How Will the Revised Inspection Procedure Affect the Collection Service Market?

By Andriy Volkov, Investohills Group’s founder and managing partner for Mind.

On October 14, the National Bank issued its Policy on Organizing and Holding Inspections of Collection Companies and Presenting Results Thereof. The regulator’s requirements were outlined in NBU Resolution No 220, which came into effect on October 19. It applies to companies without the status of a non-bank financial institution that are entered in the collection companies’ register that settle the overdue debt to the benefit of a lender or a new creditor.

Let me state that nothing unexpected has occurred in the collection services market. Provisions for inspections of collection companies’ operations have been made earlier, for instance, with Resolution No. 76 in 2021. In October this year, the National Bank detailed the grounds and procedures for carrying them out.

To wit, the NBU may conduct inspections not only remotely based on document copies (by way of off-site supervision) but also on-site in an office of a collection company. Importantly, inspections can be carried out without prior notice.

An inspection can be carried out on grounds such as a failure to submit documents and information or an incomplete submission thereof; results of the analysis of complaints by financial service consumers and third parties in the process of the overdue debt settlement; the availability of information that the entity to be inspected is not located at its legal address.

No pre-approved time schedule for inspections exists; they can be carried out at any time once the NBU has identified the need to inspect.

During the inspection, members of the inspection team are vested with the right to gain unobstructed access to all documents and information and initiate meetings with the contact person and other employees of the collection company.

Thus, the regulatory is now able to increase the number of control and review activities involving the collection companies.

Interestingly, there has been no change in potential penalties to be charged from collection companies. However, the National Bank has no additional grounds to apply enforcement measures introduced back in 2021. I am referring to penalties ranging from 300 to 600 non-taxable minimum individual income amounts (that is, UAH 5,100 to 10,200) per violation case. Depending on the violation detected, the harshest sanctions can range from 5,000 to 8,000 non-taxable minimum individual income amounts or UAH 85,000 to 136,000.

With its Resolution, the NBU expanded the powers of its Non-bank Financial Institution Markets Oversight and Regulation Committee, to which the Board of the National Bank had delegated some oversight and regulatory powers. It will be up to the Committee to decide whether to apply enforcement measures for the violation of ethical conduct requirements by collection companies based on the inspection reports.

It is important to realize that the collection services market is not homogeneous. Business processes pursued by market leaders have not changed significantly over one year and a half since the amendment of the legislation that governs the collection business (Law No. 1349-IX “On Amending Some Laws of Ukraine to Protect Consumers While Settling Overdue Debt” dated March 19, 2021). It is because all the collection services market leaders have been accustomed to working with banks that put forward many requirements of their own for the collection companies. A significant part of those requirements was implemented in the legislation. Thus, larger companies can be assumed to be ready for stricter oversight by the NBU and an expansion of control and review procedures.

However, it cannot be said about the in-house collection departments of microfinance organizations (MFOs) that have traditionally used harsher tools to deal with their debtors. The NBU has already applied enforcement measures to some of these departments and keeps motivating the market participants to comply with the law’s new requirements.

Because of the above circumstances and many economic factors associated with the war in Ukraine, many collection companies can either find themselves in a difficult situation or get out of this business completely. The collection services market has just started recovering from the onset of hostilities. Currently, not all service providers and principals are operating. Banks and microfinance companies started raising the debt recovery issue back in the summer. The recovery of the new lending has also been very slow. There are no new players in the collection services market, while the existing players are thinking about how to adapt to the current requirements and decide whether to stay in the market. It may well happen that there won’t be any meaningful debt to manage.

In any case, everything will depend on the development of war-related events and the lending market in the short run. Banks are likely to rid themselves of the portfolios that came into existence because of the use of lending limits by individuals during martial law. However, these portfolios are not that big. Banks are going to wait till the end of the war with the suppressed scoring process and the smallest new loans possible. Microfinance organizations are also reluctant to sell their distressed loans because the market is not active, and they will hardly be able to get a proper price for their portfolios. Thus, the collection services market will keep operating on a shoestring, while the regulator’s stricter requirements for its participants will only speed up its transformation.