Consumer credit in the Czech Republic: from chaos to order
April 2017 | EXPERT BRIEFING | BANKING & FINANCE
The Czech Republic has long represented a promised land for non-bank consumer credit providers which enjoyed only very mild regulation and extraordinary revenues without being put under any serious scrutiny for a lack of proper risk management procedures and professionalism. No wonder that more than 50,000 non-bank providers of consumer credit fought for consumers’ debts for years. However, the days of insufficient prudency, no or very little risk management and questionable expertise and professionalism are now over.
In response to the chaotic and often troubling situation in the consumer credit market, a heavy regulation of consumer credit was introduced on 1 December 2016. Unlike the former regulation-lite regime, the new regulation hits the consumer credit market at its core. The regulation applies to all types of non-bank consumer credit providers, ranging from payday loan providers and car leasing companies, to providers of consumer credit for residential purposes. Further, the regulation does not distinguish between big players such as Home Credit, a major asset of PPF Group, owned by Petr Kellner – the wealthiest Czech citizen, and small sized non-bank consumer credit providers.
Given that the scope, depth and severity of the new regulation is generally not far from the regulation of credit institutions, insurance companies or investment firms, the required compliance obligations are now giving small non-bank consumer credit providers a hard time.
Consider, for example, how a small operation at a purely online non-banking consumer credit provider would draft, put in place and comply with tens of obligatory internal policies regulating every aspect of the business. Naturally, a number of non-banking consumer credit providers will be put out of business as they would lack sufficient funds and personnel to comply with the regulation.
Although the new regulatory regime is perceived by many as a much needed regulatory effort to tame the consumer credit market, there is a risk that the new regulation could reduce the availability of consumer credit and could make it more costly. As always with regulation of any business activity, striking the right balance between the interests of consumers and the need to regulate and reduce risks for the consumer credit markets is the toughest call.
Cost of compliance
There are a number of estimations of what the new regulation will cost. A major non-bank consumer credit provider estimates that the cost of compliance with the new regulation may go as high as €185,000. This estimate may prove to be low, however, especially for those non-bank consumer credit providers which have just entered the market and do not have internal structure, personnel, information systems or credit procedures in place. They will undoubtedly need to put more effort into compliance and building their business, in line with the intricate requirements of the new regulation. This, together with the capital requirements for non-bank consumer credit providers which will amount to at least €740,000, will most likely deter a number of new potential non-bank consumer credit providers from entering the market and urge some of the current non-bank consumer credit providers to leave the game.
The costs are associated with, among other things, putting in place and complying with internal rules ensuring the required standard of internal risk management and higher personnel costs. The new regulation prescribes that all personnel who take part in providing consumer credit or are responsible for such provision, need to meet strict expertise criteria. A high-school education is a must under the new regulation. Further, special knowledge in the field of consumer credit is required. Such knowledge is to be tested by certified institutions which are to be supervised by the new consumer credit regulator, the Czech National Bank (CNB).
Internal risk management
Gone are the days when non-bank consumer credit providers, unaffected by any meaningful risk management requirements, enjoyed the disinterest of legislators and regulatory authorities. Since the implementation of the new regulatory regime, consumer credit providers must have a robust and functioning system of risk management. This means not only a set of rules for underwriting consumer loans, but also detailed internal policies for assessing creditworthiness, anti-money laundering measures, remuneration policies, organisational policies, compliance policies and, most importantly, information systems policies. The last is of utmost importance for those non-bank credit consumer providers that provide credit through various online platforms without ever seeing consumers face to face.
Bringing the internal risk management system in line with the requirements of the new regulation, and even more importantly with the guidance and benchmark of the CNB, may prove to be difficult. Although the CNB has been trying to provide guidance, it is not at all clear how detailed, descriptive and particular the internal risk management policies should be. On one hand, internal policies should reflect the size and complexity of the relevant consumer credit business; on the other hand, the available CNB guidance and benchmark leave only a very limited space for diverting from detailed content requirements.
It is likely that the legislators and the CNB supposed that there would be ambiguities with regard to bringing to life a fully compliant risk management system. That is perhaps why they provide a sufficiently long period (up to 15 months in case of applications filed by existing non-bank consumer credit providers) for considering internal risk management systems, as well as other particularities of consumer credit licence applications. One may fairly assume that within this period the CNB will be involved in individual cases providing specific guidance on how to achieve the necessary compliance. Given the scope of the regulatory requirements and uncertainties with regard to their applicability to entities of different size and complexity, this would be a most welcome effort.
The effects of the new regulation on the Czech consumer credit market are to be monitored closely. One would hope that consumers will benefit from the new rules, but cannot overlook the heavy hit that has been given to the market. The compliance costs are substantial and will result in a significant decrease in the number of players on the market and the restructuring of business models for the remaining ones – hoping that such compliance costs will not be transferred to consumers, who the new regulation aims to protect.
The regulation introduced new rules of the game and it is likely that the new consumer credit market will barely resemble the old one. However, if the CNB approaches its new role responsibly, we may expect that the new consumer credit market will be much fairer and transparent than before.
Jan Kotous is a counsel and David Šimek is an associate at Wolf Theiss. Mr Kotous can be contacted on +420 234 765 214 or by email: firstname.lastname@example.org. Mr Simek can be contacted on +420 234 765 250 or by email: email@example.com.
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Jan Kotous and David Šimek