Financial Supervision Authority: 32,000-euro fine makes the Estonian state a laughing stock

The head of the Financial Supervision Authority, Kilvar Kessler, is concerned that the penalties that the supervision can impose are so small that cheaters have no problem paying the fines and still break the law. Photo: Konstantin Sednev

• New laws will come in force in Estonia next year.
• Debt collection firms will be subjected to stricter supervision.
• The FSA believes that nothing will change as long as criminals receive a slap on the wrist.

Several law amendments are underway in Estonia, which would subject a number of companies to the control of the Financial Supervision Authority (FSA). The head of the agency, Kilvar Kessler, says, however, that until fines are not increased, the criminals will merely laugh at the Estonian state.

This has been one questionable part of the Savings and Loan Associations Act – if you start regulating them, the small ones would immediately go bankrupt. “The situation in the Estonian market is like this: 17 billion euros are in the hands of the market participants we control. These are, for example, banks and pension funds. At the same time, SLAs handle approximately 100 million euros of depositors' money, of which 70 million belong to the three largest SLA,” Kessler explained. Accordingly, it has been recommended that the larger enterprises would come under the control and tax of the FSA. The amounts are not large from the FSA viewpoint, but Kessler points out another reason for regulation. “Of course, it is a risk to reputation – would the cooperatives affect the entire financial sector if they go under," he said.

According to Kessler, the experience of the last financial crisis speaks in favor of stricter requirements: not a single bank went bankrupt in Estonia, which, according to him, helped save ten billion euros.

However, control is not a magic wand. Depending on the law, the FSA would mainly look at four things: the background of the SLA managers; protection of the depositors' interests; possible conflicts of interest and irresponsible lending to the managers of the cooperative; that the lion's share of loans would not be granted to single individuals.

According to Kessler, one of the problems of SLAs as financial intermediaries is their cooperative nature. Each member of the cooperative has one vote, regardless of the size of the capital contribution to the cooperative. In a joint-stock company, a shareholder has the more votes and control, the greater is his contribution to the share capital. If an SLA incurs losses and needs additional money, the investor is not always interested in capitalization, because in return he still has only one vote.

Another, even bigger topic is the regulation of debt collection companies. The Ministry of Finance reports that work is underway with the law, but Kessler points out that not all details are known here either. Not even a draft exists which the public could read. But the European Union insists that the debt collection law must be adopted by the end of next year and enforced in 2024 (see additional story).

But there is one question with all the vigilance: what use is it? Yes, the FSA can take away licenses from offenders, but the penalties for violations are so small, according to Kessler, that there can be no question of deterrence. This is not only an Estonian problem. For example, Danske Bank has just announced that it has set aside nearly two billion euros to settle a money laundering case related to Estonia. After that, the bank's stock soared on the stock exchange, because two billion euros is slightly less than the bank's 2021 profit. Candy money?

"Not even a candy wrapper,” snaps Kessler. “The fine must not be worthwhile to pay, because then the rules would not work. The Financial Supervision Authority has been asking to change the fine rates since 2004. We now have fines of up to €32,000 and up to €400,000 for certain offences. We could have claimed Danske Bank a serious fine for damaging the reputation of Estonia, but the 32,000 euros we can claim – it makes the state a laughing stock!” says Kessler.

As comparison, he cites Latvia, where financial institutions can be fined millions of euros. Kessler states that he does not know of any other European country where thugs from the financial world are treated as leniently as in Estonia.

Another point that Kessler hopes to change concerns statutes of limitations for financial crimes. "Currently, it is two years from the completion of crime, but in many cases such things only come out after two years,” Kessler states – here he would like to see the deadlines extended and the system changed.

Finally: control over debt collectors – but no one knows how

Ministries are making a law which would bring debt collection companies under the control of the FSA.

For years, there has been talk about the arbitrariness of debt collection companies over more than 80,000 debtors in Estonia, but nothing has been done to regulate them. Now the urgent matter cannot be postponed any longer, because the European Union orders the law to be introduced.

“We have to adopt the directive regulating debt collection companies by December 29 of next year, after which debt collection firms have until June 29, 2024 to obtain an operating license," explained Thomas Auväärt, deputy head of the financial services policy department of the Ministry of Finance.

At present it is not possible to get view the draft, but it is confirmed that the draft is being prepared and it will reach the first consultation in January.

However, we already know a few things that will happen: «As a result of the directive, debt collection companies will come under the supervision of the FSA, and the companies will be subject to operational requirements. Among other things, it is assessed whether the members of the management bodies of the debt collection company have sufficient knowledge to manage the company, whether they have an impeccable reputation, whether they have not been punished for certain crimes (e.g. money laundering, fraud, tax crimes), whether they have established sufficient internal rules for registering the debtors' complaints. In addition to debt collection companies, certain obligations are also stipulated for those who finance the so-called repurchase of overdue loans (credit buyers)," said Auväärt.

Although the EU directive primarily concerns all kinds of bank loans, the ministry confirmed that other loans, including express loans, will also be subjected to supervision.

The new law is also intended for improving the debtors' situation: firstly, through requirements for debt collection companies' communication with debtors, and secondly, by regulating the providing of information.

It is not known exactly what it will look like, but according to Auväärt, debt collection companies are obliged to provide information which is not misleading, confusing or false when communicating with debtors; nor should communication be harassing or coercive.

"When the debt collection company starts to collect the debt, it must inform the debtor of the size of the debts and what the said amount consists of. The debtor must get an accurate overview of the development of the debt and what part of the paid money goes to cover the principal part of the loan, interest and service fees. Undoubtedly, getting more detailed information and understanding the content of the claim helps the debtor to better protect himself if necessary, for example by disputing some part of the claim or going to court," explained Auväärt.

According to him, there is currently a discussion on whether and how the fees of debt collection companies should be limited, primarily the processing fees.