Author Rudenko Victoria
From July 1, the National Bank will strengthen its position in the financial market: it will become a regulator for insurers, credit unions, financial companies, pawnshops. The extent of the NBU is ready for these changes need to wait for non-banking institutions and their German clients – borrowers, depositors and policyholders, especially as equivalent , first deputy NBU head Catherine Rozhkova said in an interview this FinClub Victoria Rudenko.
– How did coronavirus and quarantine affect the preparation for the July 1 raft? Will the NBU be able to make this transition painless for non-banking institutions?
– During the quarantine period, the NBU did not review its plans, and the “split” is already 90% ready. We completely fit into our schedule of receiving functions from Natskomfinposlug. The work is in full swing.
First, we showed the market our vision of future work and regulation. We have published six “white papers” on the main segments of the non-banking market. These are our guides. The key ideas of the documents will form the basis of the draft laws and regulations that are being prepared.
Second, we made changes to the internal structure of the National Bank. They held open competitions for the positions of heads of newly created departments, now the winners of the competitions are undergoing the necessary formal procedures. At the same time, we staff specialized units.
Third, we continue to work with non-banking market reporting. More than a thousand companies have already tested the submission of reports and registered on our website.
There are still a number of technical issues, but for me it is important that we are essentially and in terms of processes ready for the “split”. We now “feel” the non-banking market not only in terms of preparing concepts, but also in terms of working with “living” companies. And from July 1, they are ready to perform a new function.
– In connection with quarantine and economic recession , the National Bank weakened regulatory requirements for banks and postponed the introduction of a number of new requirements indefinitely . Should the non-banking market expect any easing of the current regulatory regime?
– We continue to adhere to the position that from July 1, everything will remain as it was for companies. Only the reporting address will change. And the new regulation will appear gradually, as new laws and bylaws appear.
Not necessarily the new requirements will go in the direction of strengthening. Only two segments of the non-banking market require closer attention – insurance companies and credit unions, as they work with the money of individuals and businesses. We asked insurers if they saw a need to relax existing requirements. The NBU is ready to discuss all points, but has not yet received a single proposal.
The rest of the non-banking market (pawnshops, leasing, financial companies, factoring) operates on equity or bank loans, ie does not attract money from the population. These are less risky segments, and for them there is a serious weakening. In particular, we want to expand the list of licensed activities for them. For example, now exchangers can only exchange currencies, pawnshops – only pawnshop. If the company needs to provide a cross-service, it is necessary to open a separate legal entity and obtain a separate license. We want to move away from this and give non-banking companies the opportunity to provide several financial services within one legal entity. We assume that leasing companies may have a license to transfer and exchange currencies, if this service accompanies their business. Postal operators – currency exchange license, etc.In fact, it is about expanding their business and new opportunities.
Another important point: there will be no standards for less risky segments. They will be left with on-site supervision of activities, as well as increased attention of the regulator to market behavior and protection of the rights of consumers of financial services.
– Do you not see any risks in the work of financial companies?
– “Finns” work in the lending segment. They do not attract money from the population, but use their own capital. We plan to expand funding sources for them. They can be deposits from the founders, sub-debts. This will make it possible to obtain business funding and at the same time remove the need to use intricate and often opaque mechanisms to raise capital and resources.
In this segment, the main thing for us is consumer protection and market behavior. It’s no secret that customers’ rights are violated. Some financial companies abuse the low financial literacy of the population, hiding in advertising the real amount of rates and commissions. Real interest rates can exceed 700% per annum. Therefore, our priority is to maintain a balance of rights and responsibilities of financial companies and consumers of services.
– If we recall the history of the adoption of the law on the split of Natskomfinposlug, it is on the part of financial companies will be in serious resistance. Have you found a common language yet?
– Resistance was only in part of the market. And in fact this is a normal reaction, because changing the regulator is always a way out of the comfort zone. The participants of the financial market were afraid that we would start re-licensing, we would immediately introduce new rules. But we have a rather opposite vision: we want to give the market more opportunities for development.
Of course, I can not say that all 100% of companies are happy to move under the regulation of the NBU. But I hope that this issue will be resolved in time. I personally believe in the possibility of a colossal synergy between the banking and non-banking sectors. The same “Finns” work with a segment that banks are not quite interested in. They do not compete much. Working together, we will increase people’s access to financial services.
In my opinion, there are fewer ardent opponents of the “split”. Over time, the boundaries between the banking and non-banking sectors will be blurred both in terms of speed and quality of service, distance, and in terms of migration from one form to another.
– In the non-banking market there are participants who work not absolutely transparently and not absolutely honestly. How will you control them? What are their prospects?
– The fate of the company should be chosen by the owner or management. And the NBU will provide a sufficient adaptation period, during which each market participant will be able to restructure to work under the new rules. The main thing is to want. I would like all companies to be rebuilt and stay in the market. We observed a similar situation in the currency exchange market. There were very few licensed companies and there was almost no competition. We changed the rules, and the situation changed: there was competition, the number of players increased, the market regulated itself, and the quality of services increased.
If we talk about risk insurance, this market is very heterogeneous. We will not tolerate illegal transactions. We are also against pseudo-insurance activities, when the company collects premiums but does not make payments. There are about 40 compulsory types of insurance, which generate non-market competition and often outright dumping. As a result, we get problems with insurance payments and the solvency of companies. Therefore, the list of mandatory species will be significantly reduced. In the future, state regulation of the cost of mandatory types, such as motor vehicles, will be abolished.
But I repeat: every insurer and all market participants will have enough time to adapt to new requirements.
– The situation on the life insurance market can be called critical. How to make life insurance a really long-term investment tool?
– If you compare life and risky companies in terms of corporate governance and asset quality, life insurance companies are an order of magnitude higher. The law sets stricter requirements for the quality of assets that can be accepted to cover reserves. Life companies have a more conservative business model.
If we talk about the development and promotion of life insurance among the population, the first and perhaps the most important aspect necessary for this is macro-financial stability. After all, life insurance is a long-term investment. And we have had four crises over the last 30 years, each of which was accompanied by a surge in inflation, the devaluation of the hryvnia, assets, and bank failures. Macro-financial stability is needed to plan for the long term. Today it already exists: we are now in crisis, but the banking system is in order, inflation is low, the foreign exchange market is stable.
The second aspect is the presence of developed financial and stock markets. In this case, life companies can invest the funds raised by Ukrainians. And with this we have a very bad – opportunities are very limited. We hope that the situation will change with the development of the domestic stock market.
The third aspect is the issue of financial culture and literacy of the population. Frequent financial troubles have led to people not making long-term plans. Demand for funded insurance is very low. But I hope that financial stability will contribute to the development of financial culture.
We must also not forget that the state pension system will never be able to provide the standard of living that each of us would like to have at the end of employment. In order to feel more comfortable in retirement, you need to invest for life. Today we see that the volume of life insurance is less than 10% of total insurance. And our goal by 2025 is to reach 20%. This is a very ambitious goal, but we are ready to work with the market to achieve it.
– Insurance companies, including life insurance companies, report once a year, and anything can happen to their dumb assets this year . What changes are planned in this direction?
– First of all, we are concerned about the quality of the reports. Now the reporting is very complicated, it is difficult to understand something. The second point is its periodicity. Insurance companies cannot report quarterly or even once a year. It is obvious that from July 1, neither the essence nor the frequency of reporting will change. But I hope that as of July 1, we will be ready to discuss the planned changes with the market. Their implementation is a matter at least next year.
In addition, we plan to work with auditors. Banks are now required to publish audited financial statements in accordance with international standards. We plan to extend the same requirements to insurance companies.
In the future, we will add a rating similar to SREP for banks. This will be an assessment of corporate governance, internal control systems, risk management, capital adequacy and liquidity. Based on the results of this assessment, we determine the intensity of supervision. By the way, we planned to make SREP bank assessments public from next year. But given the current situation, we may postpone until 2022.
– Recently we rock s layfovyh few companies have disappeared from the market together with the money clients. How can such cases be prevented? How to protect policyholders?
– There really were such cases. And to prevent them, proactive supervision is needed, not reactive, as it is now. We will not just fix the problem, but we will make diagnoses, forecasts, trying to prevent risks.
In addition, Ukrainian insurance does not regulate the issue of withdrawal of insolvent insurance companies from the market or voluntary withdrawal. Banks have several options for resolving this issue: the possibility of transferring assets and liabilities, mergers, acquisitions, licenses without liquidation of the legal entity. Insurers do not have such opportunities. Therefore, we are working on this issue in the framework of proposals for the draft law “On Insurance”. The non-banking market needs the same mechanisms. All in order for the company to leave the market honestly and the insured to be protected.
– Another important aspect is the issue of guaranteeing Ukrainians’ investments in life insurance companies. Will you lobby for the extension of DGF guarantees to life insurance savings? Such bills were already being prepared.
– We openly talk about the need for such guarantees. But sometimes you need to solve many questions. The first question is the model of the fund itself. Will it be within the framework of the existing Deposit Guarantee Fund or will a separate fund be created? If this is to be implemented within the framework of an existing Fund, then the issue of its solvency must first be resolved – the DGF has obligations to the Ministry of Finance that need to be settled. In addition, there is already a question of increasing the amount of guaranteed bank deposits.
Second, the insurance market must be ready both for regular deductions of contributions to the Fund and for the entrance fee for new participants. At the same time, to guarantee insurance savings, we must be confident in the quality of the insurance companies themselves. After all, what happened in the banking market during the crisis? Banks that had better corporate governance and credit risk management paid for banks with lower standards.
– The idea of creating a separate guarantee fund for insurance companies was also discussed, but calculations showed that insurers will not be able to maintain such a fund. Which scenario do you consider the most optimal?
– I don’t think we need to create another fund. The DGF team is quite professional, has good experience in various types of asset management and valuation. I believe that we need to start resolving the accumulated issues of the Fund’s debt and at the same time work on increasing the solvency of insurers. And only after that it will be expedient to raise the issue of participation of life insurers in this fund.
– Can deposits in credit unions also receive such guarantees?
– Over time – yes. But the questions are the same. First, credit unions need sufficient solvency and capital. Secondly, it is necessary that they comply with at least the current standards. And third, will credit unions want to become members of the Guarantee Fund? After all, for them it is an additional cost, and considerable, as well as more stringent requirements for risk assessment and capital. The Deposit Guarantee Fund is created to increase consumer confidence in the event of an emergency, rather than for permanent payments as a result of chronic poor risk management in banks.
– Can the participation of life companies and credit unions in the Fund be voluntary ?
– We are considering such an option. In any case, membership in the Fund will require regular and extensive reporting, which requires certain IT systems, and this is a significant investment. In addition, it is a cost in the form of regular deductions. We will discuss with the industry the possibility of their participation in the Fund. Those market participants who become members of the Fund will gain a significant competitive advantage. But in any case, this is not the prospect of this, or even next year.
– After the NBU becomes a regulator of both banks and credit unions, is it possible to create cooperative banks in Ukraine? This has long been talked about in the market.
– This option should be. But we must understand that all banks have more serious requirements. An analogue of cooperative banks can be called a joint credit union (ACU), taking into account our planned expansion of opportunities for them. It is an add-on structure that includes credit unions. ACS for them can essentially act as a “bank of banks” – a credit union for credit unions. For example, it will be able to maintain the liquidity of its members if necessary. It is possible that such an ACS will have access to our EPS to have prompt access to funds. But the requirements and criteria for ACS will be more stringent than conventional credit unions.
– Will the NBU introduce uniform requirements for liquidity and corporate governance for all non-banking segments ?
– No, the requirements will be different. The requirements for corporate governance of insurance companies will be stricter. We are still working on the corporate governance model for credit unions, given their specifics. It, on the one hand, should not be too difficult for them, but on the other – should provide standards of work.
As for the rest of the non-banking financial sector, there will be no strict requirements. All companies, except insurers and unions, operate on equity, respectively, these are the risks of the shareholder, which he assumes. It does not make sense to set liquidity ratios or risk assessment rules – the shareholder himself, investing capital, is interested in ensuring that the structure is balanced.
– The innovations listed by you demand change of laws. Who will submit them to the Council and when , and do these initiatives have support? Various versions of the new insurance law have been debated for more than a decade, but no convocation of the Council has been able to pass it .
– We discussed this issue with the chairman of the profile committee Danylo Hetmantsev even before the split was voted. We have agreed that during 2020 we will submit all necessary proposals for draft laws to the committee. Today we have almost ready proposals for the framework law on financial services. This is our main document.
We plan to submit proposals on the bill on insurance by the end of May, and on credit unions in June. We focused on these two segments because they are the most risky for the population. We would like these bills to be submitted to the Rada by July 1, that is, by the time of the split. The rest of the bills are also in the works. We prepare them together with the market, I believe that there will be no resistance and the market will support us.
– Banks believe that even after the adoption of the law on consumer lending, financial companies have remained in a more liberal field than they are, because they issue microloans for a short period. Will the NBU initiate changes to the law so that all participants in the consumer lending market are on equal terms?
– Yes, of course. The requirements must be the same for everyone. Today, the requirements of the law on consumer lending do not apply to loans of less than one minimum wage (currently UAH 4,723 – Ed.) And for a period of less than a month. These are requirements for the disclosure of complete information about the loan, the real annual interest rate, restrictions on fines, etc. The average loan amount for “Finns” is UAH 3,711, and the term is less than 30 days. This means that the law does not cover most of these loans.
The profile committee of the parliament is currently preparing a bill for the second reading, which will extend the law to such loans. The National Bank supports such changes. This will strengthen the protection of the rights of clients of financial companies.
– How do you see the development of leasing in Ukraine? Now it is mainly a service for large industrial companies and farmers, although in the world leasing is also popular with individuals. Can banks push classic leasing companies out of the market?
– The fact that banks are developing this area is a big plus. But if we look at leasing companies that are not owned by banks, they tend to work with small businesses. This is the segment that banks do not always reach. At the same time, the demand for leasing services is enormous. The capacity of this market is very large. We like what our leasing companies look like. And we want to make it easier for them to access funding so that they have more opportunities for development.
If we talk about the development of leasing for the population, we need not just demand, but effective demand. Leasing can be an alternative to bank lending. But to do this, companies must develop appropriate products and properly present them to the public.
– In Ukraine, from time to time there are fakes and financial companies that work outside the legal field: without licenses, de facto issue loans, attract deposits, deceiving customers. They should be dealt with by law enforcement, but they do not notice these companies. Can the NBU itself somehow counteract them?
– It seems to me that the key role in this process should be played by banks. The latest case for B2B Jewelry is very significant in this regard: the bank stopped operations, blocked the company’s accounts, using information from the KYC-file. He saw a client who, without any licenses, received funds from individuals. All information was passed to law enforcement agencies and the SCFM.
Profile associations also play an important role. Their task is to protect their market and their customers from such companies. If they see suspicious transactions, they must notify the regulator, law enforcement.
Another aspect is financial literacy. We plan to launch an information campaign for the population: to tell about the simple rules of working with the non-banking financial sector. The emphasis will be on what “can’t be done” if you want to work safely with a non-bank financial institution.
In the second part of the interview, which will be published in the near future, Kateryna Rozhkova will talk about changes in the banking market.
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