Supervision of the Bank of Russia over unfair practices in the field of consumer protection of financial services

Litovko Andrei Sergeevich Postgraduate student, Department of International and Public Law, Financial University under the Government of the Russian Federation 55 Leningradsky Ave., Moscow, 125167, Russia andreilitovko@yandex.ru Other publications by this author

In recent years, there has been a significant growth in the segment of the financial market associated with interaction with consumers of financial services. However, along with the growth of the segment, an increase in the volume of unfair or illegal practices violating the rights of consumers of financial services was found (approx. electronic resource: official website of the Bank of Russia. Results of the work of the Bank of Russia 2022: briefly about the main URL: https://cbr.ru/about_br/publ/results_work/2022 / (accessed 25.04.2023), which caused concern among investors, regulators and the public.

In response to these challenges, the Russian government and financial regulatory authorities have begun to implement a wide range of measures to improve the quality of regulation and supervision in the financial market.

In this direction, the Government of the Russian Federation is improving measures aimed at strengthening corporate governance, strengthening investor protection and improving financial literacy of consumers of financial services (approx. Order of the Government of the Russian Federation of 29.12.2022 N 4355-r // SPS ConsultantPlus),

An example of the Bank of Russia's activities in the field of consumer protection may be the introduction of passports of financial products, mandatory qualifying testing for investors, the appearance of a cooling-off period in insurance (approx. electronic resource: official website of the Bank of Russia. URL: http://www.cbr.ru / (accessed 25.04.2023), which were based on the creation of a single financial market regulator represented by the Central Bank of the Russian Federation (hereinafter referred to as the Mega–Regulator, the Bank of Russia). Thus, the Bank of Russia began to supervise all participants of the financial market. With the amendments made by Federal Law No. 251-FZ of July 23, 2013 "On Amendments to Certain Legislative Acts of the Russian Federation in Connection with the Transfer to the Central Bank of the Russian Federation of Powers for Regulation, Control and Supervision in the Field of Financial Markets", control over consumer protection, legality and integrity in the financial market has been strengthened. A new type of supervision of the Bank of Russia over the behavior of financial market entities (behavioral supervision) has been formed, which is specifically aimed at protecting the rights of consumers of financial services (approx. electronic resource. Official website of the Bank of Russia. Annual Report of the Bank of Russia for 2016, pp. 169-170. URL: https://files . rmcenter.ru/year/2017/5/Bank_Rossii_Godovoy_otchet_2016.pdf ).

One of the areas of supervision of the behavior of financial market entities is to solve the problem of the spread of unfair and illegal practices in the Russian financial market, which hinder the growth of confidence in the market, especially from ordinary consumers of financial services.

It is also worth noting that this group of legal relations is formed between individuals who consume a financial product for personal purposes not related to entrepreneurial activity (consumer) and professional participants in the financial market whose main activity is activity in the financial market (supplier of financial products).

Such a selective approach in the framework of supervision is due to the fact that the insecurity of the consumer of financial services is determined by the very nature of the financial market, which, in essence, is a fiction for a person, a legal structure, which, due to its initial simplicity, is unnatural to a person and his usual understanding of the world. ^[1]

However, there are a number of topical issues in regulating the protection of the rights and legitimate interests of consumers, in particular, there is no general view in legislation and law enforcement on what can be considered unfair and illegal activities.

Speaking about unfair and illegal practices, we can give an example that the most common forms of this activity are:

1) the inclusion of hidden commissions in contracts, so sellers of financial products do not inform consumers about all commissions and additional costs that are associated with products;

2) imposing additional products. This is a practice in which sellers of financial products impose additional products on customers that are not necessary or desirable;

3) the creation of incomprehensible terms of the contract. This is a practice in which sellers of financial products use incomprehensible and confusing terms in contracts to hide additional costs and risks for customers;

4) intentional misrepresentation of the terms of the contract, a practice in which sellers of financial products deceive customers by providing them with false information or hiding important facts about the product;

5) illegal write-off of funds, a practice in which sellers of financial products write off funds from bank cards or customer accounts without their consent or violation of the terms of the contract;

6) the inability of the consumer to refuse the product or not paying the promised compensation to the consumer for services;

7) failure to provide the necessary information is a practice in which sellers of financial products do not provide sufficient information about the product, for example, about its risks or possible losses for the consumer.

Thus, the activity under consideration is characterized by various forms that are associated with the failure to provide reliable information, aggressive sale of financial products, abuse of rights.

At the same time, there is no single approach that would determine what is permissible to consider unfair and illegal practices, regulatory authorities or practices have not been established.

The Central Bank of the Russian Federation has attempted to define these phenomena, but definitions have been established for more specific cases (approx. electronic resource: official website of the Bank of Russia. Types of unfair behavior of financial market participants URL: https://cbr.ru/protection_rights/np / (date of appeal 01.05.2023) such as the sale of a financial product under a condition, insufficient presentation of information to the consumer, and others, however, the signs by which it is possible to identify unfair practices by the Bank of Russia have not been established (approx. electronic resource: Bank of Russia (2022) Protection of the rights of consumers of financial services. Types of unfair behavior of financial market participants. URL: https://cbr.ru/protection_rights/np / (accessed 01.05.2023).

The Bank of Russia has defined these forms of abuse of consumer rights as "inappropriate behavior". The Bank of Russia in its definitions avoids the exact qualification of acts as offenses or practices that violate the law. ^[2]

This position, in our opinion, is explained by the fact that the Bank of Russia implies that for the end user, the practice violating his rights is in any case negative and its more detailed qualification for the consumer is impractical, however, to ensure legality and law enforcement, it is advisable to establish a distinction.

The doctrine notes the high importance and need to define the concepts and content of illegal practices in the financial market, the expediency of clarifying at the level of the Bank of Russia the legal position on the distinction between unfair and illegal practices, which, due to the fact that the most developed foreign economic orders in their legislation attribute most violations in the financial market to financial crimes, which has a positive effect on development of the financial market. ^{[2, 3]}

However, a systematic study of the activities of the Service for Consumer Protection and Ensuring the Availability of Financial Services of the Bank of Russia and the Department for Combating Unfair Practices of the Bank of Russia allows us to conclude that in the future the Regulator divides inappropriate behavior into two categories, a) "illegal practices" (approx. electronic resource: official website of the Bank of Russia. Types of illegal activity in the financial market URL: https://cbr.ru/inside/k_illegals / (accessed 26.04.2023) and b) unfair practices (approx. electronic resource: official website of the Bank of Russia URL https://cbr.ru/protection_rights/np / (accessed 29.04.2023). However, the concept does not give these practices.

Perhaps the Bank of Russia avoids defining any practices as financial offenses due to the fact that in many of the identified acts it is not possible to state an offense without establishing all its elements, it is especially difficult that there may not be direct signs of offenses (crimes) in the acts, therefore, taking into account the parity position of the Bank of Russia it seems reasonable.

At the same time, continuing about the concept of "illegal practices", it can be noted that the analysis of existing legal relations, as well as current legislation and judicial practice allows us to conclude that not only the Bank of Russia, but also the legislator does not provide a literal concept of illegal practices in the financial services market at present, the analyzed doctrinal sources allow us to conclude that scientists refer to the category of illegal practices in the financial market without any substantive comments, implying in it a well-known category of illegal activity.

Additionally, from the analysis of legal sources related to the economic sphere, it can be concluded that the state understands illegal acts as illegal acts that are directly prohibited by existing legislation (approx. Resolution of the State Statistics Committee of the Russian Federation of 31.01.1998 N 7 // SPS ConsultantPlus).

The mentioned concept seems logical and reasonable in the financial market sphere as well, due to the fact that the wording used specifically defines the signs of illegal activity as acts directly prohibited by law, which allows us to form a clear understanding of permissible and unacceptable acts and behaviors.

His position on what can be attributed to illegal practices is given by I.Y. Dendiberya, he believes that practices based on abuse and having nothing to do with the sphere of finance, however, at the same time forming the financial obligations of the client to third parties should be attributed to the criminal legal sphere. ^[4] Thus, the author, analyzing various forms of activity, states that for criminal legal qualification (illegal practices), a sign of abuse of trust and substitution of financial relations with other, unrelated to finance is necessary.

In our opinion, this position is already contained in the current criminal law norms, under which crimes committed in the financial market are currently qualified, however, it would be advisable to take into account the signs indicated by the author in the case of creating special compositions on crimes in the financial market.

Thus, in addition to the fact that the definition of signs of legal and illegal activity is significant for practical activity, it will at the same time make it possible to emphasize the importance of consumer protection for the development of the financial market.

Thus, it can be stated that the main sign of illegal practices in the financial market is a deliberate violation of the applicable legal requirements. However, it is worth noting that the legislation on the Bank of Russia does not provide for any financial and legal sanctions for these acts.

Speaking about unfair practices in the financial market, it can be noted that this category seems to be more difficult to define.

In the theological interpretation of the information on the megaregulator's website, the Bank of Russia refers to unfair actions that formally comply with current legal norms, but which create a deliberately unfavorable situation for financial market participants - consumers of financial services.

The category of unfair practices in the financial market is actively used by the Bank of Russia and is discussed in the scientific community, however, the analysis of existing legal relations, as well as current legislation, expert opinions allows us to conclude that the Bank of Russia only gives examples of unfair practices and makes recommendations on elimination, but does not disclose the content of the category of dishonesty, and also does not identify signs, formally defining the specified category (or revealing its meaning) how it is done in civil law (approx. electronic resource: Resolution of the Plenum of the Supreme Court of the Russian Federation No. 25 of 23.06.2015, Resolution of the Plenum of the Supreme Court of the Russian Federation No. 62 of 30.07.2013 // SPS ConsultantPlus) and in tax law (approx. electronic resource: resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation No. 53 dated 12.10.2006 // SPS ConsultantPlus), in addition, according to the results of the analysis of the acts of the Bank of Russia, it is possible to identify a few informational letters (hereinafter referred to as letters) that are directly devoted to unfair practices of financial market entities (approx. electronic resource: official website of the Bank of Russia URL: https://cbr.ru/protection_rights/acts / (accessed 01.05.2023):

The analysis of these letters of the Bank of Russia allows us to conclude that in them the Bank of Russia does not give a generalization that has theoretical value, at the same time, the Bank in a meaningful sense issues letters explaining the order of conduct aimed at preventing unfair practices. These letters do not contain any sanctions for unfair actions in case of their non-fulfillment.

At the same time, a literal interpretation of these letters and regulations of the Bank of Russia allows us to conclude that the signs characterizing the unfair behavior of the Bank of Russia are:

- actions that put the consumer in an unfavorable position;

- failure to provide proper information about the purchased service or product;

- the possibility of unilateral (unequal) determination of conditions by the service provider;

- the focus of activity on misleading the consumer of financial services.

In addition, in the basic standards of the Bank of Russia on behavior in the financial market, the mega regulator also does not identify signs of unfair practices.

Analyzing the opinions of scientists on the definition of unfair practices, we can state the following.

I.E. Mikheeva, in the group of unfair practices, refers to acts that formally comply with the norms of legislation, but worsen the situation of consumers of financial services. ^[5]

G.A. Malov, considering the topic of unfair behavior of banks in the futures market, determines that unfair actions can be called "actions of a bank (including illegal ones) in order to extract benefits as a result of combining banking activities and banks' activities in the futures market, as a result of which the rights and legitimate interests of its counterparties on transactions or third parties may be violated" ^[6]. Thus, the author adheres to a broad approach in the definition of unfair practices, where all practices violating the rights of counterparties are recognized as unfair, the author notes that this activity involves extracting benefits at the expense of the counterparty.

I.Y. Dendiberya, considering the civil-legal characteristics of unfair acts, identifies the following signs of acts that can be recognized as unfair, such as:

- failure to provide proper information (misleading) about the product or service;

- provision of financial services by a person who is aware of the impossibility of fulfilling obligations due to a poor financial situation, which the consumer, due to his objective capabilities, could not have assumed.^[3]

A.V. Kanaev and O.A. Kanaeva, in their work on one of the forms of unfair behavior – misseling, argue that the dishonesty of this practice is characterized in domestic and foreign consumer protection practice by regulators as follows:

- the supplier distorts or hides part of the terms of the transaction;

- does not provide all information about the transaction;

- the supplier does not fulfill the obligation to assess the client's risk profiles and offers high-risk products;

- customers are recommended unsuitable products for them that did not meet the needs of the client;

- the supplier was not informed about the risks of the product, additional commissions and fees;

- aggressive sales practices were used against the client. ^[1]

Thus, the analysis of the works of scientists allows us to conclude that an unambiguous understanding has not been formed in the scientific environment, some of the scientists adhere to the path on which it is necessary to single out and prohibit specific acts, another part of the researchers is trying to determine that the way of determining signs of dishonesty is more in line with the interests of practice, at the same time, the most similar opinions determine that unscrupulous actions may be characterized by the following knowingly perfect or imperfect acts that have worsened the situation of the consumer of financial services:

- providing false information about a financial product, transaction;

- inadequate assessment of the financial capabilities of the consumer;

         - the use of aggressive sales methods that mislead or abuse the consumer's trust.

O.Krainova, head of the ANO "Financial Commissioner's Activity Support Service", claims that the concept of "unacceptable practices" is used within the framework of the service's activities - actions or omissions of financial service providers or their agents that contradict the principles of conscientious behavior, reasonableness and fairness, do not take into account methodological approaches in the field of consumer protection set out in information and other letters of the Bank of Russia, as well as cause or may cause losses to consumers of financial services. ^[7]

This definition highlights the signs of unfair behavior as an act:

- not meeting the criteria of good faith and reasonableness;

- contradicting the methods and practices of the sale of financial services established by the Bank of Russia;

- causing damage, that is, they worsen the situation of the consumer of financial services.

It is particularly worth paying attention to the fact that this approach reflects the fact that letters of recommendation and methodologies of the Bank of Russia are rather mandatory.

Thus, summarizing the results of the analysis of the current legislation, regulatory regulation and recommendations of the Bank of Russia, as well as the legal approaches of the doctrine, the following conclusions can be drawn:

1. Illegal practices in the financial market are knowingly committed acts that violate the current requirements of legislation regulating the procedure for the operation of the financial market.

2. There is no unambiguous concept and signs that make it possible to determine unfair practices in the financial market, however, as a result of the analysis of existing opinions, it can be stated that unfair practices in the financial market are an act of a provider of financial services and products associated with causing damage to the consumer or otherwise worsening his position in the financial market, associated with the introduction of he is misled by incomplete presentation of all information and incomplete assessment of his risk profile. 

3. Based on the results of the identification of illegal and unfair practices, the Bank of Russia transmits information to law enforcement agencies or applies measures within the competence aimed at regulating legal relations in the financial market, however, there are no financial and legal sanctions for acts by the legislation on the Bank of Russia, therefore, we note separately that in our opinion it is necessary to supplement the current legislation requirements for mandatory control by the bank's internal services of the bank's behavioral profile. However, this is a topic of a separate study.