In several months, only the companies duly registered by the National Bank of Ukraine will be permitted to collect other parties’ consumer debts.
Debt collectors present one of the most opaque parts of the financial landscape, but they perform an important function in all market economies. As the share of non-performing loans in Ukraine’s financial system remains significant, recovering overdue debts is essential.
However, the activity of debt collectors in Ukraine has recently drawn public attention and — increasingly often — criticism. The main reason is that many debt collectors violate basic ethical norms — and sometimes criminal law. For example, the National Bank has received over 2,000 complaints (link, page 23) about debt collection conduct in the second half of 2020.
Until now, this market has remained beyond the regulatory scope of the National Bank. Some of these companies are financial institutions that also collect on behalf of their peers. But others are unlicensed entities that collect consumer debts on behalf of banks and non-bank lenders and receive commission fees in return. Unlike in many Western countries, these firms used to operate outside any state permission system.
This market is far from transparent. Some of these companies — including some with foreign ownership — publicize their collection rules and contact details. But many shun public visibility when collecting consumer debt. Their collection methods transpire in disgruntled social media posts — or worse yet — criminal proceedings. While debt collection companies know a lot about debtors (it’s their job, after all), the public has little scrutiny of these companies. This information mismatch is a breeding ground for dishonest behavior and abuse — and undermines trust in the financial sector.
For the first time in Ukraine’s history, the Law on Debtor Protection, which was passed by the Verkhovna Rada on March 19 (link), brings these businesses into the regulatory perimeter and sets clear rules for their conduct. The Law empowers the National Bank of Ukraine (NBU) to authorize these companies — that is, to allow them access to the regulated market. The NBU also enforces their continued compliance with the rules after they fall under its regulatory remit.
This regulatory reform will entail sweeping changes for debt collection companies in the upcoming months. First, the Law establishes a list of requirements for a company that wishes to continue operating as a debt collector — or to start such a business in the first place. It provides for a clear procedure on how the National Bank will review their applications and register such companies — provided that they meet certain criteria. Importantly, the ownership structure of a debt collection company should be transparent, and the business reputation of its owners and managers should meet strict “fit and proper” standards. The applicant companies will also have to explain how they plan to ensure their compliance with the rules of ethical conduct.
Further, the law prohibits engaging in debt collection activities without prior registration. This rule will kick in after several months of the law’s transition period so that companies have enough time to prepare for this regulatory rite of passage. In the meantime, the National Bank will adopt the relevant bylaws and, secondly, set up and administer an official Register of Debt Collection Companies. This register will store and display key data about authorized debt collectors on the NBU’s website. Thus, banks and non-bank lenders can then check which legitimate companies they can work with — and which ones they had better stay away from.
It is already clear that the prospective debt collection companies will have a rather limited period of time this summer to ensure that they are properly authorized by the National Bank in line with the Law. In six months, financial institutions will be legally prohibited from working with the companies that are not included in the register. According to law, if banks and non-bank lenders happen to have contracts with such unregistered companies at that point, they will have to terminate such business relationships — or otherwise face regulatory sanctions. Those companies that want to avoid losing their collection business down the road should, therefore, consider getting authorized by the NBU.
The months ahead present both challenges and opportunities for the companies that already engage in consumer debt collection — as well as those foreign companies contemplating an entry into the Ukrainian market. A key challenge is to submit all the necessary documents to get a regulatory approval within tight deadlines. A major opportunity is to reaffirm a company’s position as an ethical, professional collector.
It is not only up to the National Bank of Ukraine — but also up to the regulated entities — to start shaping a transparent, integrity-driven market for consumer debt collection in Ukraine. This is a chance that the market cannot afford to miss this year.
Yevhen Vorobiov is an expert in the licensing department of the National Bank of Ukraine.
