Non-banking financial sector to receive new laws: draft law on financial services and financial companies registered in parliament

The draft Law №5065  “On Financial Services and Financial Companies” was registered in the Verkhovna Rada of Ukraine  . This document is a framework law for all financial services in Ukraine and defines common basic approaches to regulation and supervision in all markets for financial services and consumer protection. A separate part of the bill contains rules for regulating the less risky segment of financial institutions: financial companies and pawnshops.

The National Bank welcomes the registration of this document and awaits its adoption by the Verkhovna Rada. It is the first in a series of updated pieces of legislation needed for the comprehensive development of the non-banking financial sector. Therefore, the National Bank expects soon to register other related bills: “On Insurance” and “On Credit Unions”.

The current Law on Financial Services and State Regulation of the Financial Services Market was adopted in 2001 and has not been comprehensively revised since. Its conceptual provisions do not correspond to today’s realities, and also do not take into account the latest trends in global financial infrastructure. The new law introduces modern principles of prudential supervision and identifies an important component – the supervision of market behavior. It provides for the introduction of a risk-based approach to the supervision of financial institutions depending on the size, importance, complexity of the business model and the individual level of risk of the financial institution.

The bill defines two types of services: financial services and ancillary services.

Financial services include: insurance and reinsurance; lending; raising refundable funds; financial leasing; factoring; providing guarantees; currency trading; financial payment services; services in capital markets; services in the field of accumulative pension provision. To provide financial services, financial institutions, including pawnshops, credit unions, insurers and financial companies, must obtain a license.

Ancillary services will include: intermediary services (agents and brokers), as well as support services (information, collection, credit bureaus). These services are not subject to licensing, but may be subject to registration. Their regulation will be simpler and more flexible compared to financial services.

Modern approaches to the supervision of pawnshops and financial companies

Here are four main features of new approaches to supervision: 

  • Proportionality of prudential requirements – the law sets requirements for the minimum amount of equity (from 1 to 10 million UAH, depending on the type of institution and services provided). Prudential requirements are set for companies that provide certain types of services;
  • Emphasis on supervision of market behavior – during supervision, the National Bank will focus on the provision of services, consumer protection and compliance with certain requirements by officials of financial companies;
  • Possibility of applying corrective measures – the National Bank will be able to apply corrective measures if the market participant has not yet violated the requirements of the law, but the National Bank already sees certain risks;
  • Lack of an exclusive activity – The provision of financial services will not be an exclusive activity. Companies will be able to carry out other economic activities (with appropriate restrictions) to fully realize their business opportunities.

A new approach to licensing financial companies and pawnshops

The bill fundamentally changes the approach to licensing. It allows to move away from licensing of certain types of financial services, instead to carry out comprehensive licensing of the type of activity of a financial institution simultaneously with the inclusion of such an institution in the relevant register. This will simplify the market access process and increase regulatory efficiency. During the company’s entry into the market, the regulator will comprehensively analyze its business model and the adequacy of resources for its implementation.

Now a legal entity that wants to provide financial services must first be entered in the state register of financial institutions, and then – to obtain a license for each of the types of financial services. The new approach stipulates that a legal entity may provide financial services immediately after obtaining a license to operate a financial company or a pawnshop.

The draft law also comprehensively regulates the key licensing principles practiced by the National Bank: transparent ownership of companies, clear and legal sources of capital, impeccable business reputation and financial condition of company owners, as well as quality corporate governance commensurate with the risks inherent in the financial institution.