National Bank of Ukraine Reviews Bank Licensing Processes

The National Bank of Ukraine (NBU) has completed a comprehensive review of legal regulation of bank licensing processes that began in October 2017.

This resulted in adoption of the Regulation on Bank Licensing (hereinafter referred to as “Provision No. 149”) that was approved on 22 December 2018 by NBU Board Resolution No. 149. This document replaced the former Regulation No. 306 adopted in 2011.

“The NBU has offered the market a brand new document intended to convert from the formalistic to the risk-based approach to bank licensing and to provide the regulator with new instruments for analysis as part of the approval procedures,” noted Oleksandr Bevz, Director of the NBU Licensing Department.

One of the key novelties of the legal regulation of bank licensing set out in Regulation No. 149 are as follows:

Assessment of the financial standing of legal entities and individuals

1. The criteria were detailed for assessing the financial standing of the parties subject to due diligence depending on the entity type and circumstances of such assessment.

2. The requirements were set to the business plan to be submitted to the NBU when a legal entity applies for a banking license, as well as when a person intends to acquire control of an operating bank.

3. The requirements were set to the potential controller regarding submission to the NBU of information on financial resources intended for financial assistance to the bank in line with the business plan.

4. The approach was changed to evaluating adequacy of own funds in case of acquiring or increasing a qualifying holding in the bank, namely comparing such evaluation with the following indicators:

• regulatory capital of the bank*
• minimum regulatory capital set for banks by the NBU*
• the price of acquiring/increasing a qualifying holding in the bank.

*the figure corresponds to the share in the authorized capital of the bank to be acquired/increased

5. The approaches were changed to assessing financial soundness of legal entities:

• an exhaustive list of solvency indicators was replaced with recommended indicators of financial soundness 
• a requirement was set to perform an industry-specific assessment of legal entities
• not only auditors, but also other consultants are authorized to conduct assessment.

6. Stricter requirements were introduced to the sources of own funds of individuals for capitalization of the bank and acquiring/increasing a qualifying holding. Specifically, on the requirement concerning mandatory storage of such funds in cashless form throughout one year.

7. Individuals were released from submitting to the NBU the confirmation of own funds/property source, if such funds were their property for over 15 years consecutively and are free and clear of any claims of the third parties.

Evaluation of business reputation of legal entities and individuals

1. The NBU has classified all signs of the flawed business reputation in four groups:

• the first group covers signs associated with compliance with laws and the public order; if such signs are found, the NBU is compelled to recognize the business reputation is flawed
• three other groups include signs associated with discharge of liabilities, professional activity, and positions or qualifying holdings in insolvent banks eligible for the whitewashing procedure. According to this procedure, the decision on the business reputation of a person is at the NBU’s discretion.

2. The NBU was granted the right to decide on the flawed business reputation of a person if no signs directly defined in Regulation No. 149 were found and other factors were uncovered evidencing the flawed business reputation of a person. In particular, this covers a repeated violation of laws, standards of business ethics etc.

Approval of acquiring or increasing a qualifying holding in the bank

1. Special terms were approved for different types of acquiring/increasing a qualifying holding, in particular:

• in case of intergroup restructuring, if intermediate companies change while the ultimate owner of the bank remains the same, documents are submitted only on such intermediate companies
• if a qualifying holding is acquired/increased under a power of attorney or an asset management agreement.

2. A prohibition was imposed on banks to manage their own shares and shares/holdings in its ownership chain (banks were granted one year to cease such management).

Managers of the bank

1. Additional suitability requirements were imposed on  bank’s managers. This covers lack of conflict of interest and ability to devote enough time to perform his/her obligations.

3. Additional requirements were introduced for independent directors of banks. Specifically, independent directors shall not be qualifying holders in the bank.
4. The list of persons subject to the NBU mandatory testing and interview was extended. Such list now includes an independent director, members of the board responsible for risk management (CRO) and compliance (CCO).

Opening standalone units of banks and launching new lines of business

1. Regulation No. 149 prescribes liberalization of requirements to opening standalone units and launching new lines of business. In particular, the majority of formal requirements were replaced with an economic feasibility condition for opening/launching a line of business, as well as its compliance with the bank’s strategy and business plan.
2. The period for suspending operations of a standalone unit will be significantly extended (from one business day to three months) and should be reported to the NBU.

Safeguarding rights of persons with reduced mobility

The NBU has compelled banks to enable access to all premises to people with disabilities and other persons with reduced mobility in line with the state construction standards and rules (with documented confirmation issued by a certified specialist).

A transition period was set for bringing the banks’ premises in line with said requirements:

• in the first year – at least 50% of the premises in Kyiv, oblast centers, and cities with the population over 300,000,
  at least 30% of the premises in other communities of Ukraine
• in the second year – all premises in Kyiv, oblast centers, and cities with the population over 300,000,
  at least 70% of the premises in other communities of Ukraine
• in the third year – all premises.

Regulation No. 149 also prescribes specific modifications:

First, in order to promote implementation of the document its structure is process-oriented. This principle means regulation of each process in a specific section and definition of common provisions for all processes in the first three “general provisions” sections of Regulation No. 149.

Second, Regulation No. 149 is the first regulation to define the NBU’s operating principles regarding bank licensing that cover:

• consistency of substance and form (deals, operation and events are assessed according to the economic and legal substance, and the nature)
• proportionality of regulatory requirements (terms and conditions of a specific circumstance are considered, where Regulation No. 149 is applied) 
• legal certainty and reasonable doubt (specific requirements were set to banks and their owners, at the same time if further information is required, the NBU has the right to request additional information)
• comprehensive analysis (exhaustive analysis of each person filing documents in line with Regulation No. 149).

In addition, Regulation No. 149 provides that the NBU shall resort to a professional judgement for decision-making.

Regulation No. 149 that will enter into effect on 29 December 2018 was drafted with consideration to Core Principles for Effective Banking Supervision of the Basel Committee, reviewed requirements of Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, as well as EBA Joint Guidelines on the prudential assessment of acquisitions and increases of qualifying holdings in the financial sector and EBA Joint Guidelines on the assessment of the suitability of members of the management body and key function holders.

For document forms to be submitted to the NBU for the purpose of procedures set out in Regulation No. 149 follow the link.