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The Law on Depositors of Bank Mykhailivskyi: What to Count on for the Citizens and the Market


Oleksandr Vygovskyy, attorney at Ilyashev & Partners Law Firm

Has the new document facilitated the fate of the defrauded investors and the burden on the Individual Deposit Guarantee Fund?

Last week the Verkhovna Rada adopted two draft laws regulating the financial market. We are talking about the draft law No. 2455 “On consumer lending” and No. 5390 “On amendments to some laws of Ukraine regarding compensation to individuals through the individual deposit guarantee system for damage caused by abuse in the field of banking and other financial services”, which in the narrow circles was called as “The Law on the depositors of Bank Mykhailivskyi”. Forbes has already published a detailed legal analysis of the innovations proposed by the first document. Now, we offer to our readers the outline of the main aspects of the second law and its possible impact on the banking sector of the country.

Recall, as reported by Igor Doroshenko, the former Chairman of the Board of Bank Mykhailivskyi, bankruptcy of the bank was not due to violation of some prudential regulations. “The bank was declared insolvent due to the increase of the deposit portfolio. However, on the other hand, whether the increase of the bank’s deposit portfolio can cause its referral to the category of insolvent? The question is rhetorical”, Doroshenko said in the media interview. In his opinion, there were no other reasons for bankruptcy. The attorney at law Oleksandr Vygovskyy decided to delve into the problem and its legal consequences.

The resonant Law of Ukraine “On amendments to some laws of Ukraine regarding compensation to individuals through the individual deposit guarantee system for damage caused by abuse in the field of banking and other financial services” of November 15, 2016, adopted within a record-breaking short term and having clearly political implications, has caused a mixed reaction among lawyers and financial analysts. The law retrospectively equals the rights of bank depositors and clients of non-bank financial institutions raising funds through the bank that became insolvent – both have the right to claim for reimbursement of their deposits from the Individual Deposit Guarantee Fund within the limit amount of compensation (200,000 hryvnias).

The law was adopted taking into account the current situation with the depositors of the notorious PJSC “Bank “Mykhailivskyi”. The story is a vivid example of how the bank’s deposit policy can affect the political situation in the country.

Bank Mykhailivskyi attracted depositors actively by offering them one of the highest deposit rates in the market. Taking advantage of the financial illiteracy of the overwhelming majority of the population, the bank successfully tested the scheme in which the clients were proposed to conclude not the bank deposit agreements directly with the bank itself, but the loan agreements with non-bank financial institutions controlled by the bank, and the bank itself acted as an attorney.

The Bank opened for each client the bank account for crediting the deposit amount, from which the money was transferred to the accounts of the non-bank financial institutions. Mykhailivskyi earned good commission on such transactions and did not “flash” such deposits on the balance. Certainly, the bank did not advertise the fact that such “depositors” will not be able to claim the guaranteed compensation of the Individual Deposit Guarantee Fund. The victims of the scheme were about 14,000 individuals for the total amount of more than 1.5 bln hryvnias.

On the one hand, the rapid adoption of the above Law should be evaluated positively. Firstly, it enables to resolve a social problem with payments to the clients of Bank Mykhailivskyi, many of whom are people of retirement age (more than 45% of individuals affected by the scheme described above are over 55 years) with low income. In addition, the Law eliminates the possibility of using the said loophole in the future, as it prohibits banks to attract deposits from individuals without recording them in the liabilities and assets of the bank, and prohibits financial institutions to attract deposits from individuals, if such a possibility is not directly envisaged by law for a particular institution.

From now on, if the bank acts as an attorney, agent or other intermediary in raising funds from individuals in favor of third parties, it must inform the depositors in writing that such funds are not bank deposits, thus, they are not subject to indemnity by the Individual Deposit Guarantee Fund.

In addition, the Law reinforces responsibility of the parties related to the bank: in case of insufficiency of the bank’s property the Individual Deposit Guarantee Fund has the right to demand to compensate for such damage from the related party, which actions or omission caused damage to the creditors of the bank. Failure to comply with the demand will result in seizure of money and property of such person, and the recovered funds will be included in the bank’s liquidation estate. However, even liquidation of the bank will not be the ground for exemption from liability of the persons related to the bank. At first glance, it will permit to enhance public confidence in banks, which is running out, at least partly.

On the other hand, payments to depositors of Bank Mykhailivskyi, which are clearly beyond the “scope of responsibility” of the Individual Deposit Guarantee Fund, will extremely strengthen already considerable financial burden on it. Pursuant to the law, the funds of the Individual Deposit Guarantee Fund are formed by contributions of its members. The members of the Individual Deposit Guarantee Fund are all banks from the day of receipt of the banking license.

It turns out that the clients of non-bank financial institutions that did not participate in the formation of the resource base of the Individual Deposit Guarantee Fund, can now claim compensation from the contributions of respectable banks that did not have any relation to the activities of Bank Mykhailivskyi. The Individual Deposit Guarantee Fund actively takes loans from the National Bank of Ukraine and the Ministry of Finance for settlements with depositors, and in this case it will apparently be the main source of funding. It will increase pressure on the state budget and taxpayers, fuel inflation and devaluation of hryvnia.

In addition, one cannot but note excessive “attachment” of the Law to a particular situation with the depositors of Bank Mykhailivskyi. The Law resolves their problems and what comes next? Who will guarantee that tomorrow another major bank will not go bankrupt, and another fraudulent scheme with the contributions will not be found out? They will have to adopt a new law and get into the pocket of the law-abiding taxpayers? To prevent similar situations in the future it would be much more effective to increase financial literacy of the population and tighten control by the regulator over the banks, especially those that set deposit rates above the index points.

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