The Financial Ombudsman Institution is a fundamentally new phenomenon in Russia. Its establishment appeared to be more complicated task than it seemed at the first glance - it took six years, an impressive growth of both the society’s financial competence and banks’ social responsibility. The First Russian Financial Ombudsman Pavel Alekseevich MEDVEDEV, a State Duma Deputy, told NBJ in the interview about the way the Ombudsman financial institution is going to operate and help banks and customers to make friends and to understand each other better.

AT FIRST THERE WAS AN “ANTI-PYRAMID PROMOTIONAL SCHEME” FOUNDATION

NBJ: Pavel Alekseevich, in an interview to the Russian media you told that you are a “self-appointed” financial ombudsman in Russia for almost 20 years. Please tell us when and why did you start this activity.

P. MEDVEDEV: Twenty years ago I was really appointed as a Chairman of the Banking Legislation Sub-Commission of the Supreme Soviet of the RSFSR. The information about my appointment was published in the newspapers people read at that time. And at once I was deluged with complaints of the people deceived by many financial schemers like Mavrodi.

NBJ: So, people made complaints mainly against them that time, didn’t they?

P. MEDVEDEV: Yes, they did. I got complaints against banks or rather pseudo-banks a bit later. Now only few people probably remember that there were about 3.5 thousand banks in Russia in the early 90’s, and a significant part of them was similar to a greater or lesser extent to the infamous Chara Bank which was simply a banking house intended to take money away from the population.

NBJ: Was it possible to do anything to refund people the money they had given to such banking houses at that time?

P. MEDVEDEV: Yes, it was. We have even done something. For example, we succeeded to get 1 billion rubles from the MMM pyramid scheme, the most “glorious” Russian financial pyramid. However, the amount has been estimated in the non-denominated rubles, but even taking this in mind, a billion was a great deal of money in those days. So, at least a part of depositors (unfortunately, a relatively small one) got their money back. Unfortunately, it was impossible to make the success wide. We have repeatedly won suits, but in fact we succeeded to get a few kopecks from each ruble won at best - the rest money had been stolen by founders of pyramid schemes before their victims understood that they had been robbed. At that time I was well received by B.N. Yeltsin and during one of our meetings asked him to issue an executive order to establish a special fund in order to indemnify citizens’ losses at least partially. (Then it turned out that this happy thought came not only to me.) The fund has been established (the Federal Public-State Fund for the Protection of the Rights of Depositors and Shareholders). The government has funded it through small contributions from the privatization proceeds. However, the resources of the fund have been not enough for all deceived people, so we decided to pay only to the victims of the institutions other than banks, and to create a classical deposit insurance system for banks. The establishment history of the deposit insurance system extended over almost ten years, as you know, and mean-while, the Federal Public-State Fund began to work. The fund was headed by Eugeniy Borisovich Kovrov, a very honest and professional person, almost since its establishment. He managed not only to keep the resources of the fund but to increase them as well, and the payments are still made to injured investors and depositors (according to the list of organizations which can be easily found in the Fund’s Web site). To the 65th anniversary of the Victory the payments to war veterans were increased up to 50 thousand rubles - this is a striking result.

OTHER TIMES - OTHER PROBLEMS

NBJ: Nowadays, it is hardly to remember the names of financial pyramid schemes of 90s, such as MMM, Vlastelina, Chara. It seems that the problems of their depositors cheated have gone away with them. What are people complaining now about at most?

P. MEDVEDEV: The names of non-banking pyramid schemes have been forgotten pretty quickly, but the Chara has cast its shadow at us till the beginning of 2000s. In 1999 the Central Bank withdrew two licenses a day with sad consequences for their depositors. This matter was settled cardinally only in 2004-2005 when the deposit insurance act entered into force. However we even did not have enough time to celebrate the end of the defrauded depositors’ era when deceived borrowers appeared. In the first phase of the credit boom, some banks, fortunately, only few ones behaved improperly. They “hid” the real credit rates under various commissions, fees and additional payments abusing their borrowers in fact. It resulted in a new wave of indignation which reached my reception room, of course. Thanks God, we have coped with this task well. At first, the Central Bank obliged banks to include an effective interest rate into their contracts, and then the law with the same requirement came into effect. However, the legislator renamed an effective interest rate into a true interest cost for some reason, provoking people to think that the whole amount of money to be paid for the whole loan servicing time was meant there. But the goal was achieved - the borrowers stopped to complain.

NBJ: So, peace has been established between banks and their customers, hasn’t it?

P. MEDVEDEV: No, it hasn’t. There is a small flow of complaints from borrowers who have broken their payment schedule. Fines and penalties resulted from their carelessness turned to be a surprise for them. There is an impression that they read only that part of the contract which establishes rules for loan servicing, and they are not interested in what happens in the event of their failure.

NBJ: And when this problem was quite settled, the crisis came on…

P. MEDVEDEV: I can’t say that it was settled but it is obvious to me that the citizens in our country increase their financial culture slowly but surely. The number of mere misunderstandings decreases. The life doesn't become less inventive. Its last invention is the crisis.

For me it began in February - March 2009, when borrowers - mostly mortgage ones - who lost their jobs or good salaries, realized that they became unable to pay for their loans. In the most cases they didn’t come with claims against banks, but they asked for help to arrange a debt restructuring. It is true that sometimes a despair and a fear to lose an apartment prevented them from making a specific request. So, for a while I had to become not only a self-appointed ombudsman, but a self-appointed psychotherapeutist.

NBJ: And as I know you have been an intermediary between them and banks at that time. Is it true?

P. MEDVEDEV: It was exactly the thing my applicants wanted from me. And after a while I could ask for mortgage loans restructuring not only banks but also the Housing Mortgage Finance Agency (and then the Housing Mortgage Restructuring Agency), since the government took reasonable measures to support mortgage borrowers in this matter. If in the beginning there were only 50-60% positive responses to my requests, then in May -June 2009 this figure reached 90%.

NBJ: A good example is contagious too, isn’t it?

P. MEDVEDEV: There is another cause here - the Government, the Central Bank and the Housing Mortgage Restructuring Agency made the restructuring not so painful for banks by their decisions and actions. So the good will of the latter ceased to be punished (in any case - hard punished).

THE MAIN THING IS NOT TO MAKE FOOLISH DECISIONS

NBJ: Does it mean that you have been an informal financial ombudsman until recently, and from October 1, this year you will become an official head of this institution?

P. MEDVEDEV: That’s right; I talked in prose for a long time but even had no idea about this. And the Russian Bankers’ Association and the banking community did not just hint me at my mistake; they gave additional opportunities into my hands.

NBJ: What kind of opportunities do you mean?

P. MEDVEDEV: Firstly (or rather, secondly), they offered me technical support. Now I have the only assistant engaged in financial problems. And when there is a crisis even if it is the tiniest one, we have a flow of appeals. It happens that we have no time not only to reply but even to open the envelopes. And now the banks signed the agreement to join the financial ombudsman institution give me three assistants. Thirdly, in some cases I’ll be able to take the decisions obligatory for banks. And the most important thing (i.e. firstly) I have received a priceless gift - a confidence.

NBJ: Will you choose these three assistants yourself?

P. MEDVEDEV: One person has been found by chance, and I hope that my friends from the Russian Bankers’ Association will help me to find others.

NВJ: Is there any risk that these specialists will treat the complaints received from customers with partiality? After all, they will be ex-employees of banks in fact.

P. MEDVEDEV: I don’t think so, but they can treat the complaints with partiality thousand times, any way the decisions will be made by me. It is unbelievable that there is “an intricately woven plot”. People start to work and make a certain career history. If they have a history of intrigue they will have problems in the future.

NBJ: As far as I know there are only six banks signed the agreement.

P. MEDVEDEV: I was told that there are a little bit more than six banks, and several banks and pawnshops have requested information on what to do to join the ombudsmenship agreement.

NBJ: And how do you think, is there a hope that there will be leading banks in the retail banking segment, i.e. Sberbank, VTB 24, Alfa-Bank, etc. among those which joined the agreement?

P. MEDVEDEV: You know I am obliged to be extremely tactful. There should be no suspicions that I’m trying to push someone. I can only call urbi et orbi (Lat. to the city and the world) to join the Ombudsman institution. It is what I’m doing now.

NBJ: Well, how can a financial ombudsman push any bank? You’re not a head of any government institution and not a leader of any political party.

P. MEDVEDEV: I can come to its president, take a button on his jacket and say: you ought to be ashamed that you have not joined yet? You can discredit any even the most wonderful idea, and you should not be a big boss to do this. That’s why the most important place in our relations with banks is the confidence, I think. Some banks have presented me this confidence; I have to earn it from others.

NBJ: What will be the criterion for success of your work - the number of disputes resolved in favor of citizens?

P. MEDVEDEV: The number of disputes resolved fairly.

NВJ: But certainly it will be unpleasant for banks to perform some of your decisions which are even fair.

P. MEDVEDEV: I intend not to take decisions without necessity but come to an agreement. If almost 90 percent of my requests are fulfilled now, then, I hope, when the confidence is expressed to me the result will not be worse. In addition, the banks which have signed the ombudsmanship agreement, signed their own obligation with invisible ink: not to offend their customers. It is obvious that it is risky to sign the first document for the bank which didn’t sign the second one.

THE COMPULSORY CONDITION IS NOT TO GO TO COURT AND NOT TO WRITE INTO ROSPOTREBNADZOR

NBJ: How will the customers’ applications be taken and processed in a technical sense?

P. MEDVEDEV: A person comes with his problem to the reception room of the ombudsman, or sends a letter describing it. It is the beginning of the conciliation procedure. We ask the applicant to apply directly to the bank. If the answer is satisfactory to the citizen, the procedure is finished. If not, and the grounds for refuse don’t seem convincing to the ombudsman, he turns to the bank for an explanation. The explanations are discussed with both parties, and a compromise is sought. If a compromise can’t be found, the ombudsman can make a decision mandatory for the bank. A citizen may seek assistance from any third party at any time, for example, in court. But in this case the conciliation procedure is terminated.

NBJ: What will happen if the bank fails to perform the ombudsman’s decision?

P. MEDVEDEV: It only risks losing its own reputation. But, I repeat again, I will seek to make decisions only in exceptional cases. If I am not able to convince the bank, so I do not really deserve its trust. But the whole ombudsman institution structure is supported by trust!

NBJ: And are the customers dissatisfied with your decisions entitled to apply to the court, the Central Bank,the Rospotrebnadzor and so on?

P. MEDVEDEV: Certainly. But the bank has no place to send a claim in about my decision (if I make it). We recognize an individual as a vulnerable party in the relationship with any bank and this fact (not only this fact) reflects our recognition.

NBJ: And the fact of prior complaint examination by the ombudsman does not affect the case and the judgment, does it?

P. MEDVEDEV: Legally, this shall not be taken into account, but, as we know, there is the letter of the law, and the spirit of the law as well as wisdom and conscience of a judge. The wisdom and conscience may prompt the judge to take into account the results of the Ombudsman’s examination.

“NOT OLIGARCHS WILL COME TO ME”

NBJ: Correct me if I’m wrong but now only the complaints not exceeding 300 thousand rubles will be processed. Why is there such a limit set?

P. MEDVEDEV: I think the figure was chosen by chance in many aspects. But, thinking about it I began to remember the complaints filed by citizens recently. Even in the cases of mortgages the amount did not exceed this limit. Nobody comes and says: I owe 7 million rubles to the bank, make me free from this debt. Problems arise with the next payment, perhaps two or three payments. This is usually tens, not hundreds of thousands rubles.

NBJ: But, probably, this amount may be increased over the time?

P. MEDVEDEV: Possibly. But the main thing for me is not to increase this amount, but (I’m afraid that that you are already tired of me) to maintain the confidence. If there is a confidence you can reach agreement on any amount.

NBJ: Why hasn’t the standard Western way supposing the ombudsmanship institution-alization by law been followed in Russia?

P. MEDVEDEV: I would not have refused to become an ombudsman under the law, but there is no law now, so it is ridiculous and ungrateful to refuse from the proposition of the Russian Bankers’ Association and banks.

NBJ: And why didn’t you use the mediation law?

P. MEDVEDEV: It proved to be inconvenient for our purposes. In particular, the reason is that each conciliation procedure under this law shall be preceded by an agreement concluded by parties. We have one party -a financial institution - which agrees once and for all the time, while the other party does not assume any responsibility, but remains in the conciliation process not longer than it is useful for it.

NBJ: Do you have a thought that it would have been better if the financial institution of ombudsman had been established under the auspices of the Central Bank?..

P. MEDVEDEV: If the Central Bank considers it necessary to say anything - let it speak. But the Central Bank sees no need to intervene in the relations of banks and their customers. In addition, I hope that not only banks will conclude agreements with me but pawn shops too, for example. Then the Central Bank would not intervene, even if it had a desire.

NBJ: When the institution of a financial ombudsman "gains its strength" will the flow of citizens’ complaints to various authorities reduce? Now banks often complain that they have to fight against different “defenders of the oppressed”, e.g. Rospotrebnadzor.

P. MEDVEDEV: Indeed, sometimes it is difficult to understand the Rospotrebnadzor’s claims, though, sometimes I am grateful to it for its rational and timely decisions. I hope I will be able to unify our estimates of typical situations, and the customers of financial institutions will benefit from it.