Ensuring fairness in finance

The financial arbitrator of the Czech Republic doesn't think he'll be able to take a vacation this summer. Between doubling his staff, moving into bigger offices and expanding responsibilities that come in effect July 1, František Klufa is going to be busy.

Since the office was established in 2003, the arbiter's scope has been to act as an out-of-court body used to resolve disputes between customers and financial institutions regarding payment cards. Most often, disputes involve fraudulent charges or fees that exceed those explained in the contract, but they also include any disputes over costs arising from electronic transactions. Even with these responsibilities, the office's authority has been relatively limited since its inception.

"Our competences are some of smallest in Europe. I think only in Bulgaria and Cyprus are there smaller ones," Klufa said. "In the UK, Germany and France, for example, they are responsible for the entire financial market."

Starting July 1, however, the office will take on an entirely new workload as it begins mediating disputes dealing with consumer credit. The number of petitions from consumers has steadily risen over the past few years: 370 in 2007, 619 in 2008 and 757 in 2009. Last year, the office received a total of 822 petitions - requests from consumers seeking help in a dispute. The office accepted and began 135 proceedings last year, 94 of which were declared ultimately to be justified. Of the justified cases, 78 were closed last year, 36 percent of which were decided in favor of the petitioner.

Klufa expects the office's case-load to increase at an even quicker pace over the next few years.

"We had 822 last year. This year, I expect about 1,100 inquiries, and next year I believe there will be about 1,800, which is a dramatic increase," he said.

The increase, he explained, will be driven by the office's new role mediating consumer credit. The biggest number of petitions filed last year, 92, involved consumer credit, petitions the office had to turn down. The office will begin heavily promoting its services to the public, but Klufa expects the growth also to come from the economic situation.

"There is the unemployment rate, and there is also the rate of credits in default, which is increasing to about 9 percent of loans," he said. "For mortgages, it's about 2 percent, but consumer lending is up at 9.5 percent, which is about the same as the rate in the United States."

In anticipation of the new responsibilities, the office will begin headhunting for additional staff, doubling its current staff of seven to 14. The office will also switch its funding source from the Czech National Bank to the Finance Ministry, in accordance with an opinion from the European Central Bank that found a conflict of interest. The office's budget, which is currently at approximately 11 million Kč ($638,421) per year, will need to increase to between 20 million and 25 million Kč, no easy feat as the government implements austerity measures.

Disputes between financial institutions and customers have arisen largely from mistakes that result from "human error," Klufa said. The banking systems themselves are operating well, but mistakes are inevitable. But the consumer lending market may bring in cases that result from more intentional malpractice, he anticipates. Within the lending market, there are two types of lenders: banking and nonbanking.

"I'm not sure if we can just split the market between banking and nonbanking lenders. Instead, it's split between good and bad lenders. I don't see a big problem in the banking sector, and I don't see a problem in a very important and big part of the nonbanking lending sector. But there are nonbanking lenders as well that are not conducting business in an ethical manner," he said "They're not charging the right interest rates, they're including bad arbitration clauses, and they're not following the right procedures."

All of these institutions will now be in the institution's scope and subject to their decisions as of July 1, an expansion that will include thousands of vendors selling financial products.

"We will find out where the biggest problems are," Klufa said.

On top of the mediating activities, the office also cooperates with the Financial Ministry in several financial-literacy programs for both students and adults by publishing literature and offering presentations to promote the office and its services in an effort to inform the public about their rights as consumers in the financial market.

"The best dispute is the one that never happened," Klufa said.

Claire Compton can be reached at
ccompton@praguepost.com