Will the new legislation of the financial leasing market help?
The financial leasing market in Ukraine has been showing steady growth for several years now. According to the Association of Lessors of Ukraine, in the crisis year 2020, the number of cars leased by members of the Association increased by a record 13%.
Last year, leasing companies of the professional association, which make up about 80% of the non-banking market, registered about 15,000 cars in Ukraine. The key indicator of the market condition – the level of leasing penetration (Penetration Rate) in sales also reached a record level: in the segment of passenger cars it was 13%, for commercial – 11.6%, while in the previous two years it was 9% and 8, 6 %.
Rapid and stable market growth, even in a pandemic and economic recession, makes it necessary to have clear legal regulation of leasing activities. Therefore, in February, the Verkhovna Rada adopted in the second reading and in general the bill № 1111 on financial leasing.
The law not only takes this type of service to a qualitatively new level, but also minimizes some of the risks available to leasing companies.
Among the favorable aspects of the law are the following:
1. Clear definitions of the terms “object” and “term” of financial leasing, as well as the “financial leasing”, which will prevent their ambiguous interpretation in the future. In the previous version of the law, the definition of the object of leasing was vague, which often led to the transfer of the object of financial leasing in the operational. This created confusion when considering disputes in court.
2. Strengthening the responsibility of the supplier, both to the customer and to the lessor. In the new version of the law, the supplier is liable to the lessee for breach of obligation regarding the timing, quality, completeness, serviceability of the subject of the financial lease agreement, its delivery, replacement, gratuitous elimination of defects, installation and commissioning, etc.
3. The issue with the consequences of invalidating the contract has been resolved. Insufficient clarity in these legal relations in the current law caused significant damage to the interests of the lessor, put the parties in an unequal position, and allowed free actual use of the leased object for a long time.
4. Settlement of the issue of notarial form of contracts for vehicles with individuals.
5. According to the new law, the basis for the acquisition of ownership of the leased object is the proper full unconditional performance by the lessee of its obligations, in particular the payment of lease and other payments, the payment of penalties, etc. The client has the right to purchase the leased object only if all the terms of the contract are fully met. Previously, the relevant legislation did not work in terms of protecting the rights of the lessor, and in fact put him in a very difficult position in recognizing the lease as invalid.
6. It is enshrined in law that the advance payment is not the lessor’s funds raised. Intermediary and support services for the lessor are identified, which correspond to the approaches laid down by the NBU in the White Paper on non-bank leasing regulation.
7. The functions of control and supervision over the sphere of financial leasing have been transferred to the National Bank of Ukraine and other state bodies that exercise control over the activity of the financial leasing market.
Unfortunately, the legislator does not provide clear and understandable mechanisms for independent control of the market of financial leasing services by its participants. The status of self-regulatory organizations that could supervise market participants has also not been determined. Only the practice will show whether the adopted law will be able to solve the existing problems of the financial leasing market by becoming a “breath of fresh air” or drive the market into a new regulated relationship with the state.
Author: Yevhen Kalinin
Former Deputy Governor of Kyiv Region, Senior Partner of LC Primelex