The National Bank of Ukraine calls on Ukrainian MPs to back a crucial Draft Law No. 2455 On Consumer Lending (hereinafter Draft Law No. 2455).

Draft Law No. 2455 is intended to protect the rights and legal interests of both consumers and lenders. This draft law is designed to protect financial services consumers from having their rights violated by providing the latter with information required for decision-making.

There is currently no specific law on consumer lending in place, but there are gaps in applicable laws and regulations in this regard.  This particularly concerns unfair advertising practices, disclosure of information on lending terms and conditions, lending  intermediation services, unfair  terms and conditions of consumer loan agreements, the practice of touting  additional and supplementary services by banks and financial institutions,” stressed Director of the NBU Legal Department Mr Oleh Zamorskyi.         

The NBU pushes for the establishment of a comprehensive regulatory framework governing consumer lending practices based on Draft Law No. 2455.    Most European countries (Austria, Bulgaria, Latvia, Spain, Poland, Portugal, Slovakia, Croatia, Czech Republic and Croatia) had been following the same path which led them to design a special law governing this type of financial activity. 

“Draft Law No. 2455 is yet another contribution to building confidence in financial institutions and establishing a legal framework for promoting financial awareness on consumer lending among the public. This draft law will also help create a competitive environment in the financial market as all market participants will extend consumer loans on equal and transparent terms as mandated by laws and regulations. Information disclosure practices in Ukraine are far from being appropriate, starting from practices related to the disclosure of information before conclusion of a loan agreement and during the term of validity of this agreement. This information is necessary for consumers’ understanding of terms and conditions of these agreements. Consumers, at least, should know the actual cost of a loan, effective interest rate and information about fees charged for the disbursement, servicing and repayment of a loan,” said Mr Zamorskyi.    

The NBU regards Draft Law No. 2455 as a solid basis and a key prerequisite for the resumption of lending; market participants should be equally protected while assuming equal responsibility.  

Draft Law No. 2455 provides for the following:

• Advertising materials on loans should reflect the actual cost of a loan.  An effective interest rate on the loan should be calculated factoring in all interest rates charged on the loan, as well as loan servicing fees charged by a bank or a financial institution (lender). 
• A bank or a financial institution is required to notify a consumer of the estimated cost of services rendered by third parties (insurance companies, appraisers, etc).
• A lender is required to assess the creditworthiness of a borrower to prevent the disbursement of loans to borrowers with poor credit ratings, thus ensuring the banking and financial system stability.

This draft law has set forth the rules governing the activities of credit intermediaries that are not covered by applicable laws and regulations.

Draft Law No. 2455 has changed the order of priorities in which debt obligations under a consumer loan agreement are settled.  On a first-priority basis, borrowers are required to settle their overdue debt.   On a second-priority basis, they have to make loan interest and principal payments. On a third-priority basis, borrowers are required to settle penalties (as mandated by applicable laws and regulations, all payments made by consumers are used to settle penalties, which prevents borrowers from reducing their outstanding debt).

Additionally, Draft Law No. 2455 will make it possible to bring Ukrainian laws into line with international best practices and meet conditions set forth in the Annex to the Ukraine-EU Association Agreement in respect of the implementation of the provision set out in EU Directive 2008/48 on Credit Agreements for Consumers.

For reference

Apart from Draft Law No. 2455, the protection of the rights of financial services consumers is covered by several other draft laws.  Draft Law No. 2456-d “On Amendments to Certain Legal Acts of Ukraine in Respect of the Improvement of Protection of the Rights of  Financial Services Consumers is another important draft law. This draft law lays the groundwork for the establishment of a legal framework to protect the rights of financial services consumers. Draft Law No. 2456-d is primarily intended to address gaps and inconsistencies in laws and regulations on consumer rights protection.

Twenty-six draft laws required for advancing financial sector reforms are pending approval by parliament.  These include strategically important draft laws pertaining to  the protection of creditors and financial services consumers' rights, financial restructuring of corporate debts, consolidation of the state regulation of financial services markets functions, as well as anti-money laundering draft laws.