It has been exactly one year since the NBU received the mandate to regulate nonbank financial services markets. Insurers, insurance brokers, credit unions, certain finance companies, pawnshops, lessor legal entities, and credit bureaus came under the NBU’s regulation and supervision.
This first year was a transition period during which the NBU worked to improve the current regulatory framework for the nonbank financial market. As it pursued this goal, the NBU remained consistent: it refrained from introducing new strict requirements for market participants, allowed them time to adapt to innovations, and applied its first corrective actions only eight months after acquiring the NBFI regulator mandate.
Overhaul of the legal framework
Needless to say, the current regulatory framework is outdated and needs a revision. Most of the current laws governing the activities of insurers, credit unions, finance companies, and other market participants were passed more than two decades ago. These laws do not meet the needs of market practitioners and are lagging behind global best practices.
Obsolete legislation and the lack of proper regulation hinder the progress of the nonbank financial market and lead to the accumulation of systemic problems. As a result, public confidence is weak, and the spread of financial services throughout Ukraine is slow.
In 2020, the NBU drew up Draft Laws On Financial Services and Finance Companies (No. 5065), On Insurance (No. 5315), and On Credit Unions (No. 5125). All of these have already passed first reading by the Verkhovna Rada, and the NBU is awaiting the second-reading and final passage of these documents.
In addition, the Verkhovna Rada has already passed the second reading, and the entirety, of a raft of important documents such as the Laws On Financial Leasing, On Payment Services, On Amendments to Certain Laws of Ukraine Concerning Debtor Protection in Settlement of Overdue Debts, and On Amendments to the Tax Code of Ukraine on Improving the Regulatory Framework for the Insurance of Agricultural Products Supported by the State.
The NBU’s immediate and most important plans include preparing legislative proposals to create a system to guarantee deposits of credit union members and payments under life insurance contracts. The regulator will also propose to update the Law of Ukraine On Compulsory Third-Party Insurance against Civil Liability in Respect of the Use of Land Motor Vehicles.
As part of these efforts, the NBU will continue to work proactively to develop regulations that update the quality of the regulation of the nonbank financial services market.
Self-cleaning market
As of 1 July 2021, the nonbank financial market was made up of 1,872 companies. Those included 181 insurers, 308 credit unions, 958 finance companies, 287 pawnshops, and 138 lessor legal entities.
The overall number of NBFIs has decreased by 103 over the past year. At the same time, for insurers, credit unions, and pawnshops, the decline in their number has been a stable trend for at least the past five years.
In the vast majority of these cases, market participants decided to shut down voluntarily. Most of these businesses had been virtually dormant. The rest of these companies had been operational but struggled to meet required ratios and decided to quit to preserve their business reputation.
However, new businesses did enter the market during the year. Specifically, the authorities registered 53 new finance companies, 11 lessor legal entities, three new pawnshops, and one credit union.
Another distinguishing feature of Ukraine’s nonbank financial market is its large share of dormant companies. These businesses report to the NBU, but their financial statements display zeros instead of real economic performance numbers. In particular, more than 10% of pawnshops, 21% of finance companies, and 36% of lessor legal entities are dormant.
Size of the nonbank financial market
The nonbank financial market in Ukraine is small compared to other European countries, implying significant potential for growth. The nonbank financial institutions (NBFIs) supervised by the NBU jointly account for 11% of the financial sector’s assets.
Finance companies held UAH 162 billion in assets as of 1 April 2021, more than any other NBFIs. Finance companies’ assets have grown over the past year. Insurers’ assets have remained virtually unchanged, at UAH 64 billion. Credit unions and pawnshops have seen their assets decline by 8% and 10% (to UAH 2.3 billion and UAH 3.9 billion, respectively).
The pandemic and the voluntary withdrawal of companies from the market have been major drivers of asset dynamics.
Supervisory actions in the nonbank financial market
The NBU is monitoring whether NBFIs meet required ratios. Specifically, 44 insurance companies (a quarter of the insurance market) failed to meet the ratios at the end of Q1 2021. At the same time, all of the largest insurers complied with these ratios.
In the credit unions market, 53 NBFIs (17% of the market) were in breach of the ratios. But there is another side to this coin: the largest credit unions are also the most risky. On top of that, 19 finance companies, 88 financial guarantor companies, and 6 pawnshops were in violation of the required ratios.
As a result, the NBU applied corrective actions to a number of NBFIs. In particular, the licenses of 10 insurers were suspended, and some of these NBFIs were subjected to the “remedy your violations by this deadline” corrective action. In addition, four credit unions had their licenses suspended, while the rest of the violators in this NBFI group were obliged to correct their shortcomings.
When applying its corrective actions, the NBU takes into account the nature of violations and the ability of companies to meet their customer commitments.
Safeguarding the rights of financial service consumers
Starting 1 July 2020, individuals can apply to the NBU for clarifications and assistance in resolving their disputes with financial institutions. An analysis of people’s appeals has revealed problems that require intervention and a comprehensive approach both at the level of legislation and in terms of efforts to increase consumers’ awareness of their rights and responsibilities.
Over the past year, the NBU has developed several regulations that introduce additional supervision. Those include the Regulation On Supervision of Compliance with Consumer Rights Protection Legislation, which took effect on 14 July 2021. What is more, documents are being drafted that govern the disclosure of the full cost of a loan, its terms, and risks to the borrower. These regulations should establish requirements for loan agreements and more. These regulations are intended to provide transparent, high-quality, complete, and reliable information to customers (primarily about loans). Work is also underway on other important documents in the field of consumer protection.
Apart from working to improve legislation, the NBU has launched a campaign to inform the public. This effort aims to explain the rules of law in plain language, to make people aware of their rights, to teach them how to protect themselves, and to remind them that they would be wise to diligently meet their contractual obligations.
At present, the most acute problem in consumer protection remains the activities of debt collection agencies and finance companies that make loans. An analysis of consumer appeals has revealed numerous violations and cases of unethical behavior by employees in charge of debt collection. To fix these problems, the rules of operation for collectors have been written into law. Violations are met with sanctions, from fines to exclusion from the Register of Debt Collection Agencies.
The top priority this year with regard to NBFIs is direct supervision of nonbank financial market participants and elimination of violations of financial service consumers’ rights.