Annual Report 2014

ANNUAL REPORT 2014

ANNUAL REPORT 2 0 14

TABLE OF CONTENTS

4 Address of Chairman of the Board 5 Address of Financial System Mediato 6 About the Office of Financial System Mediator 10 About activities carried out in 2014 18 About activities to be carried out in 2015 22 Statistics about consumer complaints 44 Financial statements and audit opinion 52 Customary business practices and case studies 64 Questions and Answers 68 Acknowledgments The year of 2014 was prominent in that the Government of Armenia approved a national strategy for financial education, and the Financial System Mediator was involved in the national strategy development and im- plementation committee. This was a major achievement for us because we consider the financial education an issue that encompass- es public, national and global perspectives and brings in the possibility to focus more re- sources and make the projects more targeted.

CHAIRMAN OF THE BOARD OF As Chairman of Board of Trustees of the TRUSTEES OF THE OFFICE OF FINANCIAL Office of Financial System Mediator, I very SYSTEM MEDIATOR much appreciate all the efforts and projects the Office carried out to promote financial education of consumers, which, I strongly be- Dear reader, lieve, provided most important incentives for the achievements we had. erformance of the Office of Financial P System Mediator in 2014 stood out In the end of my address, let me wish the by scale and nature if we compare it Financial System Mediator and the entire with prior years. It is noteworthy that in recent team endless energy while expecting that years the number of users of financial services they would further be strong enough to over- has increased in parallel with the increase in come new challenges. the number of complaints addressed to the Mediator. What is more encouraging is that complaints are becoming more substantive, and people - more demanding. This is a good progress which is based on increasing public awareness of consumers' rights and obligations and the level of financial literacy.

Over these years, the Office of Financial System Mediator has done tremendous job in the field of financial education of consumers, Sincerely, and I am pleased to admit that this has be- Vakhtang Abrahamyan, come noticeable. Citizens who are well aware of their rights not only are able to rehabilitate BOARD MEMBER OF THE a broken right through the Mediator but also CENTRAL BANK OF ARMENIA prompt the financial system to be more alert CHAIRMAN OF THE BOARD OF to whatever violation, thereby reducing the TRUSTEES OF THE OFFICE OF FINANCIAL 4 number of possible infringements and abuses. SYSTEM MEDIATOR

Address of Chairman of the Board Just a few figures of what we have done in the course of the past year. We had received a total of 3907 claims and complaints, of which 2667 were eligible for review by the Office of Mediator. But in the first year of operations of the Office, these numbers were dramatically, tenfold, smaller. About 5 percent of complaints filed were satisfied by financial institutions in their preliminary stage of application and roughly 71 percent of the cases investigated by the Mediator were resolved through reconciliation of the parties.

FINANCIAL In the course of these six years we have SYSTEM MEDIATOR been moving forward slowly but firmly. We will continue going ahead with our goals, with a clear certainty that building a sta- Dear reader, ble financial system which serves financially educated, informed and protected citizens is his report rounds up the 6th year of our what we try to achieve. We go forward and T activities. Six years, it seems, is not a believe that there are no undefeatable prob- long time to break deeply-rooted ste- lems along the way; we just need to break reotypes, handle serious system-specific prob- stereotypes… lems and build public trust. But this is only at a first glance… It seemed that no one would ever think of authority that pledges to help, abso- lutely free, solve personal problems because, the stereotype goes, “free cheese is only trapped in there”. It seemed that no financial organization would ever commit itself to willingly pay money to a regular citizen while acknowledg- ing their failure or guilt because “the weak is always sinful before the strength”. Today, six years into the job, I am so happy and confident to say that we have broken these stereotypes. An increasing number of citizens visiting our office with their complaints, their trust toward us and belief that they would receive an unbiased support for solution to their problems point to the above statement. This is also well proved Yours truly, by the fact that financial institutions now are Piruz Sargsyan, taking more careful approach to the solution of problems as they try to be as much helpful FINANCIAL and ready to cooperate as possible. SYSTEM MEDIATOR 5

Address of Financial System Mediator 6

About the Office of Financial System Mediator ABOUT THE OFFICE OF FINANCIAL SYSTEM MEDIATOR

he Office of Financial System Media- Management of the Office of T tor is an establishment with an in- Financial System Mediator consists of: dependent management system. Its founder is the Central Bank of the Republic of • Board of Trustees, and Armenia. The Office is called to settle out any • Manager of the Office, i.e. the Mediator. property disputes that arise between consumers as natural person and financial or- According to the Republic of Armenia Law on ganizations. The services of Financial System Financial System Mediator, the Board of Trustees Mediator are free of charge; the process of of the Office of Financial System Mediator con- review of complaint is explicit, fast and trans- sists of 7 members, and they are appointed as fol- parent. lows: The Office of Financial System Mediator was established pursuant to the Republic of • one member by the Republic of Armenia Armenia Law on Financial System Mediator, Government, passed on June 17, 2008. The Office of Finan- • one member by the Board of the Central cial System Mediator started professional ac- Bank of Armenia, tivity from January 24, 2009. According to the • one member by organizations that advo- said law, the Financial System Mediator is ap- cate protection of consumer rights, and pointed by the Board of Trustees of the Office • four members by unions of organizations. of Financial System Mediator. The first meeting of the Board of Trustees on December 22, 2008 appointed Piruz Sargsyan, a lawyer by profession, as Mediator. In 2012, Ms. Sargsyan was reappointed by the Board.

The following objectives The Office of Financial System Mediator performs in pursuit of the following objectives: • Protection of consumer rights and interests in the financial field; • Fast, effective and free of charge review and handling of claims of clients; and • Enhancement of the public confidence in the financial sector. 7

About the Office of Financial System Mediator ccording to the said law, the Financial A System Mediator is appointed by the Board of Trustees for a 4-year term. Furthermore, the law requires the Financial System Mediator to have higher education, firm authority and at least five years’ work experience. The Financial System Mediator shall not be a person who has worked in any financial organization in the last three years. The Office has an audit function. The -au ditor is appointed by the Board and reports to the Board direct. The auditor takes on a function which involves independent and impartial investigation and evaluation of the operations of the Office through checkups/ examinations. • Case handling and investigating group which makes sure the Office performs its profession- The Office of Financial System Mediator al duties as prescribed by the law. This group has two pillars which make sure the Office consists of: operates fluently. THESE ARE: • specialists who accept complaints, or otherwise, the front office, which receive the visits of clients and provide primary con- sulting, and • specialists who investigate claims, or otherwise, the back office, with the main function of claim investigation, explanation/ clarification, legal attendance of the Office, international cooperation.

This year the Office invited another group • Support group which performs adminis- of young professionals to join. The group is trative tasks, and its main function is to make primarily responsible for making visits to sure day-to-day activities of the Office are in schools and getting involved in activities re- place. The group includes a personnel man- lated to the consumer education program, as agement specialist, an accountant, a ledger well as assisting in claim investigation pro- clerk and a car driver. cess.

About the Office of Financial System Mediator STRUCTURE

6 1

BOARD AUDITOR OF TRUSTEES

4 1 1

SUPPORT ASSISTANT GROUP MEDIATOR TO MEDIATOR

HEAD OF THE CASE HANDLING AND INVESTIGATING GROUP

6 6 5

COMPLAINTS CASE SPECIALISTS SUPPORTING HANDLING SPECIALISTS INVESTIGATERS CASE INVESTIGATORS

About the Office of Financial System Mediator 10

About activities carried out in 2014 ABOUT ACTIVITIES CARRIED OUT IN 2014

n January 24th we met to mark the Children were especially encouraged to O fifth anniversary of the activities of the attend seminars organized in capital Yerevan. Office. The press conference arranged To this end, we rented buses to take school- on this occasion rounded up past performance children to the capital to participate in the of the Office of Financial System Mediator, as seminars, which we had especially tailored well as we had a communiqué on the com- for them. A total of 45 pupils attended each plains accepted and claims investigated and seminar. We availed ourselves an opportunity talked about the projects carried out. to talk to most of them, posing questions like In 2014, we decided to organize special “what’s the advantage of the money that is on events to mark the 5th year of the operations the bank account rather than at home, under of the Office. This had a broad resonance the pillow”, “why a bank account and not a especially at high schools, and judging from wallet”, or “how insurance could simplify our their reaction, we now think to make these life”, and so on. events continuous and work on getting a As part of the seminar, we took the school- broader coverage. These events included: children to the Visitor Center of the Central Bank of Armenia where they had an oppor- • “Five Events for Five High Schools”: we tunity to get acquainted with the history of developed an awareness program for high circulation of notes and coins of the Republic school students in the context of financial of Armenia through interactive exhibitions. In- education, which was aimed to raise the level spired for immediate relevance to the subject, of students’ consciousness and awareness the schoolchildren demonstrated great inter- of financial services. The program selected a est and the most active ones received prizes total of 5 high schools from different regions awarded by the Office. of Armenia, and relevant workshops were or- As well as the seminar and hospitality, we ganized for the students in capital Yerevan. organized visits to Matenadaran, a famous In the period March-May, we arranged repository of ancient manuscripts, and the seminar-meetings for 9th and 10th grade stu- National Gallery. The schoolchildren returned dents of the following schools: Metsamor High home with great enthusiasm, inspiring us to School No. 2, Voskehat High School, Yegheg- have the same vigor for future projects. nadzor High School, Gyumri High School No. 45, and Aparan High School. The schools were • A promo action “Five Special Days for Cli- selected based on the results of school semi- ents on the Occasion of the 5th Anniversary”: nars which our specialists conducted in previ- five days in 2014 were chosen by us randomly ous years, in consideration of such important to give presents to the customers who visited factors as the level of interest and involve- the Office on those days. ment by both the school and the students. 11

About activities carried out in 2014 Issuance of quarterly e-journal: in 2014 we embarked on an issuance of a quarterly FINANCIAL e-journal. It has a broad coverage of financial industry-specific issues both controversial EDUCATION and topical, and it contains tips for financial market consumers as well as reviews, on a OF CONSUMERS/ quarterly basis, precedents and customary business practices made known to the Of- AWARENESS CAMPAIGN fice during its activities. The journal is a kind of platform that invites the system participants to professional discussion and debate, elow is a brief introduction of the meas- prompts the interested parties to address B ures which the Office undertook in ed- specific issues at the general and system lev- ucating and increasing awareness of els and find solutions thereto. consumers about financial services/products. The opinion and views expressed in the journal come not as much from the perspec- Seminars at schools: this year too, the tive of the Mediator or financial organiza- staff of the Office arranged seminars for senior tions but reflect the opinion of the field -ex schoolchildren of a total of 45 high schools in perts about one or another issue. The journal regions of the Republic of Armenia and capi- is an ideal place for signature articles as they tal Yerevan, in accordance with the consumer include analyses in the field of law and eco- education curriculum and timetable. Specifi- nomics. cally, seminars were held in a number of high The journal consists of different sections. schools, including Yerevan High School No. 42 Section 6 “Riddles” of the journal offers many named after Shevchenko, and high schools riddles. The reader needs to answer them by No. 94, No. 184, No. 29, No. 105, No. 83, No. 127, sending a correct answer to the e-mail of the No. 46 and No. 182 in Yerevan, as well as Her- Office, and the first few ones who have the atsi High Medical School No. 30, high schools correct answer are awarded by the Office. No. 159 and No. 97, High School No. 16 named after A. Isahakyan, High School named after M. Abeghyan, High School No. 190 named after G. Gjulbekyan, High School No. 189 named after S. Gevorgyan, high school in Vedi and Vosketap communities, Masis High School No. 5, Kapan High School No. 9, Goris High Schools No. 4 and No. 1, Sisian High School No. 3, Sevan High School named after Kh. Abovyan, high school in Gavar, Yeghvard High School No. 1 named after G. Hakobyan, Met- samor High School No. 2, Garni High School No. 2 named after Atom, Hrazdan High School No. 13 named after H. Orbelli, Hrazdan High School No. 4 named after Kh. Abovyan, Abovyan High School No. 1 named after Kh. 12 Abovyan, Vagharshapat High School No. 10

About activities carried out in 2014 named after M. Khorenatsi, Vagharshabat join the seminars. These are people who are High School No. 2 named after G. Narekatsi, thought to later become the so-called inter- high school in Ararat, Artik High School No. 7, mediary between the Mediator Office and Akhuryan High School named after N. Agh- the Region’s population who have certain balyan, Gyumri High Schools No. 1, No. 2, No. problems connected with financial products. 26 and No. 37, and Gyumri High School “Bala- In April, we had another seminar organized at ton”, Vanadzor Basic College, Basic Math- the Gavar regional municipality building with ematics and Engineering University College, participation of economists, lawyers and mu- and High School No. 5 named after V. Teryan, nicipality officials. In the period under review, involving a total of about 3,700 students. we arranged one more seminar in village During the seminars, all students of high Sarukhan to which participants from nearby schools were given hats, t-shirts and pens villages of Ganzdak, Tsovazard Lanjaghbyur with the Office logo, and information book- attended. lets and paper notebooks were distributed to provide schoolchildren with general knowl- Participation in exhibitions (EXPO events): edge of financial instruments, explain to them this is the second year in a row that the Cen- how to use such instruments, advise them on tral Bank of Armenia hosts the “One Month their rights and obligations when using fi- of My Finances” program in Armenia. In nancial services/products. 2014, we also actively participated within the framework of the above-mentioned program. Seminars in Gegharqunik Region: the In the period under review, our staff mem- results of the survey, which the Office of Fi- bers attended financial exhibitions organized nancial System Mediator had outsourced in in regions of the Republic of Armenia, such as previous years as part of the Office aware- Aragatsotn, Kotayk, Gegharqunik. Information ness campaign and further measures for booklets featuring financial products/services enhancing financial knowledge of the rural like bank account and credit card, loan, insur- population in three regions – Gegharqunik, ance, deposit, and explaining key points in the Shirak, Tavoush – of the Republic of Armenia, Republic of Armenia Law on Consumer Cred- revealed that many residents of Gegharqunik iting and Attracting Bank Deposits were dis- region who use financial services did not tributed to the Expo participants. We gladly know about the Office of Financial System answered citizens’ questions related to finan- Mediator as a mechanism that is designed to cial services and talked about the activities of protect their rights and interests in the finan- the Office of Financial System Mediator and cial sector free of charge. Given this fact, we about which services the Office provides. In pointed out rural farmhouses as a new target October, we participated in the “Pan-Arme- group and organized a pilot meeting with the nian Expo 2014”, an international exhibition farmers of Gavar community. The program event which was organized in “Yerevan Expo identified target groups, and a special meth- Center” in Yerevan in October 9-12, 2014. Oc- od has been developed for each of them. tober saw another interesting event when In March of 2014, our staff members visit- the Office was involved in the “Financial Tour ed town Gavar of Gegharqunik region in order by Bus”. This was an event in the framework to arrange seminars for the selected target of which the Office hosted more than 80 par- group. We invited the Gegharqunik Regional ticipants who had an opportunity to tour in- Agriculture Support Center consultants to side the Office, get to know more about its 13

About activities carried out in 2014 activities, including the consumer financial The Office awareness campaign education program, and learn how the Office As part of increasing public awareness of of Financial System Mediator accepts and in- the Office activities: vestigates the customer claims. • TV coverage: contracts were concluded Financial education of students: As part with some TV channels which undertook to of consumer education, we have participat- broadcast video materials telling about the ed in an intellectual game “What?, Where?, activities of the Office of Financial System When?” played by students at Dilijan Training Mediator. These TV channels also broadcast and Research Center of the Central Bank of new video shots about pawnshops, consumer Armenia. credit and debit cards and, starting from No- Highlighting the importance of financial vember, about mandatory third party liability education of students, our staff members insurance contracts. delivered a series of lectures titled “The Im- portance of Debt Management” at a number • Mass media and the Office of Mediator:we of universities, including the French Univer- had interviews on the subject of insurance on sity in Armenia, Armenian-Russian (Slavonic) two television shows “Soor Ankyun” (“Sharp University, at the TUMO Center for Creative Corner”) and “Mardkayin Gortson” (“Human Technologies in October 2014. Factor”) on the Armenia TV company, as During the year, we announced a regu- well as some other interviews on programs lar contest for best student work, and the broadcast by TV channels H1 and AR. News university students had the opportunity to agencies such as ARKA, “ArmInfo”, “PanArme- present their individual works for the theme nian.Net” and others produced articles with a “How to Promote Financial Intermediation in broad coverage of the topics discussed dur- the Republic of Armenia?”. A total of 13 stu- ing the 5th Annual Conference, talked about dents took part in the contest, of which three the programs implemented and to be imple- (one from Armenia State University of Eco- mented by the Office and released some gen- nomics and two from Gavar Branch of State eral statistics. University) were recognized as winner. They received monetary rewards from the Office. • Website maintenance: we developed and updated, on a regular basis, information on In the period under review, as part of the measures carried out and to be carried awareness campaign for young people and out by the Office, various news reports on the student involvement in the Office activities, Office, and typical case studies on consumer we arranged practical training/internships complaints. for a total of 33 students from various educational establishments in Armenia. The intern- International cooperation ees had an opportunity to obtain theoretical The Office of Financial System Mediator and practical knowledge of what the Office underscored, from the very beginning of its of Financial System Mediator does in particu- operations, the importance of international lar and the financial sector of the Republic of cooperation and bringing best international Armenia on the whole. practices in Armenia. This is why the Me- diator has regularly organized various meet- 14 ings and conferences to exchange experi-

About activities carried out in 2014 ence and share knowledge. Luckily, in recent participated as spokeswoman in the Interna- years, leading field professionals at various tional Conference titled “Consumer Protec- international meetings have been citing our tion in the Financial Sector and Financial Ed- achievements as an example of best interna- ucation” organized by the World Bank in city tional practice. In the context of international of Sofia, Bulgaria. The conference participants cooperation, the year under review was im- mostly included representatives of superviso- portant as the annual gathering of member ry authorities and non-governmental organi- financial ombudsmen announced Armenia a zations defending the interests of consumers hosting country for the annual 2016 Confer- in Eastern European countries. ence for International Network of Financial - In the period under review, our staff Ombudsmen (INFO 2016). In addition to in- members also participated in the annual troducing our country and the activities of INFO2014 conference, which was held in the Office, we had submitted an application Trinidad and Tobago where, as it was already to be a hosting country for this conference mentioned, we heard the announcement of back in 2013. We therefore are pleased to holding the INFO 2016 in Armenia. As speaker know Armenia has been honored to host this at the conference, our specialists also ap- prestigious event. peared with speaking on the theme “Fairness in theory vs. Fairness in practice”. In the context of international cooperation during the reporting year, the Office has done 5th Annual Conference: on September 4-5, the following: 2014, the Office of Financial System Mediator - In May 2014, Armenia hosted the 6th In- hosted the 5th annual international confer- tergovernmental Committee’s Meeting for ence titled “Financial Ombudsman Institute: Consumer Interest Protection in CIS, which increasing public confidence and enhanc- was chaired by Genadi Onishchenko, advi- ing financial mediation” in Hotel Marriott, sor to Russian Prime Minister. The meeting Tsaghkadzor. Guest speakers of the confer- was organized by the Armenian Ministry of ence included Financial System Ombudsmen Economy. The meeting invited the Media- of Canada and the Netherlands, Insurance tor to participate particularly because the Ombudsman of Germany, micro-insurance speech the Mediator had delivered in the 4th specialists from Luxembourg and USA, a mo- CIS Consultative Council’s Meeting in Astana, bile payments system specialist from Great Kazakhstan, in 2013 was received with great Britain and a banking system specialist from interest, and participants expressed a desire International Cooperation Fund of German to know more about the functions of the Me- Savings Banks. Among home speakers, pro- diator. fessor Grigor Beqmezyan of Yerevan State - To broaden professional knowledge, two University delivered a speech about compen- case investigating specialists of the Office sation of the moral damage in Armenia. Other had a business trip to City of Prague, Czech conference participants included representa- Republic, to participate in a training course tives from the central banks and supervisory “Introductions to Chargebacks, Level-2”, authorities of Russia, Kazakhstan and Belarus. which was organized by “MasterCard Acad- The conference made a discourse on a great emy” from May 12 to May 15, 2014. variety of topics, such as the structure of fi- - In the period under review, the head of nancial supervision frameworks and consum- the case handling and investigating group er protection mechanisms in different coun- 15

About activities carried out in 2014 tries, the legal issues in compensating moral Bank of Armenia for consideration and work- damage in Armenia, as well as new financial ing them into a common practice. products like micro-insurance and mobile payments. The conference had selected panel A get-together with insurance market discussions about organized fraud (including participants: in December 7-8 of 2014, the financial pyramids), insolvency of mortgage Office arranged the 5th annual meeting in a borrowers, consumer loans, property and round-table format between our specialists health insurance, insurance fraud and so on. and insurance market participants, including top managers of all insurance companies, Ar- menian Bureau of Motor Insurers and insurer brokers in Armenia. The meeting addressed COOPERATION WITH controversial issues arisen in connection with the review of customer claims filed against FINANCIAL INSTITUTIONS insurance companies, mandatory third party liability insurance contracts; explanations were given to insurance companies concerning n the year under review, the relation- some sensitive issues and there was refer- I ship between financial institutions ence to the programs and statistical profile and the Financial System Mediator of the Office. remained strong. Both sides further uncov- ered a bunch of problems and attempted to Best cooperating partners: each year, give solutions thereto. To this end, we have the Office of Financial System Mediator spots organized a number of meetings with repre- and announces best cooperating partner or- sentatives of financial institutions. ganizations. In the year under review, the A round-table meeting with banks: in Mediator awarded certificates titled “Best November of 2014, the Office of Financial Cooperating Partner” and “Best Cooperating System Mediator met with Armenian com- Officer”. Best partner organizations are cho- mercial banks at the 2nd round-table. During sen based on the criteria developed by the the meeting, we illustrated typical examples Office. These criteria include the level of the of the claims reviewed at the Office, present- organization’s involvement in the case review, ed the Mediator position with regard to each the share of cases ended with reconciliation of the cases in question, selected customary of the parties in total, and etc. Based on the business practices, reference information on 2014 results, best cooperating banks were Ar- claims/complaints filed to and handled by the dshinBank CJSC and VTB-Armenia Bank CJSC; Office from 2009 to date, and provided an best cooperating insurance companies were overview of the five years’ activities and pro- INGO Armenia CJSC and Nairi Insurance LLC. grams of the Office. For the problems and controversies which For demonstrating willingness to support had been identified as a result of review of the Office of Financial System Mediator in customer claims and complaints filed against the review of claims, the Mediator awarded banks, each participant expressed their pro- certificates titled “Best Cooperating Officer” fessional opinion and talked about the cur- to Ms. Rosa Pedanyan, a specialist of Ardshin- rent practice at their bank. The issues raised Bank CJSC, and Ms. Mané Martirosyan, head 16 at the meeting were referred to the Central of legal affairs unit of Nairi Insurance LLC.

About activities carried out in 2014 TABLE OF CONTENTS

About activities to be carried out in 2015 ABOUT ACTIVITIES TO BE CARRIED OUT IN 2015

Six years into the job: anuary 24, 2015 is the date that marks Involvement in the National Strategy for J the 6th year of the operations of the Of- Financial Education Program: the Office of fice. On this occasion, we are planning Financial System Mediator will remain proac- to hold a press conference during which certifi- tive for its cooperation with the Central Bank cates will be awarded to best cooperating part- of Armenia in the framework of the meas- ner organizations and best cooperating officers. ures taken as part of the program of national The winners of the contest “Best Student Work” strategy for financial education, including the announced by the Office in the framework of “One Month of My Finances” project. Consumer Financial Education Program this year will be invited to the awarding ceremony. More coverage: in the coming year, too, we will be working hard to broaden the cov- Consumer financial education program: erage of activities of the Office, making a special in 2015, we expect to push forward the imple- focus on the regions of the Republic of Armenia. mentation of the Financial Education of Con- More video advertisements with new style and sumers and Increasing Awareness Program. creativity will be developed and are expected to The project “Five Events for Schools” received be also aired on regional TV channels. great resonance among schoolchildren and was highly appreciated. Based on the reac- Internet websites and social media: next tion and assessment of the effectiveness of year we plan to develop and launch a new the project, the Office decided to carry out website of the Office, which will be more the project the next year, too, by involving functional and attractive. The website will this time 10 schools in different regions of be designed to allow, among other functions, Armenia. Also, we believe the workshops for posting complaints/claims by the clients. In high school students and university students addition, an internet website INFO2016 will should be an ongoing process. be developed and put into operation, through which about 100 conference participants Financial Education of Consumer and from different countries will be able to reg- Increasing Awareness Program in the Re- ister and make attendance fee payments public of Karabakh: plans for the year 2015 through the website. include a visit to the Republic of Karabakh in Given the rapidly spreading social media order to meet different target groups. We in- these days and high rates in their accessibil- tend, in particular, to arrange meetings with ity and usability, we expect to be more active high school students, university students as in different social networks by increasing the well as the staff of the Stepanakert City Hall coverage of the Office operations and con- and different government departments. sumer education program. 19

About activities to be carried out in 2015 Preparation for INFO2015 in Helsinki, The agenda of the conference will include and hosting INFO 2016 in Yerevan: the in- such important issues as strategy of commu- ternational network of financial ombuds- nicating to the client and other beneficiaries men will gather in 2015 for another great with the use of latest technologies, including conference in Helsinki, Finland. In this event, social media, the Ombudsman’s reputation the Mediator has been invited to participate and communication to the media, the inter- also as a speaker. Our delegation will repre- national investment arbitration as a means of sent Armenia at the conference and will be dispute resolution. The conference will also pleased to invite the member ombudsmen have a discourse on dispute resolution mech- to attend the next conference to be held in anisms in the financial sector of different Yerevan, Armenia. A video material, typical countries. There will be selected panel discus- items and brochures with invitation would be sions covering issues like mortgage loan in- expected to be used to represent Armenia. surance, the Lloyd of London, card fraud and scams. The conference will offer a novelty – Discussions/workshops: we intend to ar- participants will be teamed up to exhibit their range a meeting in a round-table format with abilities in a game-simulation called “Justice”. representatives of Armenian insurance companies, insurance intermediaries (brokers) and Armenian Bureau of Motor Insurers to address controversial issues arisen in connection with the review of typical examples of claims of the clients (including mandatory third party liability insurance contract-related claims) and other matters of relevance. It is also planned to organize the 3rd annual meeting of bank specialists who are responsible for contacts with the Mediator and with whom our specialists in charge of claim investigation collaborate.

The 6th Annual Conference: next year we are going to host the 6th annual international conference “Financial Ombudsman Institute: increasing public confidence and financial mediation”. Guest speakers will include Aus- tralia’s Credit and Investment Ombudsman, Financial Services Ombudsman of Great Brit- ain and Ireland, an expert from MasterCard and an arbitration specialist from Russia, the Swiss Banking Ombudsman. Representatives from central banks and supervisory authorities of the CIS countries will attend the conference, as well. 20

About activities to be carried out in 2015 TABLE OF CONTENTS

Statistics about consumer complaints STATISTICS ABOUT CONSUMER COMPLAINTS

• In 2014 the Office received a total of positively by the organizations without hav- 3907 complaints, including 3244 complaints ing to file a request in writing to the Media- related to the financial sector, of which 2667 tor; where the client applied to us for request, were eligible under law to be reviewed and/ we helped them to complete any complaint- or handled by the Mediator. It should be claim filed against that organization. In spite mentioned that the number of complaints of the fact that the number of complaints, tend to increase year by year which can be which were satisfied by financial firms with- the result of our consumer awareness cam- out Mediator's intervention, increased, their paign and our financial consumer education weight in the total number of complaints program, including special training programs decreased compared with 2009, 2010, 2011 executed for rural areas as well. Note that in and 2013 years. Not that in 2013 this indicator 2009 the Office received 378 complaints filed was 5.6 percent (92 complaints out of 1627), in against financial organizations (in 2010, 642 2012 2.7 percent (26 complaints out of 951), in complaints, 2011, 803 complaints, 2012, 1311 2011 7.8 percent (43 complaints out of 551); in complaints and in 2013, 2003 complaints). 2010 14.7 percent (66 complaints out of 450); and in 2009 20.4 percent (40 complaints out • Complaints not eligible for handling of 196). were associated with the events occurred before the Law on Mediator has entered into • During 2014 a total of 1276 claims/com- force; some of the claims ended up with plaints were received in writing, 76.91 percent court writ issued in respect thereto or with of which settled out in favor of the client; the case pending in court proceedings; and about 61.30 percent of claims settled out in a few cases were not under the jurisdiction favor of the client ended up with reconcilia- of the Mediator since the consumer didn't tion of the parties involved. According to the qualify as "customer" according to the law on 2009 results, of claims settled out in favor of the Mediator. The rest of complaints were of the client 61 percent had an outcome of rec- a general nature and these have not, virtually, onciliation; in 2010,2011 and 2012 these indi- contained property-related claims. cators were nearly 60 percent 70.5 percent and 73.36 percent respectively. • Specialists of the Office delivered -ad vice to all the clients who applied as well as • In monetary terms, a total AMD helped draw up complaints to the financial 199,147,628 was compensated through the organizations concerned and explained their mediation of the Office in favor of the clients rights and obligations. Based on the 2014 during 2013. Incidentally, this figure does not results, 130 complaints (4.8 percent) out of consider the cases which were settled out a total 2667 eligible for review were treated with no money actually reimbursed to the 23

Statistics about consumer complaints client but rather seeking to satisfy another claim of theirs, for example, by changing the terms in the loan contract or having an overdue loan re-classified in favor of the client, and so on. The largest compensation was AMD 4,000,000 and the smallest, AMD 350. In 2012, the total amount of compensation reached 134,087,137, in 2011 AMD 58,137,847; in 2010 and 2009 these indicators were AMD 29,264,354 and AMD 26,062,886, respectively.

• By virtue of our central principle of fast and effective review and handling of every claim, after a preliminary review we often explained to our clients and made them clear that action of the organization involved was exemplary and that we would not be going to have success even if we took the claim for review. Normally, in such circumstances, our clients trusted our specialists and agreed to our point. This perhaps explains the dynamics of the complaints accepted for review by the Office. In 2014 out of 3244 complaints (about 39.3%) received against financial firms 1276 became cases for further investigation.

• During the year under review about 62% of total complaints were against insurance companies, among which about 80% of complaints were about MTPLI contracts. Most of the clients did not agree with the estimated amount of damage as well as more complaints were received in connection with non-compensation of the damage or delayed compensation.

Statistics about consumer complaints STATISTICS, GENERAL PROFILE

The number of complaints received by the Office during 2014, by quarter:

The number of complaints related to financial system

1000

850 723 741 930 0

I quarter II quarter III quarter IV quarter 25

Statistics about consumer complaints The number of complaints received by the Office during 2014, by month:

The number of complaints related to financial system 400

245 335 270 260 237 226 247 251 243 285 266 379 0

January February March April May June July August SeptemberOctober November December

The number of claims received by the Office during 2014, by quarter:

The number of claims 350

320 324 286 346 0

26 I quarter II quarter III quarter IV quarter

Statistics about consumer complaints The number of claims received by the Office during 2014, by month:

The number of claims 0 140

January 57

February 128

March 135

April 116

May 96

June 112

96 July

94 August

96 September

116 October

93 November

137 December 27

Statistics about consumer complaints The number of complaints filed to and claims received for review by the Office during 2014, by quarter 1000

900

800

700

600

500

400 The number of complains 300 to financial system recived by the Office during 2014 200 The number of claims 100 850 320 723 324 741 286 930 346 recived by the Office dur- 0 ing 2014

I quarter II quarter III quarter IV quarter

Total number of complaints received during 2014, o/w: 3907

Number of complaints to financial system 3244

• Not eligible for review by Mediator 577

• Eligible for review by Mediator 2667

Resolved based on complaint/claim filed against the organization in question 130

Taken in for review upon presentation of a claim in writing 1276

• Claim satisfied through reconciliation 537

• Claim declined 263

• Claim partially satisfied 314

• Review of the claim suspended 136

• Claim satisfied 25 28 • Review of the claim declined 1

Statistics about consumer complaints Results/outcome of review of complaints/claims, by percent:

42.08% 24.61% 20.61% 10.66% 1.96% 0.08%

Claim satisfied trough reconcilation Claim declined Claim satisfied Review of the claim suspended Claim partially satisfied Reviews declined

Cases declined and cases settled down in favor of the client, presented as a ratio:

76.90%

Claim settled down in favor of the client Claims declined

23.09% 29

Statistics about consumer complaints Claims settled down in favor of the client, by percent:

61.30%

35.84%

2.86%

Claim satisfied through reconciliation Claim satisfied Claim partially satisfied

Complaints, by type of organizations:

Number of complaints to financial system 3244 100% received during 2014, which were filed against:

Banks 1029 31.72%

Insurance companies 2014 62.08%

Credit Organizations 71 2.19%

Pawnshops 25 0.77%

Armenian Motor Insurers’ Bureau 28 0.86%

Payment and settlement organizations making remittances 11 0.34%

Other financial institutions 66 2.03% 30

Statistics about consumer complaints Share of complaints filed against financial organizations in 2014 in the total number of complaints presented to the Office:

62.08% 31.72% 2.19% 2.03% 0.86% 0.77% 0.34%

Banks Armenian Motor Insurance Bureau Insurance companies Payment and settlement organizations Credit institutions making remittances Pawnshops Other

Claims reviewed, by type of organizations:

Total number of claims in writing during 2014, 1276 100% which were filed against

Insurance companies 1021 80.02%

Banks 229 17.95%

Pawnshops 3 0.24%

Armenian Motor Insurers’ Bureau 14 1.10%

Credit organizations 5 0.39%

Payment and settlement organizations making remittances 4 0.31% 31

Statistics about consumer complaints Share of claims filed against selected financial organizations in total complaints accepted by the Office for review in 2014:

80.02% 17.95% 1.10% 0.39% 0.31% 0.24%

Credit institutions Banks Armenian Motor Insurance Bureau Pawnshops Payment and settlement organizations Insurance companies making remittances

Content of claims filed against banks:

Total number of claims in writing filed against banks during 229 2014 in connection with:

Credit operations 106

Payment and settlement transactions 81

Depositary operations 8

Other 34 32

Statistics about consumer complaints 46.29% 35.37% 14.85% 3.49%

Credit operations Depositary operations Payment and settlement transactions Other

Content of claims filed against insurance companies and the Armenian Motor Insurers’ Bureau:

Total number of claims in writing during 2014, which 1035 were filed against insurance companies and Armenian Motor Insurers’ Bureau, including

Vehicle insurance 91

Medical insurance 98

Travel insurance 7

Accidents insurance 3

Property insurance 7

Mandatory car insurance contracts 815

Mandatory car insurance contracts (against Armenian Motor Insurers’ Bureau) 14 33

Statistics about consumer complaints 78.74% 9.47% 8.79% 1.35% 0.68% 0.68% 0.29%

Accident insurance Property insurance Mandatory car insurance contracts Vehicle insurance Mandatory car insurance contracts Medical insurance (against Armenian Motor Insurers’ Travel insurance Bureau)

Reimbursement:

Total value of Client reimbursement 199,147,628 100% during 2014, including:

Reimbursement on claims against banks 27,220,829 13.67%

Reimbursement on claims against insurance companies 164,791,658 82.75%

Reimbursement on claims against credit organizations 824,951 0.41%

Reimbursement on claims against pawnshops 130,000 0.06%

Reimbursement on claims against Armenian Motor 6,166,790 3.10% Insurers’ Bureau

Reimbursement on claims against Payment and settlement 13,400 0.01% organizations making remittances

Statistics about consumer complaints Share of reimbursements as a result of review of the claims filed against financial institutions in total indemnification provided to the clients in 2014

82.75%

13.67%

3.10%

0.06%

0.41%

0.01%

Reimbursement on claims against Banks Reimbursement on claims against Insurance companies Reimbursement on claims against Credit Institutions Reimbursement on claims against Pawnshops During 2014: Reimbursement on claims against Arme- - 76.91% of the cases reviewed nian Motor Insurers Bureau were settled in favor of the client; Reimbursement on claims against - the largest compensation - Payment and settlement organizations AMD 4,000,000; making remittances - the smallest compensation - AMD 350. 35

Statistics about consumer complaints Share of claims, which were settled in favor of the client, in total claims, by year:

78%

66.4% 68.75% 67.69% 72.14% 70.44% 76.91%

60%

2009 2010 2011 2012 2013 2014

Share of claims, which were settled in favor of the client, 36 in selected financial institutions claims (%):

Statistics about consumer complaints Dynamic analysis of some indicators

100

79.65

72.73

66.64 64.65

33.33

Banks Insurance Companies Armenian Motor Insurers Bureau Credit Institutions Payment and settlement organizations Pawshops making remittances 37

Statistics about consumer complaints The number of complaints received by the Office in 2009-2014, by quarter:

0 1000

185

213

249

446

850 I quarter

164

185

345

422

723 II quarter

128

212

379

445

The number of 741 III quarter complaints to financial system received by the 161 Office during 165

2009 193 2010 338 2011 2012 690 2013 930 38 2014 IV quarter

Statistics about consumer complaints The number of complaints filed to and claims received for review by the Office in 2009-2014, by year:

2009 2010 2011 2012 2013 2014

1276

57 110 144 392 818 1276 0 378 642 803 1311 2003 3244

3244

The number of complaints related to financial system The number of claims 39

Statistics about consumer complaints The number of complaints received 0 2500 by the Office in 2009-2014, by type of 1029 financial institutions: 706 509 434 419 252 Banks 2014 1142 689 252 Insurance Companies 63 54 71 48 48 60 Credit Institutions 75 46 25 14 33 42 80 Pawnshops 22 28 18 10 10 Armenian Motor Insurer's Bureau 0 0 11 7 1 4 Payment and settlement organizations 3 making remittances 0 3 0 0 1 2 1 Investment Companies 2014 63 68 2013 21 2012 0 2011 0 2010 40 Other 3 2009

Statistics about consumer complaints Share of complaints filed against 0 70 selected financial institutions in total complaints submitted to the Office 66.7 in 2009-2014: 65.3 54 38.83 Banks 35.25 31.72 14.3

Insurance Companies 9.8 31.4 52.56 57.01 62.08 Credit Institutions 12.2 11.7 7.5 3.66 2.40

Pawnshops 2.19 5.8 12.5 5.2 Armenian Motor Insurer's Bureau 2.52 0.7 0.77 0 0.5 Payment and settlement organizations making remittances 0.5 0.08 0.35 0.34 0.3 Investment Companies 0.3 2009 0.1 2010 0 2011 2012 0 2013 2.03 2014 41

Statistics about consumer complaints Client reimbursement in 2009-2014: Client reimbursement (AMD)

250 000 000

26,062,886 29,264,354 58,137,847 134,087,137 204,578,416 199,147,628

42 2009 2010 2011 2012 2013 2014

Statistics about consumer complaints Share of Client reimbursement in 0 90 total reimbursements, by type of financial institutions in 2009-2014: 58 44 38 12 10 14 Banks 35 26 39 86 87 83 Insurance companies 7 11 19 0.41 0.21 0.41 Credit institutions 1 19 2 2009 1 2010 1 2011 0.06 2012 Pawnshops 2013 0 2014 0 2 1 1 Armenian Motor Insurers' 3 It should be mentioned that the Repub- Bureau lic of Armenia Law on Compulsory Insurance 0 against Civil Liability in Respect of the Use of 0.03 Motor Vehicles entered into force in January 0 of 2011, and this means that in 2009 and 2010 0 no claims against the Bureau of Car Insurers 0.01 of Armenia were reviewed and compensation Payment and settlement 0.01 given, accordingly. organizations making remittances 43

Statistics about consumer complaints 44

Financial statements and audit opinion FINANCIAL STATEMENTS AND AUDIT OPINION

Financial statements and audit opinion 46

Financial statements and audit opinion 47

Financial statements and audit opinion 48

Financial statements and audit opinion 49

Financial statements and audit opinion 50

Financial statements and audit opinion

Customary business practices and case studies CUSTOMARY BUSINESS PRACTICES AND CASE STUDIES

CUSTOMARY BUSINESS PRACTICES

rticle 14 (3) of the Republic of Armenia customary business practice with banks. A Law on Financial System Mediator estab- According to the claim, the Client and lishes that in making a decision, Mediator the Bank signed a term deposit contract, shall be based not only on the requirements of the with USD 2,000 as deposit amount and an- Armenian legislation but also on the rules of busi- nual interest rate of 9%. The contract pro- ness conduct and ethics, and customary business vided for capitalization on deposit interest, practices. As the Mediator works on investigating which means that the monthly interest ac- claims, the need to identify a customary business crued would be added to the invested deposit practice arises not only when a particular legal re- amount. Then, the Client added USD 2,500 to lationship is not regulated by any act but especially the deposit amount. After some time passed, when it requires one and the same application of the Client requested the Bank to return the the provision or there is need to find out whether deposit money ahead of time. The Bank re- that practice is acceptable in any given situation or funded USD 4,490.77 to the Client, claiming circumstance. We, therefore, frequently make que- that the tax payments made by the Bank ries among financial institutions, sometimes at the would not be returned to the Client. This request of the financial institution, and it should be resulted in a situation where the Client has noted that financial institutions are willing to sup- received less money than the amount of the port us in this matter. So, following standardization deposit invested. The Bank argued that they of customary business practices not only gives the had no right to reclaim the income tax paid Mediator enough flexibility in decision-making but according to tax legislation, and that they enables to take as streamlined an approach as pos- would incur loss if the Depositor took out the sible to protect consumer interests. Below is the deposit money ahead of time. summary of customary business practices which To find out whether a relevant custom- we identified during the period under review. ary business practice related to the situation mentioned above exists with commercial Customary business practice on the in- banks operating in the Republic of Armenia, come tax paid on deposit interest the Mediator requested the banks to pre- When investigating a claim lodged against sent their views about the matter, if possible, a commercial bank in Armenia, the Office of and to clarify whether the bank’s actions are Financial System Mediator had to identify a lawful in a situation like this, and what they 53

Customary business practices and case studies would have done in such a situation to avoid interest calculated for demand deposit must be problems with tax authorities. retained, after which the deposit balance and interest calculated for demand deposit must be The Mediator has received explanations and returned to the depositor. Overpaid income tax clarifications from 14 commercial banks, as fol- to the state budget by the Bank as a result of lows: return of the deposit, at the request of the de- 1. One bank expressed opinion that positor, to the depositor ahead of time should the return to the depositor a deposit amount in no way affect the actual interest payable to which is less than the original deposit amount the Client. Part of banks, reflecting the Bank’s cannot per se be viewed as violation of obliga- overpaid tax income transfers to the state tions under the contract since the bank’s right budget, said the recounting of income tax to withhold from a deposit at the amount of shall be carried out in accordance with Article the tax payable to the state budget has been 25 (3) of the Republic of Armenia Law on In- provided for in the deposit contract. In this come Tax, which reads as follows: (...) the tax case, therefore, the Bank’s actions are lawful. amounts overcharged shall be offset to the To the question of how to protect depositors’ expense of upcoming withholdings or shall be interests in such cases, the bank answered refunded within one month after such varia- that the solution of the problem seems pos- tion shall have become known, for a period of sible in the context of regularizations under three calendar years subsequent to the date the Republic of Armenia Law on Taxes, which of overcharge. provides for the possibility to return overpay- Thus, we can see the banking practice for ment if the taxpayer makes an appropriate the above subject matter is generally com- application. mon and it draws on the following conclu- 2. The approaches of the other 13 banks sion: when, at the request of the depositor, the have prompted to taking the following posi- bank deposit is returned to the depositor ahead tion: according to Article 902 (1) of the Re- of time, the income tax on interest calculated for public of Armenia Civil Code, under the con- a demand deposit must be retained, after which tract of bank deposit, one party (the bank) the entire deposit balance and the amount of that has accepted a monetary sum (the de- demand interest actually paid to the depositor, posit) coming from the other party (the de- with income tax withheld, must be returned to positor) or coming for the depositor, under- the depositor. takes the duty to return to the depositor the sum of the deposit and to pay interest on it Customary business practice on closing subject to the terms and conditions and by the bank account and bank card the procedure provided for in the contract. When investigating a claim, the Mediator Analyzing this provision makes it clear that again needed to search for a customary busi- when rescinding a deposit contract, at least ness practice. To this end, the Mediator com- the amount of invested deposit and the inter- municated to all banks in Armenia to find out est due should be returned to the depositor, whether: and under no circumstance would the de- 1. If the client applies to the bank ask- positor receive less money than the amount ing to close their bank account and bank card, they have invested. When the deposit amount within which timeframe the closing is effected? is returned, at the request of the depositor, to 2. Within which timeframe will the trans- 54 the depositor ahead of time, the income tax on actions requiring authorization be suspended

Customary business practices and case studies after the application to close the bank account CASE and bank card has been made to the bank? 3. How much time is still allowed for STUDIES making transactions requiring authorization via Internet by using the same card after the application to close the bank account and Sale of collateral below the market price Case study 1 bank card has been made to the bank? 4. Is there a timing difference applied he Client has entered into a loan to closing of the account or, depending on T and collateral agreement, which was a circumstance when, whether or not there secured by gold, and offered own is cash to be refunded to the client, can the jewelry as a pledge against performance of timing for closing the account and suspend- liabilities. Under the agreement, the loan in- ing the transactions that make part of the terest and commission fees are payable on closing be changed? the 16th day each month. However, the Client 5. Is it possible to close the card ac- has failed to pay, and this led to outstanding count by transferring the remaining money liabilities. As a result, the collateral has been on to the client’s bank account, which would sold and the loan commitment fully repaid. enable to stop further transactions by card?. In a letter to the Mediator, the Client re- It should be noted that 16 commercial quired the Company to return the pledged banks responded to the Mediator, and almost jewelry or, if it is impossible, provide the pro- all of them have the practice of closing the ceeds of the sale of the collateral below the card as soon as the day on which they receive market price, while making an AMD 533,000 the client’s application to asking to close the (five hundred and thirty-three thousand card account. Some banks are also practicing Armenian drams) worth of property claim suspension of the card before closing the card against the Company. and/or the account, which excludes carrying The Company had the following argument out transactions that require authorization of with regard to the Client’s claim: failure to the card’s data. pay loan obligations on the 16th of the month As for the closing of the account, which has led the Client to outstanding liabilities, ultimately manifests that the contract of and the Company decided to market the col- bank account has been rescinded, it should be lateral. The Company sent an appropriate no- noted that the banks’ actions are somewhat tice to the Client and told the Mediator that different on this matter. The most usual prac- the receipt of the notice has been confirmed tice is when banks close the bank account by a written communication from “HayPost” at the same day or within the next business CJSC (Armenia post operator). The borrower day upon the relevant request of the client, failed to make any payment, however. Two provided that the client has no outstanding months after making an extrajudicial seizure (non-repaid) commitments. of the item of collateral and seeking to market it through public auction, the Company put it on the commodity exchange. The Mediator engaged a handwriting expert for investigation of the claim to clarify whether the field “delivered to addressee” on the letter sent by the Company had been 55

Customary business practices and case studies signed by the Client. The conclusion of the while also paying extra money to the Client. expert made it clear that the signature had The Financial System Mediator decided not been made by the Client but another one to end the investigation of the Client’s claim instead. upon reconciliation. The Company further argued, noting that Article 1058 (2) of the Republic of Armenia Civil Code provides that the party having Case study 2 caused the damage shall be exempt from the Payment of insurance compensation when compensation, if they prove that the damage a sufferer of criminal case gives up claim against was not due to their fault. So, the Company doer of harm is exempt from compensating the damage, as they have followed all actions to notify the he Client has purchased a health Borrower as required by the law, whereas the T insurance policy from an insurance fault of non-notification lies with the postal company (hereinafter referred to as company. the “Company”). On December 26, 2012, af- The Mediator also invited a professional ter a quarrelling with a person (Citizen B) jeweler in the investigation since the Client and receiving harm, the Client was taken by did not agree with the price of the sale of the ambulance to the medical center “St. Gregory collateral, either. The findings revealed that the Illuminator” and passed a series of tests the collateral had been sold in the market there. Following this, the Client was assigned at the lowest cost, and its appraisal was ill- to receive appropriate treatment. The Client timed (the Company has appraised and sold demanded an insurance compensation but the jewelry and sold without having the right the Company declined it. for it because the Client did not receive the The Company has expressed the following notification). position with regard to the Client claim. There Thus, the Mediator has come to the con- is a court decision on abatement of criminal clusion that the Company has the right to proceedings and termination of criminal pros- exercise seizure of the item of collateral and ecution. The decision says, particularly, that “... have it marketed without resort to the court, the suffering Party pleaded for the abatement if the secured obligation has not been fulfilled of the criminal proceedings, reasoning that or has been fulfilled in an improper manner, they had reconciled with the defendant (Citi- provided that they have notified the client zen B), had no claim against them and did not of their intention to exercise a seizure of the want the latter to be subjected to criminal li- item of collateral in an extrajudicial manner. ability. It implies, therefore, as the Company Two months after the delivery of the no- argued, that the Client does not have a prop- tice to the Client, the Company acquires a erty claim against Citizen B, either. new right to sell the item of collateral on be- Furthermore, part of medicament, which half of the Client through direct sale or public the doctor had assigned to the Client, was for auction, but the Company must be required the treatment of diabetes and could not be to sell the item of collateral at a reasonable regarded as an insurance accident and, there- market price that is acceptable at the time fore, would not be compensated, the Com- The above considerations were communi- pany argued. cated by the Mediator to the Company, and The Mediator engaged experts – a neuro- 56 the latter proposed conciliation to the Client, pathologist and an endocrinologist – for the

Customary business practices and case studies investigation of the claim. According to their accident, it should be noted that the court did professional judgment, the medicament in not address this issue due to the lack of a civil question is usually assigned for the diabetes case in the criminal proceedings. In this case, and its complications. a person has the right to file a civil suit in a The Mediator has come to the conclu- civil proceeding. sion that criminal prosecution involves all Thus, as it follows from the above provi- procedural actions that are carried out by sions, filing a claim associated with property the prosecution authorities and, in some damage is entirely dependent on the victim’s cases, the suffering party as well, in order to desire and determination, which the Client identify the person who has committed the did not exhibit in the criminal proceedings. criminal offence, determine whether they Therefore, in this case, the court made a de- are guilty of a crime, as well as to make sure cision to abate the proceedings of criminal punishment and other coercive measures are case and stop criminal prosecution, thereby applied with regard thereto. Basing upon the resolving the question of criminal liability for nature and severity of the committed crime, good. The issue of property claim had not the criminal prosecution will be carried out been a subject of review at all. through either public or private procedure. Given the above considerations, the Me- The list of criminal cases instituted on a ba- diator decided to partially satisfy the Client’s sis of private prosecution, i.e. the complaint claim against the Company, since part of the of the suffered party, is exhaustive, and this medicament as referred to in the claim had case in question is in the list. Neither criminal been prescribed for the diabetes, a matter case can be instituted nor criminal prosecution that was not related to the accident. carried out while the criminal proceedings will be abated, if the suffering party has reconciled with the defendant. Improper bank transfer of the visa applica- Case study 3 While examining the aforementioned tion fee provisions in connection with the case, we found it reasonable to refer to the jurispru- he Client used a transfer service of dence. The Court of Cassation’s opinion on T Bank X for paying the U.S. embassy this matter was that the possibility for insti- visa application fee onto the account tuting proceedings by private accusation and of Bank Y for collection of visa application private prosecution on this basis is totally de- fee. The Client says the payment would have pendent on the applicant’s ability and expres- to activate the MRV account number, which sion of will to go to the criminal prosecution was provided by the Embassy. The said ac- body in order to defend their rights and le- count number, however, did not get acti- gitimate interests by subjecting the offender vated since the payment had to be made at to criminal liability. In this particular case, at the Bank Y. The Client says they were noti- the pre-trial examination the Client-sufferer fied about that the payment was to be made has expressed their attitude about reconcilia- at Bank Y, but being in the vicinity of Bank X, tion with the defendant (Citizen B) and about the Client decided to ask whether the money their wish to not subject the latter to criminal can be paid through the Bank. As soon as an liability. officer of the Bank assured that no problems As for the property damage incurred by would arise, the Client paid the visa applica- the Client as a result of the aforementioned tion fee plus a money transfer fee. As a result, 57

Customary business practices and case studies the Client incurred a pecuniary loss after the “U.S. visa application fee” in the field “purpose said MRV code remained inactive. of payment”, as was instructed by the Client, The Mediator heard the position of Bank X so the money was transferred on to the rel- with regard to the Client’s claim. It says that evant account with Bank Y. The employee of the Client approached the officer of the Bank the Bank could not know and wouldn’t have and asked if they could pay at the bank for a to know that a particular code was required money transfer on to the account with Bank for transfer identification, especially when Y. Because the account provided by the Client the Client didn’t tell this in the first place. So, did not appear to be a special account num- the Mediator believes that the officer of the ber for which you need a special code, the of- Bank handled the payment order in a proper ficer replied that it was possible to make such way in that situation. The Mediator decided a deal as a typical transfer of money in local to decline the claim of the Client filed against currency to another bank in Armenia. The Cli- the Bank. ent’s money was transferred to the designat- ed account and the receiving bank took the money and had it transferred on to the ac- Case study 4 count of the organization of the U.S. embassy. Reimbursement of salary lost as a result of The Mediator had to hear all the parties an accident under third party motor liability involved with the case. During the oral hear- insurance contract ings at the Office of Mediator, the Client confirmed that their advisor on embassy issues had traffic accident caused harm to the clearly stated that the payment would have to A health of the Client. Taken to the be made at Bank Y only, adding that there had intensive care department of the been a clear instruction in writing given to the medical center, the Client received in-patient Client. treatment for about 20 days. There has been The Mediator also communicated to Bank an epicrisis issued for this matter. Afterwards, Y and found out that in practice cash money is the Client has been treated in ambulatory only possible to transfer via Bank Y, as a spe- conditions, and the community health center cial software program used in the Bank has a issued a sick leave for the Client. It should be separate field for the receipt (the MRV code) noted, however, that the Client had nowhere in addition to the field “purpose of payment”. been registered as an employee at the time of In the meanwhile, Bank Y does not have a the accident and the subsequent treatment. software solution to check the details of pay- The insurance company (hereinafter re- ment orders as a variety of sources for various ferred to as “the Company”) has reimbursed purposes can flow in the account. Funds ac- the Client the lost salary for a period of out- crued on that account are transferred to the patient treatment on a basis of the sick leave U.S. Embassy at a certain time interval. but refused to pay for the in-patient treat- In this case, as we knew from the hearings, ment period, claiming that no sick leave had the Client presented to the officer of the Bank been submitted for that period. In particular, a document with an account number of Bank the Company cited paragraph 37 and subpar- Y and asked them to make a money transfer agraph 37.1 of Operational Rules RL 1-017 Pay- on to that account. The officer of the Bank ment of Insurance Indemnity by Insurance Com- handled the payment order properly by companies in the field of Mandatory Car Insurance as 58 pleting all the fields correctly and indicating approved by the Board of the Armenian Motor

Customary business practices and case studies Insurers' Bureau under board resolution No. efits under law. Article 4 of the Law estab- 36-N, dated 17.12.2010, whereby the extent to lishes that entitled to the benefit are theindi - which the lost salary shall be reimbursed is viduals (paid workers) who are in labor relations determined as a percentage of average sal- with the employers and sole proprietors, notaries ary the sufferer has received before losing (self-employed persons). This infers that those the ability to work. Note, therefore, that the who do not constitute statutory employees number of days as indicated in the epicrisis (paid workers) or self-employed persons shall has not been included in the calculation. not be given sick leaves. It, therefore, turns Having considered the circumstances of the out that the Company requiring that the Cli- case, the Client’s and Company’s objections, as ent provide a temporary disability note in or- well as the requirements of the law, the Me- der to get reimbursement for salary (income) diator came to the following conclusion: lost as a result of the damage to the health Article 13 of the Republic of Armenia Law and refusing to pay to the persons not falling on Compulsory Insurance against Civil Liabil- within paid worker or self-employed catego- ity in Respect of the Use of Motor Vehicles ries due to the lack of such temporary dis- (hereinafter referred to as “the Law”) says that ability note, leaves such persons with no right (…) the indemnification against loss of salary to insurance indemnification for the entire (income) resulting from the damage caused period of disability. Such an approach is not to health of the party injured shall be payable only unfair to the unemployed and somehow to the suffererfor the entire period of disability discriminatory but it also runs into conflict pursuant to the stipulations determined un- with the requirements of the Law. der relevant regulations. According to Article Paragraph 18 of the Procedure on how 1079 (1) and (2) of the Republic of Armenia to complete and provide the temporary sick Civil Code, the measure of salary (income) leave, as approved under the Government of lost by the sufferer and subject to compensa- Armenia Resolution No. 1024-N, dated July tion shall be determined as a percentage of 14, 2011, says that in case of temporary dis- the average monthly salary (income) before ability resulting from a disease (damage), the the physical injury or other damage to the paid worker shall be granted a temporary sick health or loss of ability to work. Paragraph leave for the entire period starting from the 37.1 of the Operational Rules RL 1-017 estab- day on which the ability to work has been lost lishes that the extent of loss of ability to work up to the day the ability to work has been is estimated to be 100 percent for the period recovered, or to the defining of the disability mentioned in the medical certificate of tempo- category through medical and social scrutiny rary disability issued by the medical institution conducted by a competent public author- as required by the Armenian Law, and for the ity, or to the reconsideration of the disability period other than mentioned in the tempo- category. This provision infers that the person rary disability note, the extent of loss of ability is disabled to work for the entire period of the to work shall be estimated through medical disease (damage) from the date of injury up to and social scrutiny conducted by a compe- its recovery. tent public authority. It should be mentioned Given the circumstances mentioned above, that, as provided for in the Republic of Ar- the Mediator decided to satisfy the Client’s menia Law on Temporary Disability Benefits, claim by obligating the Company to indem- sick leaves shall be issued to the persons who nify the Client against the lost salary also for are eligible to receive temporary disability ben- the period of treatment in hospital. 59

Customary business practices and case studies Case study 5 Damaged caused to the property of a fam- the liabilities of the company. However, in ily member under mandatory third party li- this particular case, the Client’s application ability insurance contract must be rejected basing upon the arguments stated below. Company X is the owner of the he claim describes that in a traffic acci- motor vehicle that has caused the damage. T dent two motor vehicles – one owned Company X is also the policyholder, according by the Limited Liability Company X to the mandatory third party liability insur- (Company X) and the other one owned by the ance contract. Appendix to the said insurance Client – bumped into each other. The Client said contract specifies that the Client’s father is that on the site of accident the drivers of the the authorized user of the motor vehicle [that cars signed an agreed statement of fact at the has caused the damage]. Therefore, the Cli- presence of representatives of Company X and ent, as a family member [and the son] of the the Client. As a suffering party, the Client ap- person who is the authorized user of the mo- plied to the insurance company (the Company) tor vehicle that has caused the damage, shall for compensation. The Company made a deci- not be considered a suffered party and can- sion to decline the application, and the Client not use the right to insurance compensation, went to the Office of Financial System Mediator. according to the Republic of Armenia Law on The Company’s position with regard to Compulsory Insurance of Liability in Respect the claim of the Client was as follows: car- of the Use of Motor Vehicles. The Mediator rying out large transactions requires a rel- has decided to reject the Client’s claim. evant decision to be made by the governing authority (General Meeting of Shareholders) of Company X, according to the Republic of Case study 6 Armenia Law on Limited Liability Companies. Responsibility of Bank while transferring The Company also referred to Article 6 of the funds via a transfer system said law, which states that “provisions of this Article shall not apply to the companies con- he Client made a payment order to sisting of one stakeholder, who performs the T the Bank for a transfer of USD 10,000 executive functions of that company”. In this on to a business partner’s bank ac- case, according to the documents, Company count in a foreign bank. The Client notes that X has one stakeholder and/or founder. at the time of making a payment order, the The Company concluded that the founder officer of the Bank said they would need to of limited and supplementary liability com- have the beneficiary’s SWIFT code to exe- panies is to perform executive functions of cute the money transfer. The Client gave the these companies, while the property right is SWIFT code to the officer who then informed retained. Otherwise, losing rights over prop- that the information submitted was sufficient erty, the founder would gain the right to for money transfer. Soon it was found out claim in respect of the legal entity. Thus, the that no money transfer had been made since Company found it appropriate that the Cli- the beneficiary’s IBAN code was missing in ent’s application would be declined. the data as delivered by the Client. Because Having reviewed the claim, the Media- the money did not go the beneficiary, the Cli- tor concluded as follows: Company X is an ent demanded a refund from the transaction. independent civilian entity, the stakehold- The Bank could only return USD 9,942, indi- 60 ers/founders of which are not responsible for cating that the foreign banks had charged 57

Customary business practices and case studies U.S. dollars as a commission fee for a non- The beneficiary’s account number reflect- executed transfer. The Client applied to the ed in the Client’s payment order to the bank Mediator with a request to get back these 57 consisted of 13 characters. The IBAN system dollars. has been registered by the SWIFT system, The Bank’s argument was that the Cli- and this information is regularly published ent had signed on the payment order, thus on the website of the SWIFT system, so the confirming the authenticity of the data it Bank having made the money transfer via this contained. In fact, an incomplete account system should have followed the operation- number provided by the Client was the rea- al rules of the SWIFT system. However, the son why the beneficiary did not receive the Bank failed to do that and the Client has in- money transfer. The IBAN is not an additional curred a financial loss as a result. condition, the Bank said, and they are not li- The Office of Financial System Mediator able to claim it for the simple reason that the inquired a number of banks in Armenia. In IBAN code is an integral part of the account. response, they confirmed that before mak- The Mediator did further investigation and ing outbound transfers to the UAE, the banks came to the following conclusion. The ben- require an IBAN code and, once they have it, eficiary’s bank is located in the United Arab only after that they will execute a transfer of Emirates. It should be mentioned that, effec- money. tive from November 19, 2011, all banks in UAE In consideration of the above circum- are obliged to accept and process payments/ stances, the Mediator has decided to satisfy transfers of money transfer money through the Client’s claim. the IBAN system, according to the UAE Cen- tral Bank decision. In UAE, the IBAN-system account numbers should consist of 23 char- Pecuniary claim filed against non-received Case study 7 acters. According to the UAE Central Bank’s information subject to disclosure under law announcement, in the period from November on consumer crediting 19, 2011 to April 12, 2012 banks will not reject money transfers; for the period following that he Client has signed a consumer loan date, transfers executed with no IBAN code T contract with a credit organization (the will be rejected. Furthermore, a transfer re- Organization). The Client notes that jected may induce charging extra money, they did not receive monthly loan account which will only be applicable if the beneficiar- statements for 9 months in a row, although ies are located in the UAE. the Republic of Armenia Law on Consumer According to the manual which describes Credit (the Law) stipulates that the Creditor banking specifies, in the UAE local bank ac- shall provide the Customer, at established counts shall be added with as much digits of time intervals but not less than a 30-day fre- zero so that they are always up to 16 char- quency, with information in writing about acters. Apart from this, every bank in the the consumer’s liabilities arising from credit UAE must have its own three-digit code that agreement as well as repayments/install- comes before a bank account and always con- ments. The Client indicates that no such in- sists of 19 characters. As for the bank account formation has been provided, so they lodged with an IBAN code, it shall in turn consist of 4 a pecuniary claim of AMD 300,000 (tree characters, shall come before the three-digit hundred thousand Armenian drams) against code and have a total of 23 characters. the Organization. 61

Customary business practices and case studies In the review of the claim, the Organiza- tion provided the Mediator with the Client’s application stating that the Client refused receiving the information in writing, as required by the Law, and asked to get such information at the premises of the Organization. See- ing the scanned version of the application, the Client insisted that they had never signed a document like that. The Mediator invited a digital products expert asking them to examine the signature on a document available on a compact disc to find out if it has been put by the Client or someone else. The examination concluded that the signature in question had not been put by the Client. The Mediator has decided to satisfy the Client’s claim.

Customary business practices and case studies TABLE OF CONTENTS

Questions and Answers QUESTIONS AND ANSWERS

nitially, a prevailing part of frequently asked own. In case of delays in the payment of loan I questions of consumers was pertinent to installments, the loan will be categorized. which operations, functions and powers This means that the loan will fall within one the Office of Financial System Mediator had. Now, of the following 5 categories: a) standard, b) a several years into the job, the questions about watched, c) substandard, d) suspicious, and e) the activities of the Office have lessened consid- loss. More information on loan classification erably, and the citizens apply to us mostly for in- can be obtained by reading the Board Reso- terpretation and clarification of substantive norms lution No. 63, dated 23.04.2014, of the Central and standards used in the financial system and Bank of Armenia. system-specific problems. Below is the summary of questions, and answers thereto, which people Question: Is it possible to conclude a loan most frequently posed to the Office of Financial contract with the pawnshop without pledge of System Mediator in the period under review. property that secures the fulfillment of obligations? Question: What consequences can there be Answer: According to Article 2 of the Re- in the event of failure or delay to make payments public of Armenia Law on Pawnshops and as required under the credit contract? Pawnshop Activity, pawnshop activities in- Answer: Failure to make loan and inter- volve a business offering individuals short- est repayment as required under the loan term loans which are secured by movable contract will result in overdue days on which property of the individuals; a pawnshop is the financial institution calculates penalty ac- also a place where items of collateral are cording to the contract. Where the contract stored. The definition, therefore, infers that does not contain provisions about fines and the pawnshop activities are a business that penalties, the interest shall be calculated offers short-term loans secured by movable from the date of non-payment up until the property. moment the obligation terminates, using the reference rate of the Central Bank of Armenia Question: How is it possible to change the for the relevant period. Where performing of item of collateral or extend the term of contrac- obligations is secured by the pledge, the cred- tual payments? itor may be able to sell the item of collateral Answer: Article 466 (1) of the Republic of and the proceeds of the sold collateral will Armenia Civil Code says that the change and be used to fulfill the contractual obligations, rescission of a contract is possible by agree- while the remaining amount of the sale will ment of the parties, unless otherwise pro- be returned to the pledger. If the proceeds of vided by a statute or contract. Article 468 the marketed collateral are not enough to re- (1) of the Civil Code provides that an agree- pay the loan obligations in full, the borrower ment to change or rescind a contract shall will be responsible for the obligations arising be made in the same form as the contract from the loan contract by other property they unless it follows otherwise from a statute, 65

Questions and Answers other legal acts, contract or customary busi- Question: What powers does the Financial ness practices. Therefore, the item of collat- System Mediator have in the context of funded eral can be changed or the term of contrac- pension contribution system? tual payments can be extended only through Answer: Power and/or authority of the Fi- reaching an agreement with the bank and/or nancial System Mediator in the context of credit organization and/or pawnshop. funded pension contribution system are limited to the investigation of claims against in- Question: Should the creditor be required to vestment firms. notify the borrower of existing overdue liabilities, as well as of fines and penalties accrued for non- Question: How to make payment if the date performance of improper performance of credit of payment specified in the loan contract has fall- obligations? en on a non-working day? Answer: Where a consumer loan con- Answer: According to Article 329 of the tract concluded between the parties is in- Republic of Armenia Civil Code, if the last day volved, it should be noted then that article 17 of a statutory period falls on a non-working (2) of the Republic of Armenia Law on Con- day, the next working day will be considered sumer Credit establishes as follows: Credi- as the last day of a statutory period. tor shall provide Customer in writing with information on consumer’s liabilities aris- Question: If the funds under the loan con- ing from credit agreement, the reasons for tract are provided in foreign currency, which cur- their occurrence and repayment, including rency will be used to make the loan installments? a comprehensive list of applicable and ap- Answer: Where the loan is provided in plied sanctions against failure or improper foreign currency, the loan (principal of the fulfillment of consumer’s liabilities (penalty loan) will be repaid in that currency, whereas or any other measure having negative ef- the payment of interest on the loan will be fect on consumer’s standing), and cases and made in Armenian dram. terms of their application, with a frequency established independently or through a credit Question: Are persons, organizations in- agreement, but not less than on a thirty days volved in foreign currency trading, allowed to basis, through mail service, except in cases purchase and/or or sale foreign currency at the indicated under part 3 hereunder. exchange rate other than the exchange rate set Paragraph 3 of the same article says that by the Central Bank of Armenia? by filing an application, including through Answer: Article 7 (2) of the Republic of Ar- electronic service, consumer may renounce menia Law on Currency Regulation and Cur- his right of receiving information through rency Control establishes that the foreign mail service, and request a receipt of infor- currency trades, including the trades with mation subject to disclosure through elec- the terms and conditions set out in Part 1 of tronic or other communication services in- this article, in the Republic of Armenia shall stead. be carried out by specialized entities. The ex- If the loan contract between the parties is change rate as well as the value and num- not a consumer loan contract, the commu- ber of the foreign currency purchase and sale nication between the parties shall be organ- transaction are determined by the specialized pursuant to the loan contract. ized entities. 66

Questions and Answers Question: What is taken into account for the application of Malus? Answer: Malus is applied as and when the driver has an accident and the insurance company pays compensation for the damage caused by the driver at the accident. For each accident, the driver gets Malus at the score of 4, which means a 4-class deterioration of the driver’s position.

Question: Whose driving history – the driver’s or the insurer’s – is taken to serve as a basis for calculating the Bonus-Malus system? Answer: The Bonus-Malus is a system that differentiates the insurance premiums based on the policyholders’ and/or the insured persons’ driving history according to Bonus- Malus classes, Bonus-Malus coefficients relevant to these classes and policyholder rules on moving from class to class. For calculating the Bonus-Malus class, the driver’s driving history rather than the insured vehicle’s shall be taken into account, i.e. those cases when the company has paid compensation for a car accident caused at the fault of the driver.

Questions and Answers 68

Acknowledgements ACKNOWLEDGEMENTS

A thank-you letter addressed to A thank-you letter addressed to Anahit Khachatryan, Piruz Sargsyan claim handling specialist of the Office Financial System Mediator

Anahit’s friendly attitude as well as proper ap- I am writing to say that your employees are proach to the work gives the client a sense of doing their job with high professionalism appreciation. When you are frustrated, it’s very and adherence to high ethical standards, for important when you can hear encouraging which I express my immense gratitude. I’d words and see willingness of the people of the like to say many thanks particularly to Emilia law. Harutyunyan for her respectful and organized Thank you, Anahit Khachatryan! work and to you as a leader. I now think I am Anna Sargsyan 06.02.2014 going to stay in Armenia. Mher Poghosyan 21.07.2014 A thank-you letter addressed to Emilia Harutyunyan A thank-you letter addressed to claim handling specialist of the Office Piruz Sargsyan Financial System Mediator I would like to convey my special thanks to the staff of the Office of Financial System Media- I would like to thank you and your staff. tor and Emilia Harutyunyan in particular, for her Narek Manoucharyan professionalism, comprehensive and whole- hearted approach to the work and for being A thank-you note very polite. We very much need people like you. Thank you, Anahit Khachatryan! I am very grateful for the support you showed Mher Poghosyan 20.02.2014 in solving the problem I had with the bank. Mher Poghosyan Thank-you letter

It’s gratifying and I am very happy that there is such an organization which serves and supports people unselfishly and helps defend and rehabilitate their rights under the law. The staff is very friendly. I say thank you all! Karen Poghosyan 27.02.2014

Acknowledgements A thank-you letter addressed to tion as well as young enthusiasts from Meghri Tatevik Avetisyan region attended the seminar. At the seminar, claim handling specialist of the Office experts of the Office Ashot Ghochikyan and Lilit Simonyan provided a comprehensive Dear Ms. Avetisyan, overview on the Mediator mandate and ac- I thank you for your caring and kindness, pro- tivities and the procedure of how to apply fessionalism and commitment to helping peo- to the Mediator, which were delivered in a ple. You did really a great job by helping me manner most understandable to young peo- prepare the documents. I have had many ple. The seminar also addressed a number contacts with employees of organizations of issues on credit relations, highlighted the of public authorities and local governments, provisions of the contract to which the con- including staff of law firms and other such sumer must pay an increased attention when groups, but I would say that the staff of the purchasing a credit, deposit and/or insurance Office of Financial System Mediator is a way product. different for their professionalism and will- It is noteworthy that we still receive warm ingness to help. words of appreciation by seminar participants Davit Gharibyan 09.05.2014 addressed to the Office of Financial System Mediator, while a handful of community ad- A thank-you letter addressed to ministrations and educational institutions of Mané Babajanyan Meghri region welcome such seminars aimed claim handling specialist of the Office at raising financial education and express desire to make such gatherings and events Mané, my dear, you cannot imagine how much affordable to the youth and schools and col- I am grateful not only for the material gain but leges students in their region. an excellent treatment as well. What a fortu- nate lady Mrs. Sargsyan is! Looking forward to further cooperation, Nelly Harutyunyan 19.02.2014 Gagik Sardaryan, 03.11.2014 Head of “Agribusiness and Rural A thank-you letter addressed to Development” foundation Piruz Sargsyan Financial System Mediator

Dear Mrs. Sargsyan, We would like to express gratitude to you on behalf of the “Agribusiness and Rural Devel- opment” foundation for the seminar which was arranged by the Office of Financial Sys- tem Mediator on October 30th this year. Tai- lored for young people of Meghri region of Armenia, the seminar was helpful in enhancing their awareness of the specificities of the financial industry. The list of organizations having signed You may know that both the students and and having not signed covenant with the 70 lecturers of “Meghri State College” organiza- Mediator is available in our website.

Acknowledgements

«Elite Plaza» Business Center 7th floor 15 Movses Khorenatsi str., Yerevan, 0010, Republic of Armenia

T: +374 60 70 11 11 F: +374 10 58 24 21 [email protected] www.fsm.am