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New Regulator for Non-Banking Institutions in Ukraine

10/ 07/ 2020
  Insurance, leasing and factoring companies, credit institutions and many other non-banking financial services companies in Ukraine are facing a new reality. Starting on 1 July 2020, the National Bank of Ukraine (the “NBU”) became their new regulator1. Transition Period The concepts of licensing non-banking financial institutions developed by the NBU have a number of innovations. Their implementation will be divided into two stages: before the adoption of new comprehensive laws and after. All major legislative acts for the registration and authorisation of non-banking financial companies continue to remain in full force and effect before the NBU develops the new regulations. This transition period implies that neither licensing nor registration processes face any significant changes regarding non-banking financial companies. The Split Law provides for the new gradual approach to market segmentation, licensing, supervision, reporting, inspections, corporate governance and consumer protection, with which the participants of the non-banking financial sector would need to comply with. Insurance Market Regulation Insurance companies as non-banking financial companies are exposed to the potential negative impact of risks that may threaten their solvency and have negative consequences for their customers. As the NBU stated, effective market regulation and supervision facilitates consumer confidence in the reliability of insurance companies. With the Split Law in force, the transition from some types of insurance to a single licensing procedure by insurance classes would help to reduce the number of procedures for the licensee that insurance companies face. The new approach would ensure high standards of protection of consumers’ rights and the rights of policyholders, and provide for transparency of the insurance market and increase its attractiveness to customers and investors. The introduction of a new model of regulation and supervision of the insurance market will help to achieve higher level of capitalisation, liquidity and stability of insurance companies as well as diversification of insurance products and increased competition. Leasing Companies Leasing companies will be able to combine the provision of financial services with certain types of ancillary operations such as insurance for the leased property; its repair and maintenance; sales of leased and foreclosed property; renting and consulting services and some others. Importantly, the requirements for lessor-financial companies and lessor-legal entitles have been unified and the latter will automatically be re-registered as financial companies. This new approach should result in strengthening the requirements relating to the ownership structure, capital, business reputation and reporting by leasing companies. Factoring and Debt Collection Companies As a non-banking financial activity, factoring currently poses a minor risk to the financial system and, as a result, is subject to simplified regulation and supervision by the NBU. One of the key factors influencing the assessment of this risk is that factoring companies operate without raising funds from the public. Factoring companies will now be able to provide financial services under one licence. The requirements for factoring activity will be established depending on the particular services. Factoring companies can offer a wider range of activities, including lending, financial leasing and currency trading, and will be able to provide non-financial support services as well as other transactions required to provide financial services. Pawnshops Pawnshops are now subject to the NBU regulation. Among the newly adopted amendments is the transition to one licence, which covers several types of financial services. Simultaneously with the issuance of the licence, information about the pawnshop will be included in the Register of Financial Institutions. Having lending as their principal activity (but not exclusive as before), pawnshops will be able to provide loans secured by assets along with non-financial supporting services. Pawnshops will be entitled to transfer funds without opening accounts, perform cash currency exchanges, and provide other financial services. Common Standards The NBU intends to establish common standards of activity in financial services companies. Simultaneously with the issuance of a licence to operate a financial company, information about the company will be entered in the Register of Financial Institutions. This approach will significantly simplify the licensing procedure by merging obtaining a licence and registration of the applicant into a single procedure. Overall, the NBU will supervise activities on the market of non-banking financial services in the form of off-site and on-site supervision. The key supervision principles will be proportionality and a risk-oriented approach. While insurance companies and credit unions operate with funds raised from customers (private individuals or businesses), other financial institutions operate using their own equity. The main task of the new regulator is to make supervision over non-banking activities adequate to the risks, and choosing the intensity of supervision according to the risk category. Additionally, in the supervision of the non-banking financial services market, the NBU intends to gradually introduce early detection of potential risks and early intervention before the relevant risks are revealed and caused harm to consumers. Conclusion According to the NBU, the Split Law should ensure transparency, reliability and efficiency in the non-banking financial market. As the transitional period is pending, the NBU is working on draft laws and other regulations based on the European Union legislation to implement the new model of regulation and supervision. For more information, please contact our local experts: Ihor Olekhov Partner, Head of Banking and Finance, CMS Cameron McKenna Nabarro Olswang Iryna Kravchenko Lawyer, Banking and Finance, CMS Cameron McKenna Nabarro Olswang ____________________________________ 1 The NBU assumed a new supervisory authority pursuant to the Law of Ukraine No. 79-IX dated 12 September 2019 “On Amendments to the Law of Ukraine ‘On Financial Services and State Regulation Financial Services Markets and to the Laws Governing Certain Financial Services Markets’ and to the Laws Governing Certain Financial Services Markets” (the “Split Law”).

Insurance, leasing and factoring companies, credit institutions and many other non-banking financial services companies in Ukraine are facing a new reality. Starting on 1 July 2020, the National Bank of Ukraine (the “NBU”) became their new regulator1.

Transition Period

The concepts of licensing non-banking financial institutions developed by the NBU have a number of innovations. Their implementation will be divided into two stages: before the adoption of new comprehensive laws and after. All major legislative acts for the registration and authorisation of non-banking financial companies continue to remain in full force and effect before the NBU develops the new regulations. This transition period implies that neither licensing nor registration processes face any significant changes regarding non-banking financial companies. The Split Law provides for the new gradual approach to market segmentation, licensing, supervision, reporting, inspections, corporate governance and consumer protection, with which the participants of the non-banking financial sector would need to comply with.

Insurance Market Regulation

Insurance companies as non-banking financial companies are exposed to the potential negative impact of risks that may threaten their solvency and have negative consequences for their customers. As the NBU stated, effective market regulation and supervision facilitates consumer confidence in the reliability of insurance companies. With the Split Law in force, the transition from some types of insurance to a single licensing procedure by insurance classes would help to reduce the number of procedures for the licensee that insurance companies face. The new approach would ensure high standards of protection of consumers’ rights and the rights of policyholders, and provide for transparency of the insurance market and increase its attractiveness to customers and investors.

The introduction of a new model of regulation and supervision of the insurance market will help to achieve higher level of capitalisation, liquidity and stability of insurance companies as well as diversification of insurance products and increased competition.

Leasing Companies

Leasing companies will be able to combine the provision of financial services with certain types of ancillary operations such as insurance for the leased property; its repair and maintenance; sales of leased and foreclosed property; renting and consulting services and some others.

Importantly, the requirements for lessor-financial companies and lessor-legal entitles have been unified and the latter will automatically be re-registered as financial companies. This new approach should result in strengthening the requirements relating to the ownership structure, capital, business reputation and reporting by leasing companies.

Factoring and Debt Collection Companies

As a non-banking financial activity, factoring currently poses a minor risk to the financial system and, as a result, is subject to simplified regulation and supervision by the NBU. One of the key factors influencing the assessment of this risk is that factoring companies operate without raising funds from the public.

Factoring companies will now be able to provide financial services under one licence. The requirements for factoring activity will be established depending on the particular services. Factoring companies can offer a wider range of activities, including lending, financial leasing and currency trading, and will be able to provide non-financial support services as well as other transactions required to provide financial services.

Pawnshops

Pawnshops are now subject to the NBU regulation. Among the newly adopted amendments is the transition to one licence, which covers several types of financial services. Simultaneously with the issuance of the licence, information about the pawnshop will be included in the Register of Financial Institutions. Having lending as their principal activity (but not exclusive as before), pawnshops will be able to provide loans secured by assets along with non-financial supporting services. Pawnshops will be entitled to transfer funds without opening accounts, perform cash currency exchanges, and provide other financial services.

Common Standards

The NBU intends to establish common standards of activity in financial services companies. Simultaneously with the issuance of a licence to operate a financial company, information about the company will be entered in the Register of Financial Institutions. This approach will significantly simplify the licensing procedure by merging obtaining a licence and registration of the applicant into a single procedure.

Overall, the NBU will supervise activities on the market of non-banking financial services in the form of off-site and on-site supervision. The key supervision principles will be proportionality and a risk-oriented approach. While insurance companies and credit unions operate with funds raised from customers (private individuals or businesses), other financial institutions operate using their own equity. The main task of the new regulator is to make supervision over non-banking activities adequate to the risks, and choosing the intensity of supervision according to the risk category. Additionally, in the supervision of the non-banking financial services market, the NBU intends to gradually introduce early detection of potential risks and early intervention before the relevant risks are revealed and caused harm to consumers.

Conclusion

According to the NBU, the Split Law should ensure transparency, reliability and efficiency in the non-banking financial market. As the transitional period is pending, the NBU is working on draft laws and other regulations based on the European Union legislation to implement the new model of regulation and supervision.

For more information, please contact our local experts:

Ihor Olekhov

Partner, Head of Banking and Finance, CMS Cameron McKenna Nabarro Olswang

Iryna Kravchenko

Lawyer, Banking and Finance, CMS Cameron McKenna Nabarro Olswang

____________________________________

1 The NBU assumed a new supervisory authority pursuant to the Law of Ukraine No. 79-IX dated 12 September 2019 “On Amendments to the Law of Ukraine ‘On Financial Services and State Regulation Financial Services Markets and to the Laws Governing Certain Financial Services Markets’ and to the Laws Governing Certain Financial Services Markets” (the “Split Law”).

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