Estonia cracks down on loan associations as depositors lose over €30 million
With little oversight, Estonian savings and loan associations have cost depositors more than €30 million, prompting legislation to phase in a switch to credit unions.
In recent years, nearly €33 million disappeared following the bankruptcies of Erial and Eesti Arengu savings and loan associations (SLAs), said Erki Pisuke, chief legal officer (CLO) at Hugo.legal. Problems also exist at Tartu Credit Union.
"Depositors are having difficulty recovering their savings; their claims are being contested, and liquidity — especially in one association — has become highly questionable," Pisuke said.
He explained that, in some cases, money collected from depositors was loaned to companies linked to the SLAs or their subsidiaries. Funds were moved around and ultimately lost.
The Estonian Financial Supervision and Resolution Authority (FSA) noted that many SLAs are also violating territoriality rules.
"Whereas an SLA used to be a local hunting club, figuratively speaking, today they've become nationwide deposit collectors and lenders," said FSA board member Siim Tammer. He added that some individuals have exploited these structures with less than good intentions.
The Ministry of Finance, the Bank of Estonia and the FSA all agree that SLAs should be regulated like any other financial service provider. Thus, SLAs that continue to collect deposits will need a banking license from the authority.
Early next year, the Riigikogu will introduce legislation banning the formation of new SLAs, aiming for a full transition to credit unions by 2029.
The amendments will phase in the switch in three stages.
MP Mart Võrklaev (Reform), a member of the Riigikogu Finance Committee, said the law will prohibit advertising deposit interest because these deposits lack guarantee funds. Once in effect, no new SLAs can be established, and by 2029, existing SLAs must either convert to credit unions or close their doors.
"All of this is intended to protect depositors' funds," Võrklaev said.
As credit unions, deposits will be guaranteed up to €100,000. The minimum capital requirement for a credit union is €1 million, compared with €5 million for a conventional bank. SLAs may also merge into a single credit union.
At Hugo.legal, Pisuke acknowledged meeting the requirements for a credit institution will be extremely challenging for small SLAs.
"It's very hard to imagine how they'll make such a leap," he said.
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Editor: Marko Tooming, Aili Vahtla
