The National Bank decided to update approaches to supervision of the non-banking financial sector. To do this, he developed a regulation on the basis of which insurance companies, credit unions, financial companies and pawnshops will be allowed into the market, as well as subsequent control over their activities.
The National Bank explains: the new regulation will regulate the procedure for authorizing financial institutions, simplify the process of their licensing and clearly define the conditions under which they can carry out activities in the provision of financial services.
After the “split” took place and the National Bank became the regulator of not only the banking market, but also the market of non-banking financial services, it did not have time to bring its regulatory framework into line with the requirements of the laws. In particular, these are the laws “On Financial Services and Financial Companies”, “On Insurance” and “On Credit Unions”, which will come into force on January 1, 2024.
And so that there are no contradictions with the mentioned laws, the NBU is in a hurry to approve a new regulation regarding the regulation of the non-banking sector.
The draft regulatory legal act has been published for discussion by December 4. The regulator plans that the document will be approved before the end of 2023 and will come into force on January 1, 2024. At the same time, the current Regulation on licensing and registration of participants in the market of non-banking financial services No. 153 will lose force.
I figured out what exactly would change in the regulation of representatives of the non-banking financial sector.
Who exactly will be affected by the document developed by the NBU? The new regulations will apply to:
Insurance companies; credit unions; financial companies; pawnshops; market entities that conduct foreign exchange transactions (exchange offices, postal operators).
The scope of the provision will cover a wide range of issues that relate to the activities of non-banking financial institutions. Namely:
issuance of licenses and termination of activities of market participants; changes in the ownership structure (acquisition of a significant participation interest); accreditation/registration of branches of non-resident companies; assessment of the business reputation of managers and owners, the professional suitability of management and the financial condition of shareholders; appointment of heads of insurance companies and other market participants, approval of their candidacies by the National Bank; making changes to information about non-banking institutions (including representative offices/branches) and their beneficiaries; approval of an increase/decrease in the authorized capital of an insurance company by the NBU.
How will approaches to issuing licenses change? One of the key innovations is that the National Bank promises to simplify the licensing algorithm. There must be a transition from the principle of “one license – one financial service” to a license for a type of activity, which in turn may include one, two or even a dozen financial services.
For example, insurers will have licenses for life insurance, non-life insurance, and incoming reinsurance. And within the framework of the obtained licenses, companies will be able to provide insurance of specific types. For example, sell savings policies, enter into CASCO, OSAGO or voluntary health insurance agreements.
For comparison, within the framework of the current insurance law No. 85/96-BP (it will become invalid in 2024), there is a division into more than 20 types of voluntary and 53 types of compulsory insurance. And for each type of insurance, the insurer must issue a separate license.
Licensing of other market participants will follow the same principle.. A standard license for a credit union will allow it to issue loans and attract funds (including bank metals) to deposit accounts.
Financial companies, within the framework of the received license, will issue loans, issue guarantees, provide factoring and financial leasing services, payment services for transferring funds without opening an account and acquiring services.
At pawnshops everything is simple. Having the appropriate license, pawnshops will be able to provide loans secured by valuables. In addition, the license to operate a pawnshop may include payment services for the transfer of funds and acquiring services for payment instruments.
What will influence the licensing process? When issuing licenses to participants in the non-banking market, the NBU will pay special attention to the financial condition (primarily capitalization), business reputation of management and owners, and the presence of a risk management system (internal control).
In particular, in order to obtain a license, the applicant is required to form a minimum authorized capital (except for credit unions) in cash and by placing funds in a bank account. The size of such capital should range from 1 to 48 million UAH, depending on what kind of license we are talking about. Reasons for revocation of a license may be failure to comply with NBU regulations, claims against the ownership structure (its opacity), non-admission of representatives of the National Bank to inspection, absence of a company at the place of registration, etc..
What will be the internal control system? A rather weighty block in the draft NBU regulations is devoted to the requirements for organizing an internal control system in financial institutions that engage in foreign exchange transactions.
Such a system should be built along three lines:
the first includes divisions that initiate, carry out or reflect business transactions and are responsible for risk management; The second line of control includes units that are entrusted with the function of risk management and compliance (preventing violations by employees); the third line of internal control is represented by the internal audit unit or an individual official who is responsible for internal audit, including assessing the effectiveness of the first and second lines of control.
In total, the internal control system should look like this.
The financial institution develops a certain set of rules and documents that all employees without exception must adhere to.. The implementation of these rules is monitored by special structural units.
Moreover, internal control is intended not only to ensure that company employees do not violate the law, but also to avoid problems with various government agencies and departments (NBU, tax, consumer rights protection service). This is why internal audit is needed to prevent missed reporting deadlines, unethical behavior towards clients, or violations of legal requirements for financial monitoring.
By the way, those reports that are generated by the internal audit service are then submitted for consideration and approval to the supervisory board or the general meeting of shareholders (participants).
What should the non-banking sector expect? The NBU has repeatedly announced a revision of the rules of supervision in the non-banking financial market.
On the one hand, the licensing process will be simplified. If the company meets the requirements for the level of capitalization, and its managers and owners have no gaps in reputation and professional suitability, it receives one license instead of the conditional 10 and provides financial services. Be it insurance, loans or pawn loans.
At the same time, more and more different filters will appear to enter the market.. A lack of “real money” among shareholders that needs to be poured into the company’s capital, or the presence of unclosed court cases among top managers or connections with an aggressor country can cancel out the prospects for obtaining a license.
In principle, similar criteria for selecting financial structures still exist.. They will simply be more clearly spelled out — and the National Bank will have a wider range of tools to refuse to issue licenses and punish violators.
As a result, the financial market will shrink. For example, from September 2022 to September 2023, the number of participants in the non-banking sector fell by almost a quarter, to 1,215 institutions.
Of course, the war factor plays a big role in the fact that the demand for financial services is falling and new players do not appear on the market (or rather, only a few appear). But legislative and other regulatory changes are of great importance.
In other words, market regulation will become more stringent, which is why a considerable number of participants will leave it in the next year or two. On the other hand, there is hope that the reliability of financial institutions will increase, and following this, the quality of their services will increase, as well as the degree of protection of the rights and money of clients.