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NBU Assumes Mandate to Regulate Nonbank Financial Markets

NBU Assumes Mandate to Regulate Nonbank Financial Markets

“This day, 1 July 2020, marks a new milestone in the development of the nonbank market, which will bring great challenges as well as great opportunities for both the market and consumers. SPLIT is one of the biggest reforms of the financial market and one of the most complicated, since it requires both transformation of the NBU and readjustment of the market players, as well as parallel development of  the roadmaps for each segment of the nonbank financial market”, noted Yakiv Smolii, NBU Governor. 

Benefits of the Reform

In the last five years, the reform of the financial sector advanced macrofinancial stability and improved financial resilience, soundness and transparency of banks. SPLIT enables the NBU to ensure financial stability in a more comprehensive and effective way through regulating not just the banking sector, but the nonbanking sector as well. Furthermore, SPLIT will favor Ukraine’s integration into the EU as to the implementation of directives and other EU instruments and bring the legal framework in line with the international standards.

New regulation and supervision of the nonbank financial sector is implemented according to the international standards similar to the banking sector.

Accumulated market issues require an update of operation rules, transparent business conditions, and effective regulation. The reform of the nonbanking sector will advance stable development of the national economy and create opportunities for further evolvement and improvement of the market.

“We are certain that bona fide market players are interested in creating transparent and favorable business conditions and will be ready to join forces to reform and develop the sector, expand financial inclusion, and introduce innovations,” said Yakiv Smolii. “And this will strengthen financial stability and benefit macroeconomic development in general, and create favorable conditions and new opportunities for growth for each participant of the nonbanking sector in particular.”

Priority Tasks of the Regulator

The NBU aims to form a solvent, stable, competitive market of nonbank financial services in Ukraine with proper consumer rights protection in these services and financial institutions. To meet the target the NBU has defined the following priority tasks:

  • creating and introducing an integrated model of supervision and regulation of the financial markets
  • further reforming and developing the sector in line with international best practices, the EU-Ukraine Association Agreement, and Ukraine’s other international commitments
  • building up trust to the market of nonbank financial institutions
  • enhancing protection of consumer rights and interests in financial services
  • developing financial instruments and the financial market infrastructure.

Comprehensive Revision of the Legal Framework

Together with experts and market players the NBU is drafting proposals on key draft laws on regulating markets of nonbank financial services. In particular, the Draft Law of Ukraine On Financial Services and Rendering of Financial Services has already been referred to the relevant parliamentary committee. Proposals for new versions of Laws On Credit Unions, On Insurance, and On Financial Companies are being drafted and will be presented in the near future. Drafting of new laws, On Mandatory Third Party Liability Insurance of Owners of Land Motor Vehicles and On Insurance Distribution, will start soon.

“Ukrainian laws regulating the nonbanking financial sector have not changed for years, and sometimes – decades. Thus the main task for the regulator and the market is to prepare proposals to draft laws intended to introduce modern regulation and supervision of the market, and most importantly, build foundation for business growth,” commented Dmytro Sologub, Deputy Governor.

Enhancing Consumer Rights Protection

The NBU pays special attention to consumer rights protection, since only accurate information on financial services and respective consumer trust create demand and advance stable market growth. In this area, the NBU will focus on handling public requests and classification of found violations and key deficiencies in operation of nonbank financial institutions, providing quick and proper response. Furthermore, regulation will cover integrity of advertisements and complete disclosure of information on services.

Based on the collected information and examination of problem issues arising from incomplete or concealed disclosure of information on services, recommendations will be drawn up for nonbank financial institutions on effective handling of customer complaints, and together with the market payers new requirements will be drafted to disclosure of information on services in advertisements and on websites.

Risk-Based Regulation and Supervision Model

Regulation and supervision model of financial institutions, similar to bank supervision, will be risk-based.

The new model prescribes requirements to licensing, assessment of solvency and liquidity, corporate governance, and the risk management system, “Ukrainian laws regulating the nonbanking financial sector have not changed for years, and sometimes – decades. Thus the main task for the regulator and the market is to prepare proposals to draft laws intended to introduce modern regulation and supervision of the market, and most importantly, build foundation for business growth,” commented Dmytro Sologub, Deputy Governor.of risk-based prudential supervision, market conduct supervision, as well as procedures of organization, business recover and resolution.

Regulation of each market segment will differ depending on whether a particular financial institution raises customer funds. Thus, banks, insurance companies, and credit unions operate on the account of customer funds from households and businesses, while other financial institutions operate using their own equity. The main task of the regulator is to adequately match supervision of such institutions with the inherent risks of each particular institution. At the same time companies relying on equity should not be overcrowded by the regulator.

“The new regulation model will provide a more effective, transparent, and reliable financial system complying with international standards. Our joint mission, on the one hand, is to find new growth opportunities for each segment of the nonbank financial market and, on the other hand, to safeguard consumer rights in nonbank financial services,” noted Kateryna Rozhkova, First Deputy Governor.

Adaptive Financial Sector Regulation

For the purpose of regulating the nonbank financial sector, the NBU tends toward reasoned and gradual changes in the financial market that will be preceded by thorough examining of issues and discussions with market players. The new regulatory model is to be introduced gradually with consideration to the current economic situation and challenges at hand.

Bearing in mind major differences between the banking and the nonbanking components of the financial market, supervisory functions will be segregated. Thus, the main supervisory mandate regarding nonbank financial institutions will be exercised by the special Committee on Supervision and Regulation of Nonbank Financial Institutions. Also, the NBU has established separate units that will supervise nonbank financial institutions.

The NBU believes that by building a new regulation model the NBU will create conditions for developing new financial instruments and business models as required by the fast-changing environment in Ukraine and globally.

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