Natalia Taraba: How regulation of the non-banking financial market will change

photo1632825138The Verkhovna Rada Committee on Finance, Tax and Customs Policy approved draft Law No. 5065 “on financial services and financial companies” for the second reading on September 22. Natalia Taraba, lawyer, PhD in Law, adviser to the Director of the Department for Work with Special Assets of Investohills Group of companies, told Mind what norms remained in the bill and how they will change the situation in this market if they are adopted by the Verkhovna Rada.

Earlier, the expert in the column for Mind drew attention to the main resonant novels, hoping that thanks to the joint work of profile associations and deputies, they will be eliminated or at least mitigated.

Unfortunately, most of the problematic provisions remained in the wording for the second reading. Therefore, financial companies should prepare for the fact that after the entry into force of Bill No. 5065, regulators – the National Bank, the National Securities and Stock Market Commission – will have the right:

  • conduct unscheduled inspections on the grounds defined by regulatory legal acts of the regulator, which means an increase in the number of such inspections;
  • apply several measures of influence to a financial company for the same violation;
  • apply fines for violations not in a fixed amount, but as a percentage (0.1%) to the assets of a financial company. Fixed fines remain only for violation of consumer rights, and their amount does not change in comparison with the current legislation;
  • demand the dismissal of the head in case of improper performance of his duties;
  • apply measures of influence within 3 years from the date of the violation (compared to one year today);
  • influence the grounds for revocation of the license through the establishment of requirements for the activities of a financial company (the license is canceled due to non-compliance with such requirements, while the deadline for eliminating violations is not provided);
  •  involve individuals and legal entities for supervision.

Draft Law No. 5852, registered on August 17, added more clarity to the question of how the National Bank is going to use its powers. According to this draft, the NBU intends to attract law firms to conduct lawsuits abroad without tenders. Nevertheless, the right of the National Bank to transfer its supervisory powers to private entities remains a rather controversial innovation.

What is new in Bill No. 5065?

By the second reading, amendments were made to Bill No. 5065 that strengthen the influence of the regulator on the market and according to which it has the right:

  • revoke the license of a financial company if, as a result of the audit, its absence at the legal address is established;
  • in addition to financial statements, require the submission of regulatory reports, the content and list of which will be determined by the regulator.

Consequently, the regulator’s ability to obtain information about the activities of financial companies is growing. It should also be noted that during public discussions of drafts of other regulatory legal acts, the NBU announced its intentions to receive various monthly reports from financial companies.

How did you manage to reach a compromise?

However, thanks to the joint efforts of financial market participants and specialized associations, some provisions of Draft Law No. 5065 have acquired a more compromise character.

  1. The new law will come into force in 2 years from the date of publication, although during the discussions the National Bank asked for a reduction of this period to 3 months. After the law comes into force, financial companies will have an additional 6 months to bring their activities in line with its requirements.
  2. The NBU has waived the authority to coordinate the change of ownership of a significant participation in pawnshops and financial companies (except insurers), the relevant changes will be made to the current law “On Financial Services and state regulation of financial Services markets”.
  3. The concept of “support services” that can be provided to a financial company has been clarified and set out in the exclusive list. So, the situation when paper suppliers should be coordinated with the regulator will not come.
  4. The “professional judgment” that the regulator uses when making decisions remains in Draft Law No. 5065, but cannot replace evidence and legal justification.
  5. Financial companies will be able to raise funds by conducting transactions with all financial instruments (except bank savings certificates), and not only by placing debt securities.
  6. The right of financial companies to lease property belonging to them, as well as to dispose, manage and maintain (with certain restrictions) property acquired in the process of providing services is secured.
  7. Pawnshops managed to get rid of the obligation to provide customer information to the credit registry.
  8. A provision has been added to the second reading, which, as in the current law, establishes a limitation on the period of inspections carried out by the regulator. At the same time, another term may be established by special laws.
  9. The norm has been preserved, according to which the regulator does not apply measures of influence if violations and their consequences are eliminated by the violator independently before making a decision on the application of the measure of influence.
  10. When forming the authorized capital or in the process of acquiring a share in the authorized capital of financial companies, it is not necessary to prove the legality of the origin of funds declared in the order of a one-time (special) voluntary declaration.

How will the market work?

In general, with the entry into force of the new law, financial companies will have to work in an undeniably tougher regulatory field, at the level of control and reporting, which is approaching banking.

It is also indicative of the withdrawal from some of the norms of the draft of the phrases “within the limits established by law”, which determine the right of the regulator to issue regulatory legal acts on the activities of financial companies.

Such a level of discretion (the right to act at one’s discretion) and the scope of rights granted by Bill No. 5065 to regulators seem to be such that it does not comply with the constitutional principles of separation of powers, the legality of the actions of subjects of authority and legal certainty.

Since the National Bank received the right to regulate the activities of non-bank financial institutions, more than a hundred financial companies have already left the market, others have refused individual licenses. With the further expansion of the powers of regulators and their requirements, this process will continue. As a result, competition in the market will decrease, and the cost of services for the end user will increase.