Bank review, Best Practice, № 4, 2012

At present, a “collective” cooperation scheme is quite attractive, especially for banks and insurers being part of one financial group. The reasons for this popularity are fairly obvious: a bank independently selects an insurer to insure its debtors’ risks. Life and health insurance are the least unprofitable types of insurance, which enables the insurer to pay higher commission fees to the bank, and in case of a financial group – to enjoy greater profits.

At the same time, such cooperation scheme between banks and insurance companies when insuring debtors’ risks has on various occasions become subject of close attention of the antitrust authorities. However, one can observe the absence of a unified position on this issue, as well as the absence of a single approach to classifying such agreements by the central body of the FAS (Federal Antitrust Service) of Russia and its territorial bodies.

Example in Practice

A stark example of this is the examination by the Udmurt Directorate of the FAS of Russia and the central body of the FAS of Russia of the same agreement entered into by OJSC Sberbank of Russia and OJSC SK ROSNO, with the subject matter being collective insurance of bank debtors’ risks, within the cases on violation of antitrust legislation.

As suggested by the resolution of the committee of the Udmurt Directorate of the FAS of Russia on case No.SU 06-06/2010-26, OJSC Sberbank of Russia and OJSC SK ROSNO entered into agreement No.258 on insurance conditions and procedure dated 31.08.2009 (collective insurance agreement), under which OJSC Sberbank of Russia acts as the insured for the bank’s clients, while OJSC SK ROSNO acts as the insurer.

Based on the results of examination of this case by the Udmurt Directorate of the FAS of Russia regarding agreement No.258 on insurance conditions and procedure dated 31.08.2009 with respect to OJSC Sberbank of Russia and OJSC SK ROSNO, on 07.12.2010 the antitrust authority passed a resolution, based on which the said entities were recognized to have violated Clauses 4, 5 and 8 Part 1 Article 11 of the Federal Law “On protection of competition” (hereinafter the “Competition Law”) (as revised prior to enforcement of Law No.401-FZ) as pertaining to an economically or technologically unsubstantiated refusal to enter into agreements with particular sellers (or buyers), imposing on bank’s debtors agreement conditions that are neither profitable nor related to the subject matter of the agreement, as well as creating barriers for the access to and exit from a product market by business entities.

This resolution of the Udmurt Directorate of the FAS of Russia was recognized lawful and substantiated by courts of three instances based on the results of appeal.

On March 11, 2012 the Committee of the FAS of Russia came to a conclusion that there was no violation of the Competition Law in the actions of OJSC Sberbank of Russia and OJSC SK ROSNO with respect to signing and implementing the same agreement No.258 on insurance conditions and procedure dated 31.08.2009, and, therefore, cancelled case examination.

In the course of examining the case, the FAS of Russia analyzed the provisions of the agreement and the documents issued by OJSC Sberbank of Russia for purposes of implementing this agreement.

Based on the results of the analysis it was established that the documents available in case materials contained no provisions on imposition or other form of compelling debtors to express their consent to be insured under the collective insurance agreement. The existence of an agreement between OJSC Sberbank of Russia and OJSC SK ROSNO regarding compelling the debtors to participate in the Life and Health Collective Insurance Plan was likewise not proven.

Therefore, two opposite resolutions were adopted by the FAS of Russia and its territorial body on the issue of classifying the same agreement.

What about the FAS of Russia?

For purposes of uniform application of antitrust legislation regulations when identifying similar violations by territorial authorities of the FAS of Russia, on February 22, 2012 the Presidium of the FAS of Russia adopted a resolution on the issue of classifying anti-competition actions of credit and insurance companies when signing agreements that determine the procedure for arranging debtors’ life and health insurance and other conditions of cooperation between the parties in the course of participation in debtors’ collective insurance plan.

In particular, it was determined that since the bank is acting as the insured under the collective voluntary insurance plan, it is entitled to independently choose an insurance company to enter into a collective insurance agreement for its clients. The bank’s debtors do not enter into individual insurance agreements, but only express their voluntary consent to be insured under the insurance agreement that was already signed by the bank.

At the same time, according to the FAS of Russia, the bank is not obliged to sign debtors’ collective insurance agreements with several insurance organizations.

At the same time, collective insurance must not be imposed on the bank’s debtors, and they should have an opportunity to choose whether to agree or refuse to participate in this agreement.

Therefore, according to this resolution of the Presidium of the FAS of Russia, in the event the bank’s debtors are offered an additional voluntary service – collective life and health insurance for the bank’s clients and a refusal to participate in such insurance agreement does not impact the granting of a loan, and there is no evidence of imposing collective voluntary insurance on the bank’s clients, the bank’s actions may not be classified as violation of the antitrust legislation.

However, irrespective of the existence of the legal position formed by this resolution of the Presidium of the FAS of Russia, the Supreme Commercial Arbitration Court of Russia in its Ruling No.VAS 2892/12 dated 28.05.2012 dismissed the request of OJSC Sberbank of Russia and OJSC SK ROSNO to submit case No.А71-124/2011 for reexamination to the Presidium of the Supreme Commercial Arbitration Court of Russia for supervisory review of the court acts that recognized resolution of the Udmurt Directorate of the FAS of Russia lawful and substantiated.

The Supreme Commercial Arbitration Court of Russia indicated that subject to case circumstances, signing of the agreement on insurance conditions and procedure and actual implementation of same in the Udmurt Republic results or may result in imposing on a third party – the debtor – of disadvantageous agreement conditions in violation of prohibitions established by the Competition Law.

Furthermore, since establishing cooperation in signing insurance agreements only with one insurance company without providing the debtors with a right to choose an insurance company at their option results in (or may result in) elimination and/or restriction of competition between insurance companies and creates barriers for other business entities – insurance companies – to access the product market, the courts have reasonably recognized the bank and the insurance company to have violated Article 11 of the Competition Law.

What to rely on?

In September 2012 modifications were introduced to the Resolution of the Presidium of the FAS of Russia, pursuant to which the proof of violation of the antitrust legislation may also be the refusal of a credit organization to reduce the interest rate for a loan to the level which the debtor could count on under the announced conditions for reduction of the loan interest rate in the event he agrees to become insured under the collective insurance agreement, in the event the debtor presents an insurance policy signed by an insurance company selected by the debtor and providing for the insurance of risks required to reduce the loan interest rate; or a similar agreement between the insurance and the credit organization.

It is obvious that introduction of these changes was conditioned upon the need to bring the position of the FAS of Russia in compliance with the approach of the Supreme Commercial Arbitration Court of Russia, as well as in order to ensure that the debtor has a right to independently choose both the insurance company and the type of insurance when obtaining a loan, and to exclude the opportunity to restrict competition on a respective product market.

For the banks that prefer working with captive insurers, these changes mean the need to have requirements for insurance companies and the rules for the procedure of insurer accreditation pursuant to Government Decree No.386 “On the cases of admissibility of agreements between credit and insurance organizations” dated 30.04.2009. In the absence of such requirements and rules, the bank will be obliged to accept policies of any insurance company provided by the debtor and to reduce the loan interest rate to the level provided for if the debtor participates in a collective insurance plan.

At the same time, it should be noted that bank interaction with an affiliated insurance company appears to be more profitable for the parties to the agreement from the perspective of generating profit. Such cooperation in itself suggests a more reliable credit security and cost reduction, which allows the bank to offer its debtors a credit product at a reduced interest rate.

Obviously, the bank cannot be fully confident of reliability of an “outsider” insurance company, even if it undergoes the procedure of bank accreditation, which among other reasons may result in increasing the loan interest rate.

However, it should be noted that at certain banks the existence or absence of any insurance does not impact the interest rate on bank credit products, which does not make cooperation with insurance companies less efficient, while minimizing the antitrust risks both of the bank and of the insurance company.
At the same time, it is obvious that introducing changes to the Resolution of the Presidium of the FAS of Russia failed to provide answers to a range of debatable issues that were likewise left unresolved by the effective legislation.

Minimizing Antitrust Risks

Taking into account the existing ambiguous practice of classification by antitrust authorities and courts as regards actions of credit and insurance organizations when signing collective life and health insurance agreements for banks’ debtors, antitrust risks for the parties to such agreements still appear to be quite high.

Therefore, when signing a collective life and health insurance agreement for bank’s debtors, it is still reasonable for the parties to such agreement to:

• Avoid language that may be interpreted as an arrangement for imposing such insurance at a particular insurance company;

• Inform the debtors of all conditions of participating in a collective insurance plan, including the fact that it is voluntary;

• Take into account the possibility of refusal to participate in collective insurance plan, including a possibility to return a paid-up insurance premium;

• Take other measures in order to avoid imposing on the bank’s debtors the need to participate in the collective insurance plan.

Furthermore, it would be good not to forget about the rather broad powers that the antitrust authority has in conducting inspections, including ‘dawn raid’ inspections, as well as about the opportunity to conduct sample purchases and other similar control activities.

Summarizing the above, it should be noted that despite the fact that legal transparency has not emerged in a range of issues after the Resolution of the Presidium of the FAS of Russia and changes thereto were adopted, it appears that these documents were undoubtedly needed by financial markets to arrange business subject to requirements of the antitrust legislation. Furthermore, they will no doubt have a positive impact both on ensuring that rights of consumers of banking services are protected, and on the state of competition on the market of insuring the risks of banks’ debtors.