Updates to Consumer Lending Legal Framework in Russia

On August 2, 2019, the President of Russia signed a law updating the consumer lending (microfinance) regulation (Federal Law № 271-FZ “On Amending Certain Legislative Acts of the Russian Federation Aimed at Improving Microfinance Activities”). Most of the provisions of this law will enter into force on October 1, 2019.

The main provisions include:

• remote customer identification for microcredit companies;
• higher standards for corporate officers;
• increased number of documents to be filed upon registration;
• new capital requirements;
• restrictions on the type of assets to be contributed to the charter capital; and
• ban on loans secured by rights to residential premises.

By way of reminder, the provision of loans on a commercial (for-profit) basis is a regulated activity in Russia and may be carried out only by banks, microfinance organizations or pawnshops.

The regulatory framework for consumer lending was introduced in 2010 by the Federal Law № 151-FZ “On Microfinancing and Microfinance Organizations” that provides for two types of microfinance organizations (MFOs) — microfinancing companies (MFCs) and microcredit companies (MCCs). There are approximately 50 MFCs and 2,000 MCCs. You can find more details on the regulation of consumer lending in our article “Consumer Lending in Russia — Market Overview and Regulation.”

Customer Identification

The principal change is that all MFOs will be able to carry out simplified (remote) identification of customers on their own by receiving the required information directly from a customer. Prior to that, for the purposes of remote identification, all MFOs had to either delegate the simplified identification of customers to credit organizations (banks) or use the Unified Identification and Authentication System (UIAS).

In addition to allowing all MFOs to carry out simplified identification on their own, Law № 271-FZ makes it possible for MCCs to delegate customer identification to third parties. Before that, only MFCs could do this, which gave them a serious advantage over the less-regulated MCCs in the digital (remote) lending segment. However, it is worth noting that, as of today, in order to delegate customer identification, MFCs must carry out activities in the microfinance market for at least two years. It is likely that the same requirement will apply to MCCs.

Higher Standards for Corporate Officers

Law № 271-FZ introduces higher standards for executive officers and shareholders of MCCs by subjecting them to the same requirements applicable to MFCs. Failure to comply with these requirements may result in the exclusion of MFOs from the state register.

Additional Registration Documents

Additional documents must be collected and submitted in order to file for MFO qualification with the Central Bank:

• calculation of capital (own funds) of a legal entity; and
• documents confirming the existence of own funds in the prescribed amount.

Further, in order to obtain the MFC status, it would now be necessary to submit documentation about the source of funds contributed by the shareholders into the charter capital of a legal entity.

New Capital Requirements for MCCs

Starting July 1, 2020, all MCCs must have at least RUB 1 ml in capital (own funds). This number will increase gradually by RUB 1 ml a year till 2024 when all MCCs are required to have at least RUB 5 ml in capital. Before that only MFCs were subject to capital requirements of RUB 70 ml, which remain the same.

Prohibited types of payment for the capital of MFC

Law № 271-FZ restricts the type of assets that can be contributed as payment for the charter capital of MFOs. Borrowed funds and hypothecated property may not be used for this purpose. In addition, it is prohibited to offset claims against an MFC as payment for new shares (increased charter capital).

Ban on Loans Secured by Residential Premises

It will be prohibited for MFOs to provide consumer loans secured by residential premises owned by borrowers (including shares in jointly owned premises and rights arising from residential construction agreements). This ban becomes effective on November 1, 2019.

Overall, Law № 271-FZ should have a positive impact on the microfinance industry in Russia by streamlining customer identification and putting governance protections against bad actors.