La Polar: A case of massive abuse!Por chileciudadano • 5 Sep, 2012 • Sección: Artículos destacados, Caso La Polar
At the present moment the foundation Chile Ciudadano has been searching and outstandingly working for consumers affected by the second largest retailer in Chile, La Polar, in one of the biggest financial scandals yet!
The Chilean retailer La Polar unilaterally rescheduled the debts of their clients to conceal payment arrears of 60% to be able to present false financial statements to launch a bond application to seek funding from local financial markets and gain capital increases.
The case La Polar perhaps for the first time ever, has sparked a mass reaction of absolute intolerance for an abuse of this magnitude.
The foundation Chile Ciudadano was initiated by a group of professionals, who decided to establish this organization to be able to provide their personal skills to the development of Chile in 2004. It was established with two main objectives in mind: first, to allow citizen (mainly the poor) the opportunity to effectively exercise their rights when they have been abused by economic power; second, to encourage similar organizations by sharing their experience and knowledge with them.
The Chile Ciudadano foundation is an organization whose central objective is the protection and promotion of the rights of persons, especially those of economic significance, such as the rights of consumers and free competition rights. From this point of view, the members of the Foundation are always attentive with regard to cases and situations that violate such rights, and it is obvious that in relation to the case “La Polar”, which probably represents the largest case of any violation of such rights, they could not abdicate to participate actively, especially taking into account that those affected are mostly people of few resources and little chance of access to justice.
Tomás Fabres Bordeu, 50 years old, is an attorney of the University de Chile and Executive director of the Foundation for Civil law. He is the head attorney for the foundation Chile Ciudadano in the La Polar case and also the spokesperson in light of the media. Tomás Fabres has specialized in commercial law, consumer protection law, real estate law and law of free competition.
Fernando Arancibia Meza, 48 years old, is an attorney of the University de Chile and has a MPHIL from Cambridge University. He has specialized in real estate law and consumer protection law, he is the founder and President of Chile Ciudadano, he has been leading the team working directly with affected customers.
The La Polar case started because the company La Polar was in the practice of granting credit to clients behind on payments, which had the effect of cancelling the previous debts but which capitalized on the interests as well as other accessories to the debts, this resulted in an exponential increase in the total amount now owed!
This system allowed the company to hide the delinquency of up to 60% of its portfolio of clients and submit false financial statements giving an account of a healthy portfolio, which in turn allowed them to receive an increase in capital through issuance of payment of shares; the shares were mostly pension funds.
La Polar itself admitted to the rearrangement of contracts on behalf of thousands of their clients in the past few years. La Polar wrote in a letter to the local regulator that the number of clients who had their contracts renegotiated without their consent reached a whopping 418, 826 or alternatively 35 per cent of the total of La Polar’s clients. Before it was made known how many clients were affected the company La Polar had reported a mitigation plan which consisted of reducing interest rates and eliminating fines and billings of clients as well as a 5000 Pesos gift card to use at the store for those who agreed to this new plan.
The clauses that were added to the contracts without the consent of the clients were mandates that very basically gave La Polar permission to cancel their debts and give an extension for late payers. In the process of doing this the interest rate for late payers would go up significantly more than what was originally agreed on and this had the result doubling or even tripling the debt originally owed. This re-agreement would take place around every 3 months.
The debts were acquired during the use of the credit cards received from La Polar which went unpaid anything from one month on. The new high interest rates have led to a collapse of credit records and also damaged the portfolio of the pension fund of many Chileans. With no personal bankruptcy law in Chile consumers are faced with the risk of being labelled as a debtor or high risk consumer in the Dicom, a private unregulated credit-rating agency owned by Equifax. A bad Dicom credit usually means being black listed for jobs, mortgages and any other personal loans. This can severely tarnish a person’s life by making them jobless, homeless and for the younger people unable to go to a university and a never ending credit debt that is spiralling out of control.
The estimated number of affected clients is 1,048,000 of this the foundation Chile Ciudadano has helped just a little over 22.000, by giving each person an in-depth explanation of their situation, gathering consent forms, answering e-mails and phone calls, posting letters and consulting legislation to ensure that these people are receiving the most up to date knowledge of the position they find themselves in. The number of people directly involved in the case, through Chile Ciudadano, at this moment is only 1500. So few people have come forward because the Chilean consumer can be characterized by their lack of information, this prevents them from knowing their rights and most importantly how to exercise them effectively, this is also highly entrusted to companies and people rely on them fulfilling their obligations. The consumers usually show willingness to contest but rarely have the will to confront the companies.
Both the law and the public agencies with expertise in consumer protection show serious flaws. The legislation is not only insufficient and full of gaps; it is also full of obstacles which hinder the exercise of the rights by citizens.
Successful initiatives that have become law have improved the standard drastically, even though it still holds short comings such as restrictions, low participation, insufficient authorities attributed to relevant public organizations (low levels of oversight and complete absence of law enforcement) and there are extremely long and cumbersome judicial proceedings, amongst others.
There is a major lack of public funding for consumer organizations and as such this would make it impossible for any of these organizations to function properly without some sort of benefit from law suit winnings. As this is the first time Chile has seen such a major case being taken on by such a small NGO the media has shown concern about the foundation Chile Ciudadano receiving compensation from La Polar, simply because they have no previous situation to compare it to as they do not deal with cases like these daily. In this light it is important to note that all the consumers receive the brilliant management of this situation by the foundation Chile Ciudadano entirely for free. This case has now perhaps brought into light how NGOs worldwide function when dealing with cases like these.
In this context legislative changes are essential, the dozens of initiatives that have been tabled in this regard do not have the support of parliamentarians - funded incidentally by the major economic groups - and, in practice, one has legislated on the bases of the particular cases that have gone so far as to constitute public scandals.
SERNAC, the Chilean consumer protection agency, received hundreds of complaints from La Polar clients who had received threatening letters from collection agencies. SERNAC tried to negotiate a solution with La Polar privately but La Polar refused to take part. SERNAC then filed a class actions suit on May 2011 on behalf of approximately 2000 consumers the number then grew to about 20000.
SERNAC is a de-centralized public service, subject to the supervision of the President of the Republic through the Ministry of Economy, as for example in the present case it is not just a legal problem but obviously one of political importance as well, what with over a million people being affected. The objectives of SERNAC, established by law are to inform, educate and defend Chilean consumers. Its main functions are: to check compliance of the legal regulations related to the protection of consumers’ rights; formulate and carry out class action law suits and encourage information and education programs for the consumer; compile, process, and publish information to provide the consumer with a better knowledge of the characteristics of the goods and services commercialized in the market. Therefore, its faculties are mainly of an enforcing nature, although, it also has education and research functions.
Nowadays, even though SERNAC cannot sanction malpractices, it has several tools to enforce consumer rights taking actions in Courts under the 1997 Consumer Protection Act (CPA). Moreover, in 2004, this act was complemented introducing, among others, the sanction of spam and abusive clauses in adhesive contracts.
When SERNAC filed a “class action” lawsuit in May 2011 against La Polar, they requested the courts, firstly to rescind the unilateral re-agreements made by La Polar, secondly to set aside the unfair terms in the contracts which gave La Polar the ability to change contracts without consent, third to punish the company with fines and lastly to pay compensation to affected customers.
Collective actions in Chile are distinguished by the following:
A) Active standing is restricted to the government, consumer associations and a group of at least 50 people.
B) Two forms: Before trial or examination of admissibility (which could take up to several months) the procedure that needs to be followed in Chile is not even a single collective action with a final judgment, despite the fact that legislations introduced this system more than 6 years ago.
C) The limitation of your scope of application as a subsidiary mechanism for resolving conflicts when there is specific legislation in place, a good example is the telecommunications market, where legislation provides an administrative procedure of prior reclaim and this is compulsory before the competent public body is approached.
D) No training of Judges in this matter.
The foundation Chile Ciudadano became involved by launching a massive campaign to appeal to the majority of people to be able to give them the opportunity to exercise their rights directly in the trial without relying exclusively on the activities that SERNAC provided, as there are many reason why SERNAC might have wanted to reach any agreement as soon as possible, one such reason being that this case is a major political problem. As the foundation Chile Ciudadano gradually received more publicity on this case, so more affected consumers came forward seeking their assistance, which had the effect of strengthening their involvement in this case.
With the consumer protection suit now open the next step the foundation took was to open a criminal suit, which made it possible for them to file criminal proceedings against the managers of La Polar. Lastly the Foundation filed a request for compensation for moral damages in the courts of the local police.
In light of this situation the foundation Chile Ciudadano implemented 3 main actions for the benefit of the affected parties:
Firstly; to have the contracts terminated, so that the affected clients can recover their freedom and no longer suffer the consequences of this abusive situation.
Secondly, the opening of direct negotiations with the company La Polar in hopes to end the conflict based on three actions: relief sought for the victims, to revise the contracts and to revise the practices of the company.
Thirdly, to seek compensation for those who have been affected.
Tomás Fabres, the head attorney for the foundation Chile Ciudadano in this case has led the negotiations with La Polar, he has been designated in the trial “common attorney”, i.e. the person who represents all those who are a party to the trial.
Jairo Casanova and Gonzalo Angel are the Chile Ciudadano attorneys in charge of the criminal law side of the La Polar case. Casanova and Angel, filed complaints against the previous executives of La Polar, on behalf of about 30 individuals affected by the La Polar case, for the following crimes: fraud, conspiracy and usury (the excessive charging of interest than what is permitted by law). This reduction in the number of people is due to the fact that people are even more reluctant to participate in criminal trials.
The agreement between the FCHC and the new La Polar executives
The actions of Chile Ciudadano have up to this point generated a massive loss of customers to the company La Polar, established reasonable mechanisms for resolving future conflicts as well as achieving the termination of the credit card contracts and the opening of negotiations with La Polar to end the conflict.
There are probably two reasons why a massive company such as La Polar would agree to go into negotiations with Chile Ciudadano a very small non-profit organisation:
One being that Chile Ciudadano, through Tomas Fabres, led the procedure against La Polar and the media recognised this, and more importantly due to the political issues that are attached to this case it was more convenient for La Polar to work with an organization quickly and quietly and in a very technical manner, which is exactly what the foundation Chile Ciudadano offered on condition that La Polar accepted that the negotiations took place on behalf of not only the people who came forward but on behalf of the entire one million affected.
In December of 2011 the FCHC and the new La Polar initiated negotiations with the foundation Chile Ciudadano. The Chile Ciudadano team did 6 months of intense quiet work which is one of the reasons the agreement which was reached was so successful. The agreement was finally signed on May 16, 2012.
The Foundation obtained for the total affected customers of 1,048,000 of La Polar in the newly approved agreement: first; a recalculation of their debts, as a result of the recalculation thousands of customers will become creditors of La Polar and receive money back, second; the cancellation of existing charges so that affected consumers are no longer recognized as being in debt, third; the reduction of interest rates to once again comply with the interest rates set by law. In total this represents benefits of more than 650 million dollars. This agreement was drawn up solely by the Foundation Chile Ciudadano and not by SERNAC.
Approximately one week after the signing of the agreement SERNAC who was supported by the Minister of Economy accepted the agreement, drawn up by La Polar and the FCHC, however they introduced 3 additional items :
1, If any clients still have debt with La Polar after the recalculations have taken place they have three years to pay these debts off.
2, there needs to be a reduction of the interests rates in order to pay these debts off.
3, La Polar must give each and every affected client a compensation of 15000 Pesos.
On May 31, 2012 the civil Tribunal in charge of the case added 2 conditions to be added to the agreement before they would examine and eventually approve this agreement:
1, Increase of Capital; The company La Polar needs to increase its capital to be able to pay all the above mentioned compensations as well as to keep the business afloat. On June 11, 2012 the shareholders of La Polar approved an increase in Capital of 240 million US Dollars.
2, The board of directors of La Polar needs to approve the agreement; On August 7, 2012, the creditors of the La Polar Board approved the agreement with Chile Ciudadano.
The next step is to have the agreement approved by the Civil Court, Chile Ciudadano expects this case to close in the next month or two with the final approval of the agreement by the civil judiciary. Once approved this will be the starting point for the recalculations of every debt of each client, this process could last anything from 6 months to one year. After this each client will have clarity on whether they now have credit with La Polar or still in debt to them, Chile Ciudadano estimates that of the 1 million people affect approximately 150 000 people will no longer have any debt with La Polar but on the contrary will be receiving on average 350,000 Pesos from them.
In the criminal side of the case the FCHC will drop the charges due to the agreement reached in the civil negotiations, the 30 individuals will receive compensation in the form of damages which was part of the agreement reached with the new executives of La Polar and Chile Ciudadano.
The top executives of La Polar have in the meantime resigned from La Polar and the company has fired 11 managers who were involved in the scandal. The company has also stated that they are taking criminal actions against several previous employees and against its auditing firm, Pricewaterhouse Coopers.
The previous executives who were responsible for concealing the true state of affairs of La Polar are still however under investigation for crimes against banks. The order was given that the prosecuting attorneys have 8 months until the next hearing to gather the information they need. The criminal actions seek penalties of imprisonment for the previous executives of La Polar who devised and implemented the unilateral re-agreements.
On August 23, 2012 an extension of 10 extra months was given due to the complexity of the case, the prosecutors now believe that the oral trial will take place in August or September 2013 and this trial should last up to 3 months. The crimes they are investigating are: laundering money and crimes against bankery laws, crimes such as these have a maximum penalty of 15years imprisonment in Chile.
As such the biggest financial scandal in Chile comes to a close thanks to the impressive hard working team of the small non-profit organisation, Chile Ciudadano.