Effective 21 March 2016, only creditors and credit intermediaries who hold an activity licence from the Financial Supervision Authority may provide or intermediate credit to consumers. What this means is that any entity that is not a bank and issues or brokers loans, hire-purchase arrangements and leasing to individuals will have to apply for a licence to be engaged in this activity. If a company had not obtained a licence by 21 March, its existing loan, hire-purchase and leasing agreements will become null and void.
The Creditors and Credit Intermediaries Act passed on 18 February 2015 (Estonian abbreviation KAVS) is aimed at harmonizing the requirements for undertakings operating on the financial services market and solidify responsibility on the part of lenders and brokers in regard to the requirements governing their activity. Primarily, the Act establishes requirements for the activities of lenders and credit brokers that are not banks and provide credit to individuals/consumers.
The Act applies to creditors and credit intermediaries that lend or channel credit to consumers as a business activity. In addition, the Act also applies to leasing and hire-purchase companies: after all, from the perspective of the consumer, there’s no difference whether the credit is granted in the form of a loan, leasing or deferred terms on a purchase. In all cases, creditors should act responsibly.
Creditors and credit intermediaries that were founded and operated before KAVS entered into force had to apply for an activity licence from the Financial Supervision Authority and had to bring their activity and documents into conformity with KAVS by 21 March 2016.
Who is a creditor and credit intermediary?
A creditor is an undertaking whose economic or professional activity is providing credit to consumers. Creditors may take the form of a public limited company (AS), private limited company (OÜ) or, pursuant to the Savings and Loan Associations Act, a commercial association (tulundusühistu). One should be aware that companies that grant a one-off loan to a third party aren’t in the remit of the Act. But the border can be fuzzy as to when lending is to be considered a company’s principal area of activity and when it is a secondary activity.
A credit intermediary is a natural or legal person not operating as a creditor and whose economic or professional activity is the intermediation of credit to consumers. The Act makes it plain that a credit intermediary cannot simultaneously be a creditor – it cannot at the same time intermediate its own or others’ credit. Credit intermediaries are distinct from creditors in another way – there is no requirement that a credit intermediary must be a company. An individual may also act as a credit intermediary if this is that person’s economic or professional activity. Therefore merchants who offer leasing or hire-purchase should review their agreements with a critical eye and assess whether the new law will affect them. If necessary, they should contact the Financial Supervision Authority.
If a service provider has no licence from the Financial Supervision Authority, its hire-purchase contracts became null and void effective 21 March. On the consumer end, the person would still have to repay the credit in such a case, but instead of interest and other possible charges, only the European Central Bank’s standard interest rate must be paid (this rate is currently very low).
In addition, it should be borne in mind that continuing to operate without an activity licence could cause creditors to run afoul of penal law. Under the Penal Code, operating in the field of credit and financial services without an activity licence is punishable by a monetary fine or up to three years’ imprisonment.
Who has to have an activity licence?
The following are required to apply for an activity licence:
- Creditors founded and operating in Estonia
- Estonian branches of creditors from EEA countries
- Creditors from foreign countries
There are also a number of subjects who are not required to apply for a creditor’s activity licence. The most interesting exception is an undertaking who as part of its economic or professional activity sells an item or provides a service to a consumer and, as its secondary activity, allows the consumer to defer the payment due date for a fee – in other words, it cedes the financial claim arising from the agreement to another person under a factoring arrangement.
This would allow, say, an electronics store that provides hire-purchase finance but which hasn’t received an activity licence to team up with a factor or creditor. One such example is Koduliising OÜ, which offers hire-purchase financing under the brand name Liisi.ee and which does have a licence from the Financial Supervision Authority. If an electronics store that offers hire-purchase sells or intermediates a financial claim to a creditor or factor like Liisi.ee, the store does not have to apply for a licence itself. This is an alternative for cooperation in a case where a company that sells products to consumers wishes to continue offering deferment of the payment due date as a secondary activity but doesn’t wish to apply for a licence from Financial Supervision Authority.
21 March – an important date for businesses and consumers
On 21 March, creditors and credit intermediaries had to bring their activities and documents into line with the provisions of the new law. The date is very important to both creditors and intermediaries, who should have completed the necessary procedures by that time, as late starters may have missed the boat. Companies that did miss out should move quickly to find themselves a factoring partner to work with.
21 March was also a key date for consumers. If one uses the service of a creditor or credit intermediary at the end of March (including hire-purchase financing), it would be a good idea to first make sure whether the service provider has received a licence from the authority. If not, the creditor is not in compliance and it’s a sign it may not be trustworthy.