Development of the Financial Ombuds practice in Russia by Elena Seryapina

Elena Seryapina

Facing the New Year I can't stop thinking of an old famous saying: "Don't take your old debts to the New Year". Unfortunately not everyone in Russia is blessed to have an opportunity to enter the New Year leaving the yoke of mortgage and consumer loans behind. Sad as it is, Russians are overwhelmed with loans. Strong temptation to live beyond income makes people to ignore ridiculously high interests on loans (up to 900% per year) which are offered by banks and other lenders. At the same time Europeans refuse to purchase goods paying by installments including 5-6% of interest charges considering such deals extortionate. Russians are not familiar with the simplest rules like "do not take the loan if you have to pay back each month more than 30% of your monthly income). RF Central Bank forecasts a vast default of population due to high debt ratio.

In accordance with the data provided by RF National Credit History Bureau the total volume of loans provided to Russian people for the last two years has almost doubled and is equal to USD 272 billion as of July 2013. RF Central Bank reports that currently national banks have USD 13 billion of not-performing loans (banks consider loans as not-performing if the loan payments are late for more than 90 days). And this number is constantly growing. The total number of people having unreturned loans is 34 mln., that is 45% of economically active population in Russia. There are not many people who have never taken loans. According to RF Central Bank 66 mln people have taken loans at least once, provided that the total number of borrowing capable people in the country is 80 mln. As of June 1st, 2013 one in ten loan debtor in Russia managed to take more than five loans, and the proportion of such debtors has increased by 52%. In some regions of the country the proportion of economically active population having debts is close to 100%.

One of not many opportunities to help "prisoners of debts" that exist now in Russia is the Financial Ombudsman service. Such service has been created in Russia three years ago and not many people are familiar with it. Activity of the Financial Ombudsman differs essentially from the activity of other state authorities or organizations. Here we talk about resolution of disputes arising between citizens and financial organizations out of commercial contracts.

RF State Duma has not still adopted the Federal Law on Financial Ombudsman even though it was expected to do so in spring 2013. Currently the Head of RF Banking Association also executes the functions of the Financial Ombudsman. Basically he holds negotiations between the banks agreed to cooperate and the debtors. Any person owing a debt over 500 thousand Rubles who has not submitted any legal claim against the bank is eligible to address to the Financial Ombudsman for the dispute resolution. Services of the Financial Ombudsman are free for all citizens. According to the law banks and other lenders are not obliged to execute decisions of the Financial Ombudsman, so all his efforts are about diplomacy. Since 2010 the Financial Ombudsman in Russia has received almost 12 thousand claims. Majority of these claims are about loan restructuring, cutting the interest rates or annulment of penalties. 80 % of all disputes are usually settled.

The Financial Ombudsman not only resolves the disputes but also mediates it. In a nutshell he does not issue a formal decision but rather brings the parties together and helps them reach a mutually satisfying agreement. According to the experience of those countries where the institute of Financial Ombudsman has been realized (i.e. the Great Britain) only 2-3% of the total amount of financial disputes end up with a formal decision of the Financial Ombudsman. This means that even though the Financial Ombudsman is empowered to issue an official formal decision the largest part of his work relates to mediation. More over the Financial Ombudsman service often acts as a financial and legal consultant for applying citizens helping them to clarify a complicated case, define the person to address the complaint, formulate the demands. This is the core distinction of the Financial Ombudsman service from the judicial institutions.    

The international practice has elaborated the list of the universal principles for the Financial Ombudsman service (see the World Bank report):

1)    Rule of Law

2)    Self Determination

3)    Confidentiality

4)    Impartiality

5)    Independency

6)    Operational efficiency

Besides the Financial Ombudsman service Russia is currently thinking of creating an Insurance Ombudsman service. The draft law on Insurance Ombudsman has been submitted to the RF State Duma.

Also Russia has established the service of the Business Ombudsman. Offices of such service will shortly be opened in each region of the country. This is the first step on the road to making Russia an attractive place for the foreign investors. The Business Ombudsman is also called the Investment Ombudsman due to special functions that he has. 

As you can see the development of the modern Ombudsman institute in Russia is closely connected with its professional specialization.  

Examples covered in this article indicate the significant role that Ombudsman service being a progressive democratic and legal institute plays for RF state and society.



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