National Audit Office: More effective Supervision and Protection of Consumer Rights Needed in Consumer Loan Sector

7/10/2023 | 11:00 AM

Text size: [-A] [+A]

Language: EST | RUS | ENG


TALLINN, 10th July 2023 – The National Audit Office has revealed in its latest audit that significant improvements are required in the supervision of credit providers not associated with banks . This step would ensure that loans are not granted too readily and enable a thorough assessment of the creditworthiness of the consumer in accordance with established regulations. While the Ministry of Finance acknowledges the frequent difficulties people face when repaying non-bank consumer loans, the policymaking and supervision in this area have been relatively modest. In addition to enhancing oversight of non-bank lenders, it is crucial to assist individuals in accurately assessing their financial capabilities.

The National Audit Office conducted an audit to determine whether the supervision of consumer credit adequately safeguards consumer rights and if the state has made efforts to enhance public awareness about the risks associated with financial obligations. The current legal framework fails to encourage responsible lending, and the supervision of non-bank consumer credit providers has thus far proven insufficient in preventing irresponsible lending to individuals with questionable repayment capacities.

Märt Loite, the Director of Audit at the Analysis Department of the National Audit Office, identified several issues related to responsible lending. "Lenders should prudently evaluate borrowers' ability to repay their loans. Acquiring a consumer loan should not be too easy, primarily for the consumer´s benefit. The rules used to assess individuals' creditworthiness are intended to shield them from aggressive loan offers and enticing borrowing practices employed by creditors, as well as protect them from their own miscalculations. Moreover, the supervision of consumer credit advertising, especially online advertising, is lacking, and direct mail can not be restricted. Creditors should inform consumers about the potential implications of their obligations, ensuring they understand the associated risks. Simultaneously, consumers must make a realistic assessment of their financial capacity. Once arrears accumulate, debts escalate, and debt collection agencies come knocking, it is already too late to evaluate the risks," emphasised Director of Audit Märt Loite.

He further noted that while the number of individuals experiencing difficulties repaying their credit varies over time and circumstances, it can generally be stated that nearly a quarter of credit agreements with non-bank creditors encounter delayed repayments.

Statistics indicate that bank customers repay their loans more adequately compared to customers of creditors not associated with banks. The Estonian Financial Supervision and Resolution Authority's report for the last quarter of 2022 reveals that by the end of that year, only 6% of loans from bank associated creditors were overdue, whereas 22% of loans from non-bank lenders were overdue. Additionally, it is crucial to recognise that consumer loans from creditors not assiociated with banks, in comparison to loans from banks and bank-assiociated creditors, involve smaller amounts, shorter terms, higher interest rates, and consequently, higher annual percentage rates (APR).

The interests and rights of customers and debtors are less protected than those of creditors and debt collectors, as decisions made by the Consumer Disputes Committee are legally non-binding. In expedited order-for-payment procedure, courts are not required to verify the legal basis for debt collection if no objections are raised by the debtor. Debt buying occurs without state oversight. If creditors can easily and profitably transfer credit agreements with weaker borrowers by selling them to debt collection agencies, this reduces the creditors' risks and may diminish the incentive to thoroughly assess customers´ creditworthiness before granting loans.

Although the numerous bottlenecks and risks in the consumer credit regulation have been known, attempts to address them through legislation have frequently stalled. Delays occur either during the legislative coordination process between ministries, where the immaturity of the draft resulted in prolonged coordination periods, or in the parliamentary proceedings due to uncertainties arising from legal disagreements. Consequently, the transformation of the legal framework in this field has been sluggish and protracted, resulting in materialised risks and harm to consumers, depositors, and investors. It should be acknowledged that even if the necessary legal framework were devised, implementing it, developing technical solutions, etc., would take years.

The current tools employed by the Financial Supervision Authority and the Consumer Protection and Technical Regulatory Authority (CPTRA) have limited use and impact. The likelihood of initiating misdemeanour proceedings against creditors for their violations has been minimal. For years, the CPTRA has neglected to verify whether non-bank lenders fulfil the requirements concerning pre-contractual information provided to loan applicants. Monitoring of consumer credit advertising has been largely based on complaints. Only a relatively small share of non-compliant ads displayed online and on social media have been removed.

To ensure adherence to responsible lending principles and consumer protection, it is imperative for the Financial Supervision Authority and the CPTRA to deploy all available supervisory tools. Additionally, the extent to which recent legal changes regarding misdemeanour proceedings guarantee effective and deterrent penalties for violations of responsible lending principles must be monitored.

The National Audit Office recommends that the Ministry of Finance assume a more active leadership role and responsibility to establish an environment that discourages disregard for responsible lending principles and to use supervisory tools that ensure better protection of consumer rights and interests. Targeted efforts should be made to enhance financial literacy among adults, particularly those in financially disadvantaged situations, including raising awareness about credit risks and debt accumulation, as well as informing these people about available debt counselling services in case of financial difficulties.

Background Information

The National Audit Office's audit focuses on creditors not associated with banks primarily offering unsecured small loans (72.6% of the number of contracts) and instalment payments (26.4%).

As of 30th September 2022, the outstanding balance of loans from non-bank lenders amounted to 259 million euros, compared to 263 million euros as of 31st March 2023.

Between 2019 and 2022, the proportion of loan payments overdue by more than 30 days, indicating late payments, ranged from 12% to 18% (see figure). Additionally, loans with payment deadlines within 30 days constituted approximately 11% of the total number of loans. As of 30th September 2022, non-bank lenders had almost 80,000 overdue loans, accounting for 29% of the total number.

Toomas Mattson

+372 640 0765
+372 513 4900
[email protected]
[email protected]

  • Posted: 7/10/2023 11:00 AM
  • Last Update: 7/10/2023 1:57 PM
  • Last Review: 7/10/2023 1:57 PM

Lenders should prudently evaluate borrowers' ability to repay their loans. Acquiring a consumer loan should not be too easy, primarily for the consumer´s benefit.

Arno Saar / Õhtuleht / Scanpix Baltics

Additional Materials


More News