The NBU will check everyone online. What will be the new rules for supervision of the financial market?

On December 14, the National Bank approved Resolution No. 162, which regulates issues of ongoing supervision of participants in the non-banking financial services market. This document will come into force on January 1, 2024 and will apply to insurance companies, credit unions, pawnshops, financial companies, non-banking financial groups, residents of other states who provide financial services in Ukraine, as well as to persons who outsource on the financial market.

In other words, the rules of non-travel supervision have been updated for almost all participants in the non-banking sector. The exceptions are collection companies, credit bureaus, payment service providers and legal entities that have licenses for cash transactions.

The National Bank clarifies that the new resolution is one of the tools of a risk-based approach as part of control over the financial market.

Simply put, on-site (remote) supervision will allow the NBU to identify problems with insurers, financial companies, and pawnshops at an early stage and respond to them in a timely manner. How exactly everything will be organized, I figured out .

Why is constant surveillance needed at all? Conventionally, the mechanism of control on the financial market by the NBU can be divided into two types. These are remote (on-site) supervision and in-person (inspection) checks.

Remote supervision is carried out on the basis of reporting and other documentation/information that the NBU receives from financial institutions. Thanks to this, the National Bank has a fairly wide range of data, which gives it the opportunity to:

assess the nature and level of risks in the activities of an individual insurer, credit union, financial company, and the extent to which these risks threaten the interests of clients and creditors; evaluate the corporate governance system of the financial institution and its internal control system; analyze the reliability of the information specified in the reports of the market participant and its financial condition; monitor how the financial service provider complies with regulations, requirements for the ownership structure and the business reputation of owners/managers.

On-site supervision allows the National Bank to understand in advance whether a financial market participant is violating regulations or not, what problems it has (or may have), and what to do next.

Based on the results of remote control, the NBU may resort to an inspection, oblige the financial institution to eliminate violations or put its financial condition in order. In extreme cases, there will be a fine or license suspension.

What steps is the National Bank taking within the framework of remote control? Resolution No. 162 contains about 10 points that describe the actions of the NBU in the process of on-site supervision.

In short, the National Bank:

Conducts general monitoring of the financial institution: its reporting, financial condition, customer service standards, compliance of top management with qualification requirements, etc.. Finds out how the market participant generally complies with the requirements for its activities and whether it commits violations. Identifies potential risks that could lead to violations of legislation, including prudential requirements and regulations. Evaluates signs that indicate deterioration in the financial condition of financial service providers. Forms proposals for preparing a plan for inspections of a market participant and determines the frequency of such inspections.

What does the NBU do based on the results of an on-site inspection? Further actions of the National Bank depend on the results of the on-site inspection.

If a market participant has signs of deterioration in financial condition, a violation of capital adequacy standards has been recorded and markers of risky activity have been identified, then the National Bank:

warns in writing the insurer, financial company, credit union or pawn shop that he needs to straighten out his financial condition; initiates an unscheduled inspection or prescribes an algorithm that will eliminate risks and violations in the activities of a market participant; applies an administrative penalty (restriction of powers, fine) to officials of a financial institution.

The NBU also reserves the right to control how the market participant complies with the instructions of the National Bank and eliminates identified violations.

How is communication structured between the NBU and market participants? The National Bank may request additional documents, information and explanations from financial institutions as part of on-site supervision.

The reasons for such requests may vary.. For example, the NBU needs clarifications on financial statements for a certain period; the regulator wants to understand a particular operation, which, in his opinion, is risky; The National Bank saw signs of violation of the law in the activities of the insurance company or credit union and requested clarification in this regard.

Communication between the NBU and market participants can take place online (in the form of electronic documents) or by sending “paper” letters by regular mail (in addition, the National Bank may require electronic copies of documents on a USB drive to be attached to such a letter).

The National Bank independently sets the period within which it wants to receive a response to its request.. But you have at least two days to prepare explanations. A market participant may apply to extend this period. But only on the condition that he needs to receive/collect documents that relate to residents (legal entities and individuals) of another state.

Copies of documents requested by the NBU, as well as written explanations, must be certified by the personal signature of the head of the financial institution.

Despite the fact that non-travelling supervision does not provide for visits by inspectors, the National Bank still has the right to initiate working meetings with top managers and other representatives of the object of inspection, sending appropriate invitations. Such a meeting can be held in person (in person) or remotely (via audio or video).

If a market participant does not agree with the results of the on-site inspection and with the enforcement measures determined by the NBU (imposition of a fine, for example), he can send his objections to the regulator. True, the resolution does not indicate in what time frame the National Bank must respond to such an objection and what its further actions will be: cancellation of the results of the previous inspection, a new inspection, or something else.

What does all this mean for market participants and their clients? The National Bank continues to prepare its regulatory framework for the entry into force of three new laws — “On financial services and financial companies”, “On insurance” and “On credit unions”. Let us remind you that their norms will come into force on January 1, 2024.

Resolution No. 162 is in conjunction with the provision on market admission (authorization) of insurance companies, credit unions, financial companies and pawnshops to the market. The NBU published a draft of this regulation in early November; it plans to approve this document by the end of 2023 and “launch” it in 2024.

In addition, the NBU is pursuing a strategy to improve the mechanism of prudential and risk-based supervision.

Literally this means the following: the National Bank will identify problems among financial market participants not when they are on the verge of bankruptcy, but when these problems are just maturing and emerging. This will make financial institutions more sustainable and improve the quality of the services they provide.

It is possible that the number of players on the market due to these changes will become even smaller. But clients (consumers of financial services) will definitely benefit.

Because insurers, pawnshops, credit unions and companies issuing unsecured loans (they are also financial companies) will understand that even for minor violations the NBU can at any time “take a pencil”. And increased control will become the reason for a series of serious inspections, which will ultimately result in fines or revocation of the license.