Russian prosecutors look into banks’ loan practices
The move throws the spotlight on banking regulation, especially over interest rates and fees.
Andrey Suroftsev has just closed his consumer credit account at Russian Standard Bank. He says that when he first opened it 10 months ago, the interest rate looked good – but that was before the fees kicked in.
“This is called ‘hidden commission’. It's used by other banks as well. I wish banks were more open with people, so that people know what they are getting into. Instead, people end up being tricked into it and ripped off. And others take advantage of the fact that people don't know,” he says.
Mr Suroftsev is one of Russian Standard's 22 million consumer loan clients. The bank, however, claims there are only few cases like his.
The exact number of complaints against the bank is unknown, but it has gained the attention of the Prosecutor General's Office.
Prosecutor General's Office: “People are sent credit cards by mail with an offer to activate them over the phone on favourable terms. At the same time, people complain they are not fully informed of the bank's charges … and that actual interest rates are higher than stated.”
Russian Standard is not the only bank using marketing strategies to attract new clients. But it does have a reputation for aggressive sales tactics, according to industry insiders.
“Russian Standard has always been known for cutting corners and for using hidden strategies and then defining it as an aggressive marketing. To be honest, I think Prosecutor General’s Office is pretty late, as regulators already paid attention to this matter about a year and a half ago,” Anton Tabakh, Senior Strategist from Uralsib, states.
Russian Standard says the default rate of its borrowers is within international standards, and 50 % of its customers come back for new products. It adds it has nothing to fear from the Prosecutor General's attention.
“It's not about being singled out, it’s about the responsibility of the market leader, who in fact can direct the industry in one direction or the other. You know, there is nothing wrong with that a big and successful bank with over 20 MLN customers attracts attention,” Georgy Gorshkov, Senior VP of Russian Standard Bank, believes.
From July 1, Russia's Central Bank requires all banks to disclose their effective annual interest rate, which includes compound interest and fees. However, apart from this regulation, there is currently no law in Russia on consumer spending.
“There is a serious lobby that doesn't want such a law to exist. As soon as the government attempts to criticise the existing practices, the bank community says ‘we have Central bank and don't need other regulators and this is none of your business’. There is one reason that has allowed banks to have it their way – the interest in the high profitability of the market,” Dmitry Yanin, Executive Committee Chair of Konfop, says.
Russian Standard says it has not only improved its customer service, but is advising on proposed legislation.
The difference between a hard sell and dishonesty is still a grey area in Russia's consumer credit market. Banks like Russian Standard cannot break a law that doesn't exist. But the lack of regulation could harm the wider economy.
Consumer protection activists say the absence of a law could ultimately reduce the consumer loan market. But Russian Standard says the numbers indicate otherwise.
Mr Gorshkov says the numbers in consumer finance double or triple every year. He adds there are no signs that “the industry is stagnating. It’s a developing industry. There are more and more people who understand that credit is a convenient way to bring luxury in their life.”
Rather than an indication of wrongdoing, the case signals the need for clear legal rules that both banks and customers understand. This could ultimately be the key to stopping others like Andrey from walking away.