The financial market, as a constant, is always under the close attention of all its participants. The market, serving almost all spheres of life, needs special rules and effective concepts of development.
The five mysterious letters “split” shocked society and became the subject of numerous discussions. The National Bank of Ukraine (NBU) is transforming its internal structure to ensure the effective implementation of non-banking financial services market regulation functions within the framework of the split project. As you know, from July 1, 2020, the NBU will become a regulator of the market of non-bank financial services of the financial sector. This block will include insurance, leasing, factoring companies, credit unions, pawnshops and other financial companies. During the adaptation period, the NBU plans to focus its efforts on building the internal capacity needed to perform key regulatory functions (licensing, supervision, etc.) and organizing ancillary functions. According to the National Bank itself,its efforts will be aimed at implementing an effective and coordinated transfer of functions from the National Commission for State Regulation of Financial Services Markets (the Commission) to the NBU. In turn, an additional focus of the National Bank of Ukraine will be market analysis and development of draft laws / bylaws, taking into account the results of such analysis.
Recently, the NBU has managed to publish six “white books” – sectoral documents in which the National Bank of Ukraine describes the current state of markets, identifies their problems and plans changes in regulation. The series of “white papers” includes documents on the future regulation of the insurance market, lending by financial companies, the factoring market, non-bank leasing and pawnshops.
Without stopping, the NBU has set up a working group to develop proposals to change the legislation to address the problematic issues of trade and international factoring in Ukraine.
Oleksandr Bevz , director of the NBU’s Licensing Department , said what the NBU plans as a new regulator of the non-banking financial sector, what challenges it faces and what exactly market participants should expect in the near future .
– What are the priorities of the NBU as a new regulator of the non-banking financial sector?
– In fact, there are several priorities, several areas of the project. The first and unconditional priority is to update the legislation. First of all, it is a draft law “On financial services and activities for the provision of financial services”. This law will be framework and common to the entire financial market. In addition, sectoral laws have also been waiting for a long time to be updated, in particular the Laws of Ukraine “On Insurance” and “On Credit Unions”. We are preparing proposals for other new bills, such as the Financial Companies project. It is he who should regulate the activities of microcredit organizations, pawnshops, factoring companies, etc.
It is also planned to update the Law of Ukraine “On Compulsory Insurance of Civil Liability of Land Vehicle Owners”, as well as to develop proposals for a new draft law on insurance distribution, which will regulate, in particular, the sale of insurance products, insurance intermediaries: agents and brokers.
Our second priority is new approaches in the practice of regulation and supervision. We clearly see that the financial sector can be structured according to the degree of risk into several large blocks: banks and credit unions, insurance business, as well as other financial companies that do not attract customers, but work on equity. Depending on the risk, the degree of supervision should vary significantly. What we want to build in the NBU now is proportional regulation and supervision depending on the risks of each financial sector and each of its elements.
The third priority is the establishment of communications in the broadest sense of the word: we strive to build quality, constructive and coordinated communication with market participants. In addition, we will strengthen work with consumers in terms of protecting their rights and improving the financial literacy of the population. Often, clients of financial institutions are poorly versed in the details of financial services and therefore feel insecure, and some financial services they do not know at all. And our task together with the market is to explain new opportunities for small businesses and citizens by talking about financial services and tools.
– What challenges did you face in the first stages of acquiring new functions for the NBU?
– Of course, one of the challenges is the legislation that needs significant updating. We are ready to implement the reforms we have planned within the existing regulations, as well as those that we will adopt as a new regulator.
Unfortunately, there are companies on the market that have licenses, but de facto do not work. There are many such companies, which distorts the understanding of how the market is structured and who actually works in it. Also in some market segments there are companies that deal with unfair practices, their activities do not meet the requirements of the law. The powers of the current regulator – the National Commission for State Regulation of Financial Services Markets – are quite limited, so our colleagues from the Commission could not respond to these challenges in a timely and complete manner without the appropriate tools. But such tools are provided to us by the Law of Ukraine “On the National Bank of Ukraine” and the so-called law on the split, and therefore from July 1, we will actively use these tools.
In addition, we needed to staff and hire those specialists who will deal with the non-banking market. This task has already been completed: we have chosen a combined approach. Some people will come from the Commission, they have the necessary practical experience. However, a large number of specialists will also join from the market. We believe that such a symbiosis of specialists will allow us to have a high level of expertise.
– Can we say that from July 1, the financial sector will receive a completely new regulation at least at the level of bylaws?
– No, from July 1, he will not receive it, because the law requires that all regulations of the NBU on the non-banking market, which are also regulatory acts, first prepared at the project level, then agreed with the market and only then approved. This procedure takes at least a month and a half. From July 1, we will start publishing these projects, and later experts, lawyers, financial companies will be able to see the ready first draft regulations on issues that need priority attention.
For example, these will be completely new licensing conditions and licensing procedures: a large document that will regulate all issues directly related to licensing, but will also include requirements for managers, owners of financial companies, the procedure for changing control in a financial company.
The second document, which will be updated as a matter of priority, is the Regulation on the application by the National Bank of Ukraine of measures of influence: from fines and warnings to withdrawal from the market and revocation of the license.
The inspection document also needs to be updated. However, in this context, I note that we will not abuse the right to conduct inspections, so the market should not be afraid of this prospect. The document on financial monitoring will also be included in the list of major and key acts that will be updated.
Everything else will change as needed. But you should not be afraid that on July 1 someone will lose their licenses or there will be some radical change in the paradigm of the market. We will act predictably, transparently and after 1 July everything will remain for some time within the paradigm approved by the Commission.
For example, July 1 is the deadline for insurance companies to align their equity requirements with those of the Commission. This order of the Commission was approved in 2018. Companies were given a year to gradually meet the new requirements. Therefore, for example, with regard to the insurance market, the first thing the NBU will do is to analyze the implementation of this order. These are not some new reforms. We will monitor the implementation of what has been developed by the Commission.
“One of the challenges we face is legislation that needs to be substantially updated,” Alexander Bevz said.
– When do you think the concepts reflected in the White Papers will become legislative initiatives?
– Proposals for the draft framework law on financial services have already been submitted to the relevant parliamentary committee. We hope that after reaching a consensus on its text, it will be registered. Proposals for draft laws on insurance, credit unions, financial companies are still being processed by the NBU, and they will also be registered later. We hope that these draft laws will be adopted and put into effect by the end of the year.
– Tell us about your main know-how for each of the six sectors.
– To begin with – the insurance sector. It is of great importance for the economy and, unfortunately, for various reasons is not developed enough to be more efficient and provide better services to people and businesses. We are very interested in the development of the insurance market and therefore will stimulate it in every possible way, but there are several structural problems of the insurance market that need to be addressed.
The first is the issue of capital adequacy and asset quality. The second problem is the use of the business of insurance companies to minimize taxation or money laundering operations. We hope that such cases are not systemic, and we believe that most players are bona fide, but if certain individuals set up insurance companies for this purpose, it is unacceptable. The third problem is the issue of exit from the market of insurance companies. Unfortunately, there is a practice where companies disappear and customers are left without their payments, even though they have paid insurance premiums. This has a negative impact on confidence in the sector, and therefore requires clear regulation by the state. The fourth is the regulation of insurance intermediaries and the protection of the rights of consumers of insurance services. This requires a separate law on insurance distribution, which will regulate these issues.The fifth problem is related to corporate governance, because it is extremely important that insurance companies have quality management and a developed system of proportional internal control: risk management, compliance, internal audit, as well as the actuarial function. Actuaries are specialists who confirm the correctness of the calculation of insurance rates. Ukraine has an underdeveloped market for actuarial services, these specialists are few, and the role of the actuarial function will grow.Ukraine has an underdeveloped market for actuarial services, these specialists are few, and the role of the actuarial function will grow.Ukraine has an underdeveloped market for actuarial services, these specialists are few, and the role of the actuarial function will grow.
Undoubtedly, we are determined to implement the European Solvency directives. I do not want to scare the market: not all companies will be subject to the requirements of Solvency II (this is the so-called second Solvency Directive). Therefore, we will implement the requirements in proportion to the degree of market risk – this is the key idea of this reform.
The next sector is credit unions. This segment is built on trust and cooperation, because you can take a loan or make a deposit in a credit union only if you are a member, and the credit union itself can be created according to a certain set of parameters. There must always be a factor that unites the members of a credit union, it is, in fact, a kind of closed cooperation. Credit unions are an interesting tool because they allow each other to provide mutual financing on the basis of trust, especially when there is no access to banking instruments. We would like to support the activities of credit unions.
The NBU has recently become a member of the World Board of Regulators of Credit Unions, we will do everything to help this market. However, it is important to understand that a credit union attracts deposits and therefore carries increased risks. Therefore, in the future we need to create a system of guaranteeing these deposits, similar to the bank. This can stimulate the development of credit cooperation.
The third block is non-risk segment companies. They do not raise funds, but work on their own capital. There are many opportunities for market development and support for economic growth, and we would like such companies to realize these opportunities.
For example, leasing companies. Leasing is a service that can provide strong support in some areas of the economy, such as giving access to finance to healthcare companies or the agro-industry or other market. Currently, there are several obstacles to the development of the leasing market. Among them are tax restrictions, as there are many distortions in the Tax Code of Ukraine that make this service unprofitable for providers, as well as a low level of protection of the rights of lessors, which is confirmed by disappointing case law. We hope that with the changes leasing will still develop in Ukraine.
Another example: the market of financial companies engaged in microcredit. Unsecured microcredits and online loans are very popular nowadays. In fact, it is access to credit for those citizens who cannot get a loan from a bank due to lack of collateral or for some other reason. Here, regulation will focus on consumer protection. This is both the fight against fraud, and ensuring honest and conscientious disclosure of information about the rate, the term, the company’s fines. In this direction, we will also work hard to increase the financial literacy of consumers of financial services.
Another area that needs to be reformed is factoring. Mostly factoring companies in Ukraine are engaged in what is called “collection activities”. We are convinced that trade factoring (when a factoring company buys from a supplier of goods the right to demand payment from the recipient, such a service allows the supplier to receive funds immediately), debt management and collection activities should be distinguished. Pure, classic factoring is a powerful financial instrument that also has the right to develop if it is properly regulated.
Certain changes are planned for pawnshops. This is a fairly conservative segment. There are a lot of pawnshops in Ukraine, they have their consumers. This is a segment that needs specific attention. We want to work with pawnshops in order, on the one hand, to expand their right to provide certain financial services, on the other – to ensure proper risk management in pawnshops.
The last thing I will mention in this issue is the regulation of the payment market. We have a lot of innovative companies, not only banks that provide quality services for receiving and making payments. We want to completely update the legislation on payment services: it will be a full-fledged new law on payment services instead of the Law of Ukraine “On Payment Systems and Funds Transfer in Ukraine”. Such a law implements the key principles of the Second EU Payment Directive in Ukraine. After the adoption of this law, the range of companies that will be able to provide such services will expand. Yes, these services can be provided by mobile operators, large retail chains, postal operators and more. Open data mode will be available,when the consumer will be able to provide access to their data in all financial institutions and use the account management service with the possibility of centralized management. This is also one of the major reforms that we expect to launch this or next year.
– What feedback do you currently receive from market participants in the context of the initiatives outlined in the White Papers?
– We immediately warned market participants that “white books” are not a dogma. We are ready to hear market offers. For example, with regard to the market for financial companies, we have received remarks that some rules remain quite strict and should be relaxed. After an internal discussion, we really came to the conclusion that these are appropriate proposals, and some positions will be simplified because of them.
We want to convince the market that we are ready for feedback, the main thing is to provide it. In general, I believe that we have a very constructive cooperation: since the beginning of the year we have held more than 30 meetings with representatives of non-banking financial services markets, and the number of participants in these meetings often exceeded one hundred people. In my opinion, communication is very intense. Sometimes it even seems that some market participants did not expect such intensive communication with the future regulator.
But there is a downside. Unfortunately, the unscrupulous part of the market understands the consequences of changing the rules of the game and eliminating those gaps that, in fact, allow unscrupulous work in the financial market. We are already noticing attempts to accuse the NBU of certain things that do not really exist. But we will not change our position: only transparent, capitalized, conscientious players who do not violate the law should remain on the market.
– What are your immediate expectations and forecasts for the development of the non-banking financial sector?
– The key word in this issue is development. The regulator is always perceived as a punitive and supervisory body. Of course, because we are called to ensure financial stability and consumer protection, we must sometimes take action. But in fact it is in the development and laid the basic idea of this reform. Development is when services are transparent and clear, businesses and individuals actively use and trust the services of the financial sector. Our task is, first, to remove obstacles to this development. Very often they are not enshrined in financial legislation, but, for example, in tax or administrative regulations of other authorities, which hinder the development of companies that provide financial services.
Secondly, it is important to create the preconditions for development. Adjust only what needs to be adjusted, and remove excess regulatory load where it is not needed.
Third, let’s not forget about financial literacy. This should be said constantly: consumer confidence in the financial system is possible only when the company transparently discloses all its services, and the consumer understands and is interested in what service he will receive. As a regulator, we must preventively establish such mechanisms so that all consumers have at least a basic level of financial awareness. To do this, we will introduce, in particular, a consumer loan passport, specific requirements for advertising and more.
Fourth, we want the market to be self-organizing, cleansing and transforming. The good faith behavior of market participants will benefit everyone – and the participants themselves, and consumers, and investors. Therefore, companies should be interested in ensuring that there are no unscrupulous players in the market. To do this, we will introduce a tool of self-regulatory organizations that will allow the market to independently regulate certain things in terms of ethics, service standards, disclosure, and in the future they may even receive certain powers of the regulator. An example is a kind of SRO of the insurance market, which already operates – Motor (transport) insurance bureau. It has been a functioning body for a long time, but we see that it needs some changes, in particular from the point of view of its corporate governance. We are absolutely convincedthat the bureau should be deprived of both political influence and the regulator’s involvement in its current work. Only market members, those who provide these services, reimburse, form funds, should manage them themselves. We hope that the bureau will become such an example of independent and conscious self-regulation and that its participants will ensure good practices in the market.
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