Strict oversight applied to all lending

Photo: Sander Ilvest

Contrary to public impression, the Creditors and Credit Brokers Act passed right before elections will not cover fast loan firms alone: all enterprises involved in lending, leasing and instalment payment will be under Financial Supervision Authority (FSA).

The only exceptions are loan associations with low interests and small customer bases (less than 3,000 clients) and leasing companies belonging to banking groups as the activity of these were supervised by the Authority even before. 

«The law makes no difference what kind of consumer credit it is. Basically, all loan types directed towards consumers are included,» said FSA board member Andre Nõmm.

Consumer credit is a broad category. This covers car leasing, credit cards, mortgage loans, as well as the aggressive fast loans.

By March 21^st next year, all enterprises desiring to operate in the segment need to apply for activity license from FSA. The application needs to be filed half a year in advance i.e. not later than beginning of this fall. At the Authority’s estimation, the number of applicants might be about an hundred.

Electronics stores and other shops where goods can be purchased on deferred terms must not get registered if they are not the ones extending the credit but are mere mediators. In case it is the store that extends the loan, it needs to get the licence. In most cases, however, it is not the stores that provide deferred payments but some other company.

As an example of that, Eesti Telekom extends loans for purchases in Elion and EMT stores. As confirmed to Postimees by the company, they intend to continue to offer deferred payment and stand ready to rearrange the work as needed to obtain the activity licence.

Checking solvency

The new law has changed the entire financial supervision paradigm. While thus far FSA only supervised and issued licences to such enterprises as assumed deposits from citizens and companies, extended money to investment banks or funds for investments, or to insurance undertakings to cover emergencies, then as of March 21^st 2016 whoever lends money will undergo FSA supervision.

«For us, this is a substantial change. Up to now, in banking our main function was capital view i.e. the banks operating in Estonia featuring deposits. We must see to it that they are sufficiently capitalised and able to hand back the deposit should an individual so desire. The same goes for insurance undertakings: you enter into a contract today and should there emerge a non-live insurance incident happen in the future, the insurer needs to be able to pay the indemnity,» explained Mr Nõmm.

With creditors, supervision is substantially different. This has little to do with capital supervision – almost nonexistent. This is purely supervision of service, directly concerning the offering of services to customers.

«Before, we only supervised lending activity by banks, and that because they involve deposits, not because they provide loans,» underlined Mr Nõmm.

According to Mr Nõmm, the supervision fill be focused on assessment of the procedures of analysing solvency. Meaning: these must work and lender must have sufficient information to assess solvency of borrower.

«Lending cannot be as easy that somebody applies for it and you just issue a loan whether you assess solvency or not. We will try to assess which segments have the largest of such risks,» stressed Mr Nõmm. «We will be collecting reports from the market, to see where the problems are the deepest. Among other things, reporting will cover late payments; this will help us see the market segments and market players pose the biggest risks,» he added.

The reporting will be monthly.

Darker dealings suspected

Andrus Alber, head of mortgage loans and instalment payments firm Finora Capital established last summer, said the regulation is welcome but he would question the need of such stringent rules – comparable to the ones applied to banks.

«Our company and some others that I know that do not issue fast loans and have just a couple of employees will need to establish internal procedure rules, hire internal auditors etc. For small enterprises desiring to operate in consumer credit, cost base will substantially increase,» explained Mr Alber.

«Meanwhile, it seems to me the expectation would be cheapening of the service; yet, the state clearly necessitates higher costs. Perhaps, they could have started by much more forcefully requiring the keeping of current laws and rules, be it the timely presentation of annual reports,» he added.

Mr Alber said they will now need to analyse if partners need to be found to fulfil the needed functions or extra staff hired. FSA itself will hire four new employees.

The law also concerns mediators of peer-to-peer lending. The best known among such, Bondora, has actively communicated with FSA even before the issue of the law was raised. Meanwhile, Bondora undergoes FSA supervision, those lending via Bondora i.e. investors will not though theoretically they should.

During the year ahead of us, aggressiveness of fast loan companies is expected to accelerate. Also, the danger exists that some on the market will ignore the law and are ready to take the risk of going to court – until then grabbing all there is to take.

«Meanwhile, the business may become much dirtier and starting next March 21^st the FSA will not have the strength to close down the lenders that never applied for licence,» said a market player who requested anonymity.