After assuming the regulatory functions of nonbank financial institutions, the National Bank of Ukraine (NBU) has drafted and released the new Draft Law of Ukraine On Credit Unions. The suggested draft law embodies the vision of general operational framework and the future regulation of credit unions that were highlighted in March this year in the White Paper.
This document is the second of six draft laws intended to improve legal framework regulating the markets of nonbank financial services. Please be reminded, that earlier the NBU released motions to the Draft Law On Financial Services and Rendering of Financial Services.
If adopted, the Draft Law On Credit Unions in the version proposed by the NBU will create for the market players new quality business rules, expand possibilities and prospects for the development of credit unions, as well as update requirements for regulation and supervision taking into account international standards and practices and successful experience of foreign regulators of the credit union market. Thus, the new law will pave the way for the stable, effective, and transparent market of credit unions, safeguard the rights of the credit union members fostering the market development.
Provisions of the abovementioned document cover all stages of operation of the credit union starting from the incorporation and licensing till operation, including membership and delivering contributions to the union, from the management system to supervision of operation and market exit. Considering risks inherent to credit unions limited by member contributions and in order to safeguard the rights of creditors, the main requirements in the suggested draft law are meant to protect the rights of the credit union members and monitor market conduct in good faith, availability of quality corporate governance and embodiment of risk-based approach in supervision, namely proportionality of requirements with the company’s level of riskiness.
At the same time, the document drafted by the NBU prescribed expansion of possibilities and streamlining of process for ensuring operation of a credit union.
Operation of credit unions
NBU proposals to the daft law cover the option for a credit union to select at its own discretion the type of activity as either profit or nonprofit organization in line with the Tax Code of Ukraine. This approach complies with the international practice, however at present it poses a concern for operation of credit unions.
Incorporating and licensing a credit union
The effective licensing processes of credit unions will be streamlined. Among other things, a universal license will be introduced for credit union operation. This license, save for issuing loans and raising deposits, will cover business expansion of credit unions. In particular, the license will authorize credit unions to provide a range of payment services, issue guarantees to its members and perform foreign exchange.
At the same time, in case of changes in operation and the need for respective alterations to the licensing scope, a credit union will be able at any time to change the scope of services without requiring a repeated licensing procedure.
Credit union membership
The proposed draft law expands the list of entities eligible for credit union membership. If previously such entities could only be individuals, after the adoption of the draft law credit unions will offer membership to a wider range, such as sole proprietors and certain legal entities, in particular, farms, associations, trade unions with the central or local status, religious organizations, and condominium association.
Credit union management system
The draft law will expand the members’ decision making on credit union operation. For that purpose the draft law sets out in detail the operating rules and authorities of the general meeting of credit union members. At the same time, considering the limited financial resources of the credit union for keeping a big staff, in order to ensure internal control, a permission was granted to a respective person to jointly perform these functions, including as a side job. In particular, separate units for risk management, internal audit, as well as compliance can be assigned to one person in the position of compliance manager, chief risk manager, and chief internal auditor upon approval of the regulator. Furthermore, a part of functions of a credit union can be outsourced.
Supervision of credit unions’ operation
Considering the importance of mitigating credit risks and respective cheapening of loans, the NBU suggest this draft law should provide credit unions with free-of-charge access to the NBU credit register.
Resolution of credit unions
In line with regulation of nonbank financial institutions, one of the fundamentals of transparent and stable market of credit unions is regulation of resolution of such institutions that are unable or unwilling to continue business. The proposed draft law prescribes a mechanism ensuring the maximum possible repayment of funds to members of resolved credit union. Such provision should prevent situations when credit union members lose their contributions and are left to resolve the issues on their own.
Legal context
The Draft Law On Credit Unions proposed by the NBU will replace the effective Law of Ukraine On Credit Unions. The current law approved in 2002 is obsolete, fails to consider the current realities of credit union operation, and has a range of gaps.
At present, proposals to the Draft Law On Credit Unions prepared by the NBU are available for the market players. Comments and proposals to the draft will be considered till 30 July 2020. Please send your comments and proposals to [email protected].