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Perspectives of Financial Arbitration in Ukraine


Dmytro Shemelin, Lawyer at Ilyashev & Partners Law Firm
Source: The Yurydychna Praktyka

To create an independent institution of financial arbitration, Ukraine shall resort to foreign banking disputes settlement experience

Increasing confidence in the judicial system is one of the problems that has been relevant for twenty years. Unfortunately, the revolution again brought to the top the strategies such as “to dismiss all judges, to close all the courts” strongly resembling the famous “to take away and share everything”.

Obviously, we are not the first people to face a similar problem, thus, there are interesting international precedents of limited reform of the judicial and regulatory systems that can easily be tested in Ukraine. We are talking about an independent institution for extra-judicial settlement of financial disputes.

Comprehensive approach

In 2008, after bankruptcy of the American investment bank Lehman Brothers and the financial crisis, the Hong Kong Monetary Authority (HKMA) faced a significant decline in confidence to investors, especially laymen, to the whole financial system of Hong Kong. Consideration of disputes between financial companies and investors in courts was too time-consuming and costly to adequately respond to situation in financial markets. As a result, complaints to lack of actual protection of investors’ rights in a crisis situation poured on the HKMA. For its part, the HKMA could quickly make only regulatory decisions and could not award compensation to the investor, even if the latter was right.

In response the HKMA decided to establish the Hong Kong International Arbitration Centre (HKIAC), an independent dispute settlement system between financial companies and consumers of financial services, on the basis of local arbitration centre. Such system under the auspices of HKIAC existed for some years and was successful enough and in 2012, the Hong Kong government transformed it into a separate non-profit organization – the Financial Dispute Resolution Center.

The arbitrators of the Centre may consider any dispute between financial institutions in Hong Kong and their clients-investors. The procedure is voluntary for investors (as an option they can apply to court), while participation of financial institutions is required by law. The procedure usually envisages reconciliation of the parties, failing which an investor can request the arbitrator to make a binding decision. All procedures are performed quickly, by professional arbitrators, therefore, time and money expenditures are low, which is positively treated by both investors and institutions.

A similar system is effective in the United States under the auspices of the FINRA (Financial Industry Regulatory Authority), a non-governmental organization authorized by the US Congress to develop rules of operation in the financial markets and monitor their implementation.

Similarly to Hong Kong, financial institutions (brokers) registered in the FINRA undertake to participate in its mediation or arbitration procedures initiated under the claims of their clients-investors, for which the procedure is voluntary. The investor claiming to suffer as a result of fraudulent actions of its broker may submit a request for arbitration to the FINRA; the organization will appoint the arbitrators and will follow up the proceedings. Court of arbitration at the FINRA is popular, and its tribunals consider about 4,000 cases a year.

The Russian “financial ombudsman” acting within the Association of Russian Banks and considering disputes between member banks and their clients is a kind of similar institution. In Russia, the institution was introduced in 2010 and is in high demand among bona fide borrowers willing to restructure payments or extend the maturity of loan, which they are temporarily unable to pay.

Similarly to Hong Kong, in the United States consideration of dispute by the Ombudsman is mandatory for a member bank, but voluntary for its client. However, in practice activities of the Ombudsman is beneficial for fair borrowers, who can communicate with the bank without undue nerve-racking, and for the banks that save time and money on enforcement procedures and safe face and clients. In Russia, the financial ombudsman considers about 100 disputes per month.

In Spain, financial arbitration is slightly different, it considers disputes between banks. Associacion Espagnola de Banca has a permanent arbitration centre for settlement of interbank disputes Servicio para dirimir cuestiones entre bancos (DIRIBAN). To date, it has considered about a thousand disputes.

Initially, participation in the center’s procedures was voluntary, but on seeing its effectiveness, the central bank of Spain (Banco de España) ordered all members of electronic payment system to participate in DIRIBAN.

The arbitration procedure in DIRIBAN is free and looks more like an administrative than judicial proceedings. Both parties to dispute submit all required documents to the Secretariat of DIRIBAN, which appoints a rapporteur for the case. The rapporteur prepares case for consideration and submits it to a permanent tribunal of DIRIBAN, consisting of representatives of the banks participating in the system. Thus, banks ultimately judge themselves, which greatly enhances the credibility of this rather successful dispute settlement system.

Finally, we must mention the Dubai Financial Markets Tribunal. When Dubai was turning into the world financial center, predictability of regulatory activity for large investors was one of the obvious problems. Dubai could not afford developing financial traditions of the City for two hundred years. The problem was solved quite smartly: decisions of the Dubai Financial Services Authority, the main regulator of the financial markets in Dubai, may be appealed to the court of arbitration Financial Markets Tribunal created by the British experts from the LCIA. As a result, authority of the LCIA’s arbitrators guarantees predictability of the Dubai regulator, which is beneficial for all parties.

Resolution in Ukrainian manner

For Ukraine, regulatory arbitration is, perhaps, too “progressive”: the State Commission for Securities and Financial Markets or the NBU will hardly be willing to share their authorities with any arbitrators. The state is also unlikely to create a kind of financial enclave like Dubai International Financial Centre, a territory with its courts and even “government”. In addition, disputes between banks and clients cannot be transferred to a court of arbitration in accordance with Article 6(14) of the Law of Ukraine “On courts of arbitration”.

Therefore, in Ukraine we can speak about creation of a synthesis of DIRIBAN and Hong Kong Financial Dispute Resolution Center, a separate court of arbitration under the auspices of the NBU for resolution of banking disputes (involving banks and legal entities).

To date, the law formally prohibits establishment of a court of arbitration at the National Bank (a public agency). Such court of arbitration shall be organized at the all-Ukrainian public organization or association of banks. However, just as in Spain, the National Bank would be able to actually control such a court, ensuring quality and efficiency of arbitral awards. In turn, the NBU would provide such court a significant competitive advantage by supervising execution of its awards on the part of banks.

As an instrument of control, the NBU would participate in forming secretariat of the court of arbitration and a list of arbitrators experienced in financial law and dispute resolution. Further, the head of secretariat of such court of arbitration would be appointed on the recommendation of the NBU.

Regarding jurisdiction of such court it is probably worth going by a beaten path: consideration of disputes shall be mandatory for banks, but voluntary for their clients. From a legal point of view, banks e.g. could give a perpetual open offer for entering into an arbitration agreement that, if desired, could be accepted by clients or other banks. Thus, the state courts would remain the main dispute resolution institutions, but a lawsuit against the bank could be also filed to the court of arbitration at request of its counterparty (client or other bank in case of inter-bank lending).

In addition, consideration could be given to the opportunity of voluntarily transfer to the court of arbitration of any financial disputes with non-bank institutions. If the court of arbitration “at the NBU” is a success, disputes with insurance companies, asset management companies and other similar entities will be referred for its consideration.

To create and save

With regard to appointment of arbitrators, different options can be considered. Obviously, success of a new court of arbitration will be predetermined only by the quality of the arbitration. Therefore, it makes sense to compile a sufficiently wide list of arbitrators including representatives of banks, non-governmental organizations, law firms and other recognized experts, also those recommended by the National Bank. Accordingly, in case of collegiate arbitral tribunal the chairman would be appointed by the secretariat (or by agreement of the parties), and the parties would be free to appoint arbitrators at their choice.

If a new court of arbitration is created and act as truly independent, it will be beneficial for all parties.

Banks will get the chance to prompt and professional handling of cases, and it will be much harder to put into question legitimacy of the decision, even if it is made in favor of the bank, because private arbitrators do not have the same reputation as our judicial system. Such court of arbitration will also have a positive effect on resolution of interbank disputes: cases will be considered by professional arbitrators, who have extensive experience in such matters, speak a common language with the banks and do not spend half a year only to set a hearing of the case.

Clients can hope for a fair and legitimate resolution of dispute with the bank, if they are right, and for receipt of compensation, which payment will be monitored by the NBU. It is unlikely that the clients will submit obviously speculative claims to such court of arbitration as it is easier to drag proceedings in the state court with its formal appeal and cassation procedures rather than in an informal arbitration proceedings.

Position of the National Bank, which will have to ensure independence, legitimacy and other competitive advantages of its creation, will obviously be a key factor. Profit for the NBU in this transaction will more likely to be immaterial: in return for its efforts the NBU without revolutionary legislative changes will take an unprecedented position in the banking, and possibly in the future, in all financial markets of Ukraine.

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