to-read key information brochure that is given to the consumer at the point-of-sale, especially when he/she has been declined for credit. This brochure would explain what a credit report and credit score is, what the credit reporting system is, where more information on the system can be found (government websites), where the consumer can access his/her credit report, how to resolve disputes. In addition, the brochure could provide the consumer with a fictive example of the categories of risk used by credit reporting agencies to classify individuals. The brochure draft ought to be discussed with the industry association and the consumer associations. 20) Preservation of rights should be part of the law and mentioned in any other documents for consumers (such as brochures). Any restrictions of liabilities that arise under the law should be void. 21) Consent should be expanded to informed consent, which explains to the consumer the most important aspects of information sharing. In Art. 5 of the Law on Credit Histories it is stated that the consumer must be informed by the reporting institution that this consent to information sharing includes the transfer of data to credit bureaus and to third parties (users) “in accordance to the law.” This unnecessarily obscures the transparency of data sharing as more information ought to be provided to consumers. Further, authorities should ensure that institutions are not unduly bundling several consent clauses such as sharing information within the corporate group and credit reporting. 22) Dispute settlement mechanisms should be improved. Re-investigation techniques should be monitored by the authorities. Credit bureaus might simply ask banks to confirm whether they hold the disputed information, which does not solve an aggrieved consumer’s problems. Further, if the error is attributable to credit report merging mistakes, the bureau must take responsibility, where applicable. Information that cannot be confirmed within the timeframe of 30 days should be expunged from the report. 23) Data retention periods should be shortened. Internationally, the practice is to store positive (payment) information for 2-3 years and negative information for 5-10 years. This is in line with Art. 5.2 of the Law on Personal Data, according to which data should only be stored as long as purposes required it. Credit information is required for creditworthiness estimation, but only as long as it is predictive. The predictive power of variables should determine their retention period. 24) Rules on duty of care should be implemented, including: accurate data report, prohibition of resubmitting erroneous information, proper and standardized identification of individuals, etc. 25) There should be rules on duty to inform a consumer in adverse actions. Financial institutions should inform a consumer in case credit has been denied or granted at materially worse terms than for the average consumer, and provide him/her with the address of the CCCH where they can check for their report. 26) Once there is a credit reporting association, an ombudsman scheme could be considered. 149 Russian Federation List of Recommendations 27) There should be public education activities on credit reporting, including: key information brochure that explains to the consumer: privacy choices and which impact they have, privacy choices, rights and obligations for individuals; score simulator, where the consumer can simulate whether closing two of his/her installment accounts would improve his/her credit score; affordability assessments for consumers published by the authorities in a document of rules of thumb for the consumer; online tool for rating credit bureaus according to their accessibility and consumer friendliness, data protection standards and transparency; warnings on current problems with credit reports, based upon an evaluation of consumer complaints. 28) The provisions of the Law on Credit Histories regarding shareholders’ participations (currently requiring at least two shareholders, with one of them engaged in any type of business) should be changed to prevent exclusionary shareholding in a credit bureau. 29) Shareholder names should be published and client acceptance policies by credit bureaus ought to be reviewed such that bureaus are not used as an exclusionary devise. 30) Although there is no immediate need to act, competition should be monitored in the near future. 150 Russian Federation Key Laws and Institutions Annex 2: Key Laws and Institutions The Federal Service for Supervision of Consumer Protection and Welfare (CPS) was established in 2004 as the authority in charge of administering the Consumer Protection Law. Previously, this Law was overseen by the Ministry for Antimonopoly Policy. The head of CPS is appointed by the Prime Minister and reports to this office. CPS does not have responsibilities of oversight on data protection but covers financial services. The Central Bank of Russia (CBR) oversees banking activities. However, it does not regulate or supervise credit cooperatives, credit unions or housing finance companies. The CBR also holds the Central Catalogue of Credit Histories (CCCH), but does not conduct supervision over credit reporting. The Federal Financial Markets Service (FFMS) was established in 2004 as the oversight of financial markets, including exchanges and pension schemes. It is also the main authority supervising credit bureaus under enforcement of the Law on Credit Histories. This agency holds the State Register of Credit Bureaus, where 31 credit bureaus were registered. The Federal Service for Insurance Supervision (FSIS) was set up in 2004 as the federal supervisory authority for insurance activities. The Federal Service for the Supervision of Mass Media, Communications and Protection of Cultural Heritage (FSS) is the oversight of the Law on Personal Data. It operates under the Ministry of Communications and has the task of registering owners and operators of databases with personal information. The FSS was set up in 2007, as a result of a merger of the Federal Service for the Supervision of Communications and the Federal Service for the Supervision of Mass Media and the Protection of Cultural Heritage. The Federal Service for Technical and Export Control (FSTEC) and the Federal Security Service (FSB) have been charged in 2007 with the responsibility of issuing licenses and monitoring the technical security of information systems that process personal data. The Federal Anti-Monopoly Service (FAS) was established in 2004 as the body in charge of the adoption of regulations, control and supervision over the observance of legislation in the sphere of competition on commodity markets, protection of competition on financial services' markets, activity of subjects of natural monopolies, and advertising. Non commercial claims involving individuals (real persons) are handled by the Federal Courts of General Jurisdiction. Below a value threshold (200 times monthly minimum wage), actions are handled by special state courts ruled over by Justices of the Peace, who have full judicial status. At present these regional courts appear to supplant the ADR mechanisms. The Association of Russian Banks (ARB) has an ombudsman office within its premises in Moscow. Although this ombudsman has focused on disputes between ARB member banks, the ARB is keen on expanding its work to cover disputes that arise from customers of ARB member banks. The ARB has also drafted a code of conduct and established an Arbitration Court. The Association of Regional Banks of Russia (ARBR) has devised provisions for an Ombudsman who would deal with disputes from customers of ARBR member banks. The ARBR has also adopted a code of conduct for consumer credit. 151 Russian Federation Key Laws and Institutions In the securities market, the main exchange systems are the Moscow Interbank Currency Exchange (MICEX) and the Russian Trading System Stock Exchange (RTS). The largest SRO is the National Association of Stock Market Participants (NAUFOR) with over 400 members from all types of participants. The National Securities Market Association (NFA) is primarily made up of banks that engage in brokerage and other securities business, whereas the National League of Management Companies (NLU) is for asset managers.. According to the law, membership for SROs is not mandatory. NAUFOR and NFA have arbitration courts set up in their organizations. Contracts for customers on RTS and MICEX have arbitration clauses that refer disputes to the two SROs respectively. Insurance companies are represented by the All Russian Insurance Association (ARIA) and its affiliated regional bodies. This body is primarily intended to represent the insurance sector’s interests at the political level. The Russian Association of Motor Insurers (RAMI) carries out the standard governance and data gathering roles for mandatory motor insurance. RAMI has already established a number of codes of practice for its members, including several codes dealing with consumer protection issues. In the insurance market, the FSIS has an obligation to regularly hear policyholder complaints. For this matter, the FSIS has set up a Complaints and Claims Section; its ‘territorial offices’ have taken this function, given the increasing volume of complaints. However, the FSIS has no powers to enforce specific resolutions. At the same time, the associations cannot resolve any dispute, since the Insurance Law states that disputes need to be resolved in an appropriate legal forum or through conciliation. There is no ADR mechanism in place. An active financial media is developing in Russia (Vedomisti, Ekspert) including a dedicated television outlet (RBC-TV) with associated print media Activities by unregistered entities, such as pyramid schemes, are not overseen by any regulatory agency but by the Ministry of Internal Affairs. The concept of consumer protection was initially introduced into Russian legislation by the terms of the Law on the Protection of Consumers’ Rights of 7 February 1992. This Law was innovative in providing consumers certain rights enforceable by an agency, consumer associations, as well as by individuals. Protection was, however, afforded initially in respect of what may be termed “traditional goods and services” only. Indeed, it was only as a result of successive definitive interpretations of the term “service”, as provided by the Plenary Commission of Russia’s Supreme Court, that Chapter III of this Law (dealing specifically with “services”) was made applicable to bank deposits, consumer and mortgage loans and other similar financial services. That said, specific rules under the Law on the Protection of Consumers’ Rights aimed at eliminating abuses in the financial services sector, including detailed rules on disclosure and deception, are still to be developed. Although lacking a large cadre of specialists in consumer protection issues regarding banking matters, the role of Russia’s Federal Service for the Oversight of Consumer Protection and Welfare (or Consumer Protection Service, CPS)107 is to implement the Consumer Protection Law. The head of CPS is appointed by the Prime Minister and reports to this office. In addition, although there are no provisions regarding consumer protection in the Law governing the Central Bank of Russia (CBR) (Federal Law No. 86-FZ, dated July 10, 2002), the CBR is 107 The Federal Service for the Oversight of Consumer Protection and Welfare came into existence in 2004. Prior to that, the Consumer Protection Law was administered by the Ministry for Antimonopoly Policy. 152 Russian Federation Key Laws and Institutions required by statute to maintain financial stability of the banking system and protect the interests of depositors and lenders. While the CBR is not directly responsible for consumer protection— and cannot intervene in individual contract disputes between consumers and credit organizations—the CBR has a role to play in supporting improved financial consumer protection. In addition, the CBR Law provides, among other things, for the establishment of rules for the conduct of banking operations and for the supervision of banks and credit institutions.The CBR, however, does not regulate or supervise credit cooperatives, housing finance companies and other non-bank institutions. The Law on Banks and Banking Activities defines the terms “credit institution”, “bank”, “non - bank credit institution” and “banking group”, etc., and, among other things, sets out the principles of the relationship between credit institutions and their customers and the state, establishes a banking secrecy regime, and provides anti-monopoly restrictions for credit institutions, as well as principles for the organization of the savings business. In order to appreciate the full extent of his or her legal rights as a consumer of any financial service that a bank in Russia may offer, a consumer first needs, at the very least, to understand each relevant provision of the Constitution108; the Civil Code; the Law on Consumer Protection; the Law on the Central Bank of Russia; the Law on Banks and Banking Activities; the Law on Advertising; the Law on Credit Histories, the Law on the Protection of Competition; the Law on Deposit Insurance; the Law on Payments on Household Deposits with Bankrupt Banks Not Covered by the Compulsory Deposit Insurance System; the Law on Insolvency of Credit Institutions; the Anti-money Laundering Law; the Law on Data Protection; the Law on Collateral; and the Criminal Code, as well as the relevant regulations, orders and directions made pursuant to these various laws. Thus there is no single place or publication where a Russian consumer can readily obtain a clear statement of the protections in place or required to be in place in order to serve his or her interests in terms of any banking service. Nor is there any single statement that provides a clear warning to consumers as to those banking practices that still remain legitimate but which can be harmful to consumer interests. Furthermore, no data collection and analysis regarding individual consumers (including their complaints, disputes and inquiries), exits in any systematic and official way in respect of banking operations, whether by commercial banks, the CBR, the CPS or any Government Ministry. Consumer complaints in respect of financial services are most typically handled within the territorial jurisdiction of the court where the contract that is subject to the complaint was signed, rather than where the bank or other financial institution may have been registered. State Courts presided over by Justices of the Peace (Small Claims Courts) deal with all formal consumer claims throughout Russia that are below 200 times the monthly minimum wage (RUB 4,330 effective from January 2009). The Federal Courts of General Jurisdiction have exclusive jurisdiction over all such claims at or in excess of this sum. The judgments of all of these courts are, however, still not routinely published. The Arbitration Court under the Chamber of Commerce does not deal with consumer complaints. 108 By the terms of the Constitution of the Russian Federation, the Federal level of Government has exclusive jurisdiction to deal with the legal regulation of banking activities and the Central Bank of Russia is stated to be independent of other state bodies. 153 Russian Federation Key Laws and Institutions General Laws and Regulations 1) The Civil Code of the Russian Federation 2) The Criminal Code of the Russian Federation: Federal Law No. 63-FZ of June 13, 1996 as amended 3) Law on the Protection of Consumers’ Rights: Law of the Russian Federation No. 2300-I of February 7, 1992, as amended by Federal Law No. 2-FZ of January 9, 1996 and by Federal Law No. 234-FZ of October 25, 2007 4) Law on the Protection of Competition: Federal Law No 135-FZ of July 26, 2006 5) Law on the Protection of Competition on the Financial Services Market: Federal Law No 117-FZ of December 30, 2001 6) Law on Advertising: Federal Law No. 38-FZ of March 13, 2006, as amended on December 18, 2006 and on February 9, April 12, July 21 and December 1, 2007 7) Law on Personal Data: Federal Law No. 152-FZ of July 27, 2006 8) Law on Information, Information Technologies and Protection of Information: Federal Law No. 149-FZ of July 27, 2006 9) Law on Collateral: Federal Law No. 216-FZ of November 11, 2003 10) Law on Insolvency: Federal Law No. 127-FZ of October 26, 2002, as amended on August 22, December 29 and 31, 2004; October 24, 2005; July 18 and December 18, 2006; February 5, April 26, July 19, October 2 and December 1, 2007 11) Law on the Ratification of the Convention of the Council of Europe for the Protection of Individuals with Regard to Automatic Processing of Personal Data: Federal Law No. 160-FZ of December 19, 2005 12) Code of Administrative Offences of the Russian Federation No. 195-FZ of December 30, 2001 as amended 13) Law on the Arbitration Courts in the Russian Federation: Federal Constitutional Law No. 1-FKZ of April 28, 1995, as amended in July 4, 2003; March 25, 2004; July 12, 2006 and April 28, 2008 14) Labor Code of the Russian Federation: Federal Law No. 197-FZ of December 31, 2001 15) Law on Protection of the Rights of Legal Entities and Individual Entrepreneurs in the Implementation of State Control (supervision) and Municipal Control: Federal Law No. 294-FZ of December 26, 2008 16) Law on Providing Access to Information Regarding the Activity of the Courts in the Russian Federation: Federal Law No. 262-FZ of December 26, 2008 17) Law on Self-Regulating Organisations: Federal Law No. 315-FZ of December 1, 2007 18) Law on Amendments to Certain Legislative Acts of the Russian Federation Regarding the Improvement of Procedures of Pledge Foreclosures, Federal Law No. 306-FZ of December 30, 2008 154 Russian Federation Key Laws and Institutions Laws and Regulations for Financial Institutions Banks 1) Law on the Central Bank of the Russian Federation: Federal Law No. 86-FZ of July 10, 2002, as amended on January 10 and December 23, 2003; June 29, July 29 and December 23, 2004; June 18 and July 18, 2005; May 3, June 12 and December 29, 2006; March 2 and April 26, 2007 2) Law on Banks and Banking Activities in the RSFSR: Federal Law No. 395-I of December 2, 1990, as amended on December 12, 1991; February 13 and June 24, 1992; February 3, 1996; July 31, 1998; July 5 and 8, 1999; June 19 and August 7, 2001; March 21, 2002; June 30, December 8 and 23, 2003; June 29, July 29, November 2, December 29 and 30, 2004; July 21, 2005; February 2, May 3, July 27, December 18 and 29, 2006; May 17, July 24, October 2, November 2 and December 4, 2007; March 3 and April 8, 2008 3) Law on the Insurance of Natural Persons’ Deposits in Banks of the Russian Federation: Federal Law No. 177-FZ of December 23, 2003, as amended on August 20 and December 29, 2004; October 20, 2005; July 27, 2006; March 13, 2007 and October 13, 2008 4) Law on Insolvency of Credit Institutions: Federal Law No. 40-FZ of February 25, 1999 as amended on January 2, 2000; June 19 and August 7, 2001; March 21, 2002; December 8, 2003; July 28 and August 20, 2004; December 18 and 29, 2006 and December 1, 2007 5) Law on Additional Measures to Strengthen the Stability of the Banking System through December 31, 2011: Federal Law No. 175-FZ of October 27, 2008 6) Letter on the Issue of the Carrying Out of Consumer Crediting: Letter of the Central Bank of Russia No. 228-T of December 29, 2007 7) Ordinance on amending Regulation No. 254-P, dated March 26, 2004, on the Procedure for Allocation by Credit Institutions of Provisions for Possible Losses on Loans, Loan Debts and Similar Debts: Ordinance of the Central Bank of Russia No. 1759-U of December 12, 2006 8) Letter on Setting an Effective Interest Rate on Loans Extended to Households: Letter No. 175-T of December 29, 2006 9) Direction on the Procedure for the Calculation of the Full Value of a Credit and for Bringing It to the Notice of the Natural Person Who Is a Borrower: Directive of the Central Bank of Russia No. 2008-U of May 13, 2008 10) Recommendations for the Standards of Disclosing Information in Case of Granting Consumer Credits: Letter of the Federal Antimonopoly Service No. IA/7235 and of the Central Bank of Russia No. 77-T of May 26, 2005 Non-Bank Credit Institutions 1) Law on Consumer Credit Cooperatives of Citizens: Federal Law No. 117-FZ of August 7, 2001 155 Russian Federation Key Laws and Institutions 2) Law on Consumer Cooperation (Consumer Societies and their Unions) in the Russian Federation: Federal Law No. 3085-1 of June 19, 1992 3) Law on Agricultural Cooperation: Federal Law No. 193-FZ of December 8, 1995 4) Law on Nonprofit Organizations: Federal Law No. 7-FZ of January 12, 1996 5) Rules of Prudential Regulation of Non-Bank Credit Institutions which Perform Deposit and Credit Operations: Order of the Central Bank of Russia No. 153-P of September 21, 2001 6) Rules of Prudential Regulation of Non-Bank Credit Institutions which Perform Cash Clearing Operations and Collecting Organizations: Order of the Central Bank of Russia No. 02-390 of September 8, 1997 7) Volgograd Oblast Law on State Supervision and Oversight of Consumer Credit Cooperatives of Citizens No. 706-OD of May 27, 2002 Securities 1) Law on the Securities Market: Federal Law No. 39-FZ of April 22, 1996, as amended on November 26, 1998; July 8, 1999; August 7, 2001; December 28, 2002; June 29 and July 28, 2004; March 7, June 18 and December 27, 2005; January 5, April 15, July 27, October 16 and December 30, 2006; April 26, May 17, October 2 and December 6, 2007. 2) Law on the Protection of Rights and Lawful Interests of Investors on the Securities Market: Federal Law No. 46-FZ of March 5, 1999, as amended 3) Law on Investment Funds/Trusts: Federal Law No. 156-FZ of November 29, 2001, as amended on June 29, 2004; April 15, 2006 and December 6, 2007 4) Decision on the Federal Financial Markets Service: Decision of the Government of the Russian Federation No. 206 of April 9, 2004, as amended on August 10, 2005; March 20 and May 29, 2006; March 10 and July 6, 2007 5) Rules for Brokering and Dealing Activities on the Securities Market of the Russian Federation: Decision of the Federal Securities Market Commission of the Russian Federation No. 9 of October 11, 1999 6) Rules of Pursuance of Brokerage Activity in the Securities Market through the Use of Clients' Funds: Decision of the Federal Securities Market Commission No. 18 of September 22, 2000 as amended 7) Regulations on the Requirements to Separate Monetary Funds of a Broker and Monetary Funds of His Clients and Ensure the Clients' Rights When Using the Clients' Monetary Funds in the Broker's Own Interests: Decision of the Federal Securities Market Commission No. 03-39/ps of August 13, 2003 8) Decision on Preventing the Conflict of Interests in the Event of Pursuance of Professional Activity in the Securities Market: Decision of the Federal Securities Market Commission No. 44 of November 5, 1998 as amended. 9) Decision on the Qualification Demands Made on Special Official Persons, Responsible for Observing the Rules for Internal Control and for the Programmes for Its Implementation, and on the Demands Made on the Training and Education of the Personnel, and on the Identification of Clients and Benefit Acquirers for the Purposes of the Counteraction to Legalizing (Laundering) the Incomes, Derived in a Criminal Way, and to Financing Terrorism: Decision of the Government of the Russian Federation No. 715 of December 5, 2005, as amended on March 17, 2008 156 Russian Federation Key Laws and Institutions 10) Regulations on the Financial Market Specialists: Order of the Federal Financial Markets Service No. 05-17/pz-n of April 20, 2005 11) Regulations on the Reporting Performed by Professional Participants in the Securities Market: Decision of the Federal Securities Market Commission No. 109n of December 11, 2001 12) Decision on the Procedure for the Keeping of Internal Record of Transactions, in Particular, Time Transactions and Transactions in Securities by the Professional Participants in the Securities Market Pursuing Brokerage, Dealership Activity and the Activity of Managing Securities: Decision of the Federal Securities Market Commission No. 32 and Decision of the Ministry of Finance of the Russian Federation No. 108n of December 11, 2001 as amended on February 4, 2004 13) Regulations on the Internal Control of a Professional Participant in the Securities Market: Decision of the Federal Securities Market Commission No. 16 of July 19, 2001 14) Regulations on the Internal Control over a Professional Securities Market Maker: Decision of the Federal Commission for Security Market No. 03-34/ps of August 13, 2003 as amended Insurance 1) Law on the Organization of Insurance Business in the Russian Federation: Law of the Russian Federation No. 4015-1 of November 27, 1992, as amended on December 31, 1997; November 20, 1999; March 21 and April 25, 2002; December 8 and 10, 2003; June 21 and July 20, 2004; March 7, July 18 and July 21, 2005; May 17, November 8 and 29, 2007 2) Decision on the Approval of the Regulations on the Federal Service of Insurance Supervision: Decision of the Government of the Russian Federation No. 330 of June 30, 2004, as amended on April 25, 2008 3) Order on Some Questions Bearing on the Application of the Law of the Russian Federation on the Protection of the Rights of Consumers: Order of the Ministry of the Russian Federation for Antimonopoly Policy and Support of Entrepreneurship No. 160 of May 20, 1998, as amended on March 11, 1999 4) Informational Letter on the Review of the Case-Law in Respect of the Disputes Connected with Execution of Insurance Contracts: Informational Letter of the Presidium of the Higher Arbitration Court of the Russian Federation No. 75 of November 28, 2003 Non-State Pension Funds 1) Law on Non-State Pensions Funds: Federal Law No. 75-FZ of May 7, 1998, as amended on February 12, 2001; March 21, 2002; January 10, 2003; December 2, 2004; May 9, 2005; October 16, 2006 and December 6, 2007 2) Law on Individualized (Personalized) Record-Keeping in the System of Obligatory Pension Insurance: Federal Law No 27–FZ of April 1, 1996 3) Law on Mandatory Pension Insurance in the Russian Federation: Federal Law No 167– FZ of December 15, 2001 as amended 157 Russian Federation Key Laws and Institutions 4) Law on Labour Pensions in the Russian Federation: Federal Law No. 173–FZ of December 17, 2001 5) Law on Investment of Funds for Financing the Funded Part of Labour Pensions in the Russian Federation: Federal Law No. 111–FZ of July 24, 2002 as amended 6) Federal Law No. 334–FZ on Modification in the Federal Law ‘About Investment Funds’ and Separate Acts of the Russian Federation (Art. 2) 7) Decision on the Procedure for Non State Pension Funds Making agreements with Depositories and on the Peculiarities of Activities of the Depositories Servicing Non- State Pension Funds: Decision No. 383 of April 28, 2000 8) Decision on Rules for the Notification by the Non–governmental Pension Fund effecting Compulsory Pension Insurance of the Ministry of Labour and Social Development of the Russian duration and the Pension Fund of the Russian Federation about Newly concluded Contracts of Compulsory Pension Insurance: Decision No. 798 of December 30, 2003 as amended 9) Decision on Rules for the Placement of Means from the Pension Reserves of Non- government Funds and for Controlling their Placement: Decision No. 63 of February 1, 2007 Credit Reporting 1) Law on Credit Histories: Federal Law No. 218-FZ of December 30, 2004 as amended on July 21, 2005 and July 24, 2007 2) Decision on the Federal Executive Authority Authorized to Execute the Functions of Control and Supervision over Credit Bureaus: Decision of the Government of the Russian Federation No. 501 of August 10, 2005 3) Regulations on the Requirements of Financial Condition and Business Reputation of Participants in Credit Bureaus: Order of the Federal Financial Markets Service No. 05- 52/pz-n of October 27, 2005 as amended on September 20, 2007. 4) Decision on Adopting Provisions for Granting Additional (Restricted) Portion of the Credit History to Subjects of Credit Histories, to Courts (Judges), and to Pre-trial Investigation Authorities: Decision of the Government the Russian Federation No. 435 of July 16, 2005 5) Order on Endorsing the Procedure for Conducting a Tender for Gratuitous Transfer of Credit History Reports: Order of the Federal Financial Markets Service No. 05-88/pz-n of December 22, 2005 6) Order on Endorsing the Procedure for Conducting an Auction Sale of Credit History Reports: Order of the Federal Financial Markets Service No. 05-87/pz-n of December 22, 2005 7) Order on the Approval of the Administrative Regulations of the Federal Financial Markets Service on the Fulfillment of the State Function Involved in Keeping the State Register of Credit Bureaus: Order of the Federal Financial Markets Service No. 07-89/pz- n of August 14, 2007 8) Decision on Endorsing the Regulations on the Federal Service for Supervision in the Area of Mass Media, Communications and Protection of Cultural Heritage: Decision of the Government of the Russian Federation No. 354 of June 6, 2007, as amended on December 15, 2007; May 29 and June 2, 2008 158 Russian Federation Key Laws and Institutions 9) Decree on the Federal Service for Supervision in the Area of Mass Communications, of Communication and of Protection of the Cultural Heritage: Decree of the President of the Russian Federation No. 320 of March 12, 2007, as amended on September 24, 2007 and May 12, 2008 10) Directive on the Procedure for Filing Inquiries and Soliciting Information from the Central Catalogue of Credit Histories by a Subject of a Credit History and a User of a Credit History by Means of Contacting the CBR Webpage: Directive of the Central Bank of Russia No. 1610-U of August 31, 2005 11) Directive on the Procedure for and Forms of Disclosure of Information listed in the Titles of Credit Histories, and Codes of Subjects of Credit Histories listed in the Central Catalogue of Credit Histories: Directive of the Central Bank of Russia No. 1611-U of August 31, 2005 12) Directive on the Procedure for Filing Inquiries and Soliciting Information from the Central Catalogue of Credit Histories by a Subject of a Credit History and a User of a Credit History by Means of Contacting a Credit Organization: Directive of the Central Bank of Russia No. 1612-U of August 31, 2005 13) Directive on the Procedure for Filing Inquiries and Soliciting Information from the Central Catalogue of Credit Histories by a Subject of a Credit History and a User of a Credit History by Means of Contacting a Credit Bureau: Directive of the Central Bank of Russia No. 1635-U of November 29, 2005 14) Directive on the Procedure for Filing Inquiries and Soliciting Information from the Central Catalogue of Credit Histories by a Subject of a Credit History by Means of Contacting a Post Office: Directive of the Central Bank of Russia No. 1821-U of April 25, 2007 15) Recommendations as to Arranging Cooperation between Territorial Branches of the Central Bank of Russia and Credit Organizations (Branches) with the Automated System "Central Catalogue of Credit Histories": Letter of the Central Bank of Russia No. 32-T of March 27, 2007 16) Decree on Additional Guarantees of Private Citizens’ Rights to Information: Decree of the President of Russia No. 2334 of December 31, 1993, as amended on January 17, 1997 and September 1, 2000 17) Regulations on Licensing an Activity for the Technical Protection of Confidential Information: Decision of the Government of the Russian Federation No. 504 of August 15, 2006 18) Regulations on Licensing the Development and/or the Production of the Means of Protecting Confidential Information: Decision of the Government of the Russian Federation No. 532 of August 31, 2006 19) Rules for Making the Payment for the Furnishing of Information about Registered Rights, the Issuance of Copies of Agreements and of Other Documents Expressing the Substance of Unilateral Transactions Effected in a Simple Written Form: Decision of the Government of the Russian Federation No. 773 of December 14, 2004. 159