Ukraine’s Financial Sector Regulation Is Now Much Closer to EU Standards

As it conducts reforms and builds a reliable regulatory environment for all financial market participants, the NBU prioritizes the full implementation of the EU-Ukraine Association Agreement, as well as EU acquis.

“It is in financial services that the greatest progress was made in 2021 in implementing the Association Agreement between the EU and Ukraine. Compared to 2020, the Agreement implementation rate increased by 26% and stands at 62%, according to data from Ukraine’s government. Remarkably, as of today, the NBU has completed 85% of the tasks it had committed to fulfill under the Agreement, according to our estimates based on data from the government monitoring system Pulse of the Agreement,” said NBU Governor Kyrylo Shevchenko.

In conjunction with the NBU, the Verkhovna Rada in 2021 passed important legislation that incorporates the provisions of EU acquis regarding financial services and implements major EU directives and regulations in this area.

Specifically, the Verkhovna Rada in June 2021 passed the Law On Amendments to Certain Laws of Ukraine on Improving Corporate Governance in Banks and Other Operational Issues of the Banking System (Law No. 1587–IX).

These amendments implement global best practices in banking sector regulation (in particular, by taking into account the Core Principles for Effective Banking Supervision and the Corporate Governance Principles for Banks of the Basel Committee on Banking Supervision) and bring Ukrainian banking legislation into alignment with EU acquis (by incorporating the provisions of Directive 2013/36/EU and Regulation (EU) 575/2013). 

This law tightened corporate governance requirements for banks, updated capital adequacy and liquidity requirements, and expanded the NBU’s supervisory powers. In particular, the responsibility of banks’ governing bodies for their decisions was increased. Additional requirements were established for members of banks’ supervisory boards and boards of directors, including their collective suitability. Requirements for internal control systems of banks were streamlined. The law also provided for the introduction of requirements for a new capital structure, combined capital buffers, and an internal capital adequacy and liquidity assessment that takes into account the risks inherent in banks’ activities.

The law grants a three-year period in which to implement some of these requirements.

The law’s implementation will help shore up the banking system’s stability, safeguard the interests of depositors and other bank creditors, and bolster public confidence in the Ukrainian banking system.

In order to implement the provisions of this law, the NBU approved a number of regulations on, among other things, the organization of corporate governance in banks, the internal capital adequacy assessment process in banks and banking groups, and the supervision of banks on a consolidated basis.

An equally important step was the passage by the Verkhovna Rada in June 2021 of the Law On Payment Services (Law No. 1591–IX), which had been drafted in line with EU acquis, including Directive (EU) 2015/2366 and Directive 2009/110/EU. Its implementation will modernize the Ukrainian payment market, lay the groundwork for its development, and build a legal framework to integrate Ukraine’s and the EU’s payment systems.

The main provisions of the law take effect on 1 August 2022, and the NBU has already been working nonstop to draw up and update its own regulatory framework in accordance with these provisions. That includes the expected introduction and streamlining of regulations governing cashless payments, the opening and closing of user accounts by payment service providers, the conduct of electronic money transactions, the execution of interbank payment transactions, the engagement of commercial agents to provide financial payment services, the authorization of payment service providers, the registration of payment systems, their participants, and technical service providers, the oversite of payment infrastructure, and more.

In 2020, having acquired the mandate to regulate and supervise nonbank financial institutions, the NBU launched the reform of the sector in line with global best practices and relevant EU regulations it had committed to implement under the EU-Ukraine Association Agreement.

The Law On Insurance (Law No. 1909–IX) was drafted jointly with European experts and passed by the Verkhovna Rada in November 2021. This document incorporates the provisions of Directive 2009/138/EU and Directive (EU) 2016/97.

The law introduces a new model of regulation that aims to establish in Ukraine a solvent, stable, and competitive insurance market that will adequately protect the rights of insurance services consumers. The document envisages, among other things, improving licensing requirements for insurers, assessing their solvency and liquidity, building an effective corporate governance system, applying risk-based prudential supervision, introducing procedures to resolve insurers and transfer the insurance portfolio, and setting new requirements for insurance intermediaries.

Most provisions of this law take effect on 1 January 2024. The NBU is working hard to develop the regulations necessary for its implementation.

In addition, in order to overhaul Ukraine’s financial sector and bring its regulation closer to European standards and norms, the NBU in 2021 did as follows:

•  drew up draft law proposals to update the regulation of the nonbank financial services market. The Verkhovna Rada passed the Law On Financial Services and Finance Companies (Law No. 1953–IX) in December. The draft Law of Ukraine On Credit Unions (registered as No. 5125) is currently being prepared for second reading.
•  approved regulations that improve the regulation and supervision of nonbank financial institutions, the supervision of nonbank financial groups on a consolidated basis, the protection of the rights of financial services consumers, and information security and cyber security.
•  continued, amid favorable conditions and the stable situation in the financial markets, to take steps towards currency liberalization under the Roadmap to Cancel FX Restrictions, which was developed jointly with IMF experts. In particular, the central bank allowed businesses to buy an equivalent of EUR 100,000 per day in foreign currency without any justification or commitments, and expanded the opportunities for households to invest abroad by raising the annual e-limit for a number of FX transactions by individuals from EUR 100,000 to EUR 200,000.

In 2021, the NBU took active part in the dialogue with the EU. Among other activities, the central bank participated in the work of bilateral EU-Ukraine bodies, including the EU-Ukraine Association Committee in Trade Configuration, held regular business meetings with European Commission representatives, and collaborated with EU regulators (European Banking Authority, and European Insurance and Occupational Pensions Authority). The NBU has also been cooperating effectively with the central banks of EU member states on a regular basis.