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Bank of Russia’s 202 Good Deeds

18.03.2014 00:05 / RBC - daily

“They asked us what we want. For the financial market, it is a first”, responded licensed participants when the megaregulator approached them for KPI suggestions. Last October, the Bank of Russia warned that oversight and regulation will tighten in order to win the people’s trust and create long-term money.

It took market participants a few months to prepare their proposals for the Bank of Russia: they formed 9 working groups (by market sector), meticulously identified every problem and set KPIs. The end result was a list of “202 good deeds” for the megaregulator. KPIs were presented at the MIFC Taskforce’s annual strategic session (Bank of Russia’s Financial Market Service Head Sergey Shvetsov got to see an advance copy). Non-state pension funds ask to intervene in the reform, insurers ask for electronic car insurance policies, brokers want tax incentives for private investors, and all of them pleaded for the market to be cleaned of fraudulent participants.

“I heard that the market wants transparency. That is what matters”, said Sergey Shvetsov. “The important part is that the idea comes from the market. There is demand for quality oversight. The same KPI has been set by the president. We are lucky that the market and the authorities want the same thing”.

Financial Market Service Head refrained from promises. “We will announce which KPIs will be taken on, which ones we will have to leave out and which ones we disagree with”, he said. Interestingly enough, the Bank of Russia transformed the proposals into 233 KPIs spanning the entire financial market.

In March 2014, Bank of Russia’s Financial Market Service, in place since 1 September 2013, ceased to exist. Six months ago, Federal Financial Markets Service, the non-bank supervisor, was liquidated. Originally, BRFMS was supposed to last longer, however, the Bank of Russia Board of Directors announced in early December that ‘full integration’ is necessary.

The megaregulator set three key tasks for the financial sector: regulation and oversight, financial market development, customer rights protection. Earlier the regulator was not responsible for market development. “Customer protection rights is not something the CB would do prior to the megaregulator. It had the knowledge, but not been part of this effort”, explains a CB official.

The new reorganization phase and the new regulator is mainly result from the need to separate the three elements. “These functions often contradict one another. It is very hard to set risk management rules and develop the market at the same time: the rules must be conservative, the market needs liberalism”, says our source.

Insurers

It had been clear long before the new regulator commenced work that insurance companies will be put under strict supervision. Today’s Head of the Bank of Russia Elvira Nabiullina lobbied the application of the Customer Rights Protection Act to insurance when she was still Aide to the President.

“In the financial market, we are aiming to achieve the same regulation and oversight level that we already have in place in banking”, admit our CB sources. They say risk oriented oversight elements are long overdue for insurers.

Several restrictions are already in place. For instance, the latest draft of the Bank of Russia regulation on structure and procedure of insurance reserves bans promissory notes. “Companies have been given a sign that it is time to address capital quality. We know that insurers have heard us. We will check later”, says a Bank of Russia source. Alsom the Top 100 insurance companies will be monitored by specially designated officers, just like banks.

Parallel to this, new types of insurance are being developed, while existing ones are undergoing troubleshooting, with extra focus on Compulsory Motor Third Party Liability insurance. CMTPL Act amendments are drafted under Central Bank guidance. CB experts push for higher payouts (3-plus times), implementation of the Euro-protocol (incident reports without police involvement), besides, the CB is looking into a possible fee increase for this type of insurance.

Both insurers and CB experts expect the market to shrink. “Unofficially, the regulator informs us that out of 470 licensed companies, a maximum of 260 are actively involved in insurance business”, President of the All-Russia Insurers Union Igor Jurgens told RBC Daily, indicating that these can potentially be expelled. In the past 6 months, 23 companies left the insurance business.

Pensions

The Bank of Russia started tackling pensions at the apex of the reform effort. CB intervention in the passing of pension bills de facto saved NPFs from clients switching funds on annual basis (now the insurance policy holder can change funds annually, but has to accept investment risks; NPFs carry the risks only if the client stays with them for over five years).

Protracted debate over pension reform circumvented the Bank of Russia (NPF market regulation, and especially its development have never been part of the CB mandate), however, the hastily adopted act is now the regulator’s problem — procedures for corporatization and admission to the guarantee system require clarification. At a recent meeting hosted by Vice Prime Minister Igor Shuvalov CB representatives assured market participants that clarifications are due in the nearest future. Bank of Russia reps promised to make the guarantee system admission criteria “strict to the maximum”. As a reward for successful qualification, NPFs are entitled to manage end-2013 frozen pension savings — the go-ahead will follow immediately after the fund has been listed in the guarantee system registrar.

Asset Management

Asset management companies have their own first impressions of the new megaregulator: they had to change the CB perception of the industry. In October, Sergey Shvetsov told MIFC Strategic Session that the collective investment sector presents the most problems. The reason lies in closed-end share investment funds. Shvetsov dubbed them ‘a balance-drawing instrument’, stressing that ‘self-regulation in this market overlooks grey schemes’.

The Bank of Russia intends to impose tight limits on asset management companies as well as other market participants: for instance, the Bank of Russia has recently instructed them on monitoring suspicious clients. Late last year, the regulator demanded that asset managers submit internal control rules in order to assess their compliance with anti-money laundering law. The CB announced that the results show ‘empty phrases’ and ‘blurred definitions’, issuing a recommendation to bring the documents in compliance. “The regulator, as always, cares about the actual mechanism and procedures, not the formalities”, says General Director at Alpha Capital Asset Management Irina Krivosheeva.

Oversight

The rest of financial market participants have not noticed significant change yet. “We have not gotten to them yet”, jokes the Bank of Russia. The past six months was a complex period for the CB — too much effort went into reorganization, leaving time only for the most critical issues.

Licensed stock market participants fear the new regulator may adjust financial markets oversight to banking standard. “I wonder why the market makes a fuss over this. We do know the sector specifics”, says a CB representative. “Insurance companies, asset managers and NPFs are well suited to risk-oriented oversight, while brokers, dealers and licensed participants are largely running a high-risk venture business (a strategy that can lead to high yield or high loss)”, he explains, adding that these companies will still be subject to conduct-based oversight.

Bank of Russia Financial Market Regulation and Development Priorities

Consolidated oversight. CB sources claim the synergy is already in place. For instance, when bank licenses were revoked, CBFMS analyzed the implications for companies linked with the banks. When a centralized database is in place, this task will be performed automatically.

Passing a universal bankruptcy law. Today, the ground rules are laid by Insolvency Act that covers bankruptcy procedures for all companies, while there is also a separate Bank Insolvency Act. The effort will focus primarily on bailout and bankruptcy mechanisms for infrastructure objects (such as the exchange). “Continuity of their operation is crucial. Suspension could kill the market”, says a source. Norms for other market participants will also be reviewed. For instance, administration is planned for earlier stages of financial instability.

SRO implementation. Despite SROs existing in almost all financial market segments, Bank of Russia reps talk ‘implementation’ per se. “Existing SROs are no good. A key point for us is mandatory membership, which allows us to enforce standard compliance”, sources say. The issue that the Bank of Russia repeatedly fails to resolve with the market is mandatory pre-approval of the SRO budget and CEO. Market participants think that these parameters transform the SRO into a CB department. “We must see that the SRO has enough resources to hire qualified professionals to run company checks”, counters the CB.

On 10 December 2013, the Central Bank HQ set up 9 financial market divisions. Following the liquidation of the Central Bank Financial Markets Service, its officers joined the ranks of these departments and divisions. At the moment of writing, the Bank of Russia has officially announced the appointment of seven department heads — Philipp Gabunia, Elena Chaikovskaya, Larisa Selyutina, Elena Kuritsyna, Igor Zhuk, Valery Lyakh and Mikhail Mamuta.

According to a CBFMS representative, 95% of the Service has joined the Bank of Russia during reorganization. Despite this, the structure is understaffed. Reportedly, the CB is headhunting market professionals.

Ekaterina Metelitsa

Financial markets megaregulatorProject Group №1