At its session on 12 September 2019, the Verkhovna Rada of Ukraine adopted as a whole the Draft Law No. 1069-2 “On Amendments to Certain Legislative Acts of Ukraine on Improving Functions of State Regulation of Financial Service Markets” (hereinafter – the Law).

The main innovation introduced by the Law is to reduce the number of regulators in the financial service market. Today, the state regulation of the financial service market is carried out by the National Bank of Ukraine, the National Commission for State Regulation of Financial Service Markets and the National Securities and Stock Market Commission. Once the new Law enters into effect, all regulatory powers of the financial service market will be split between the National Bank of Ukraine and the National Securities and Stock Market Commission, and the National Commission for State Regulation of Financial Service Markets will be abolished.

Moreover, the law establishes a clear separation of financial services between banking and non-banking services provided exclusively by banks and non-banking financial institutions or other non-financial institutions entitled to provide separate financial services under a licence.

The Law will become operative only starting from 01 July 2020. In accordance with the transitional provisions of the Law, between the entry into force and effect of the Law, the state authorities that will carry out the state regulation of the financial services markets should bring their regulatory legal acts into compliance with the requirements of the Law and adopt a number of other relevant regulatory legal acts.

Separation of powers between the National Bank of Ukraine and the National Securities and Stock Market Commission

The Law separates the powers of regulators of financial service markets and provides for the interaction between them.

Thus, the powers of the National Securities and Stock Market Commission include state regulation and control over the securities and derivatives markets, issuance and circulation of mortgage bonds, activities in the system of funded and non-state pension insurances, property management activities for financing construction projects and/or real estate transactions, regulation and supervision of sale of goods on the terms of spot and forward, as well as control over the correct conclusion and fulfillment of obligations of other commodity derivatives.

State regulation of banking services and other non-banking financial services not regulated by the National Securities and Stock Market Commission will be carried out by the National Bank of Ukraine.

A new approach to the formation of the legislative framework in regulating the financial service markets

Legal relations arising in the implementation of economic activities, including the legal relations carried out only under a licence, fall within the general requirements established under the law, and the laws of the Cabinet of Ministers of Ukraine provide a number of powers to adopt subordinate legislation pursuant to the requirements of the law.

According to this Law, licence terms and conditions, certain requirements for financial market entities, prudential regulations, etc. should be enshrined in subordinate legislation adopted not by the government but by a designated authority (regulator) in accordance with the powers given to it to regulate activities in a particular area of financial services.

In general, the new Law giving regulators the powers to set a number of requirements, regulations and procedures significantly broadens the powers of regulators and creates the opportunity for more professional and practical adoption of subordinate legislation, which will serve as a guide to the entities operating in the financial market services.

Requirements to re-issue of licenses

In fact, a change of the regulator may raise a number of questions regarding the requirements to obtain licences issued by new regulators within the scope of their powers. However, the Law stipulates that licences continue to be valid or are deemed reissued, and that the new regulators rely on the previously approved licence terms and conditions until the new ones for a particular type of activity in the financial services sector are approved.

However, despite the fact that the Law does not establish requirements for obtaining new licences or undergoing a certain procedure for re-issue the licences that have been issued earlier, suspension of such licences, their revocation and control of legal compliance by entities conducting activities subject to licencing will be carried out in accordance with the new regulations and requirements from the entry into effect of the Law.

Conducting inspections by regulators and applying sanctions for the violations occurred before the entry into effect of the Law

The Law does not explicitly specify the scope of powers of regulators to conduct inspections of entities of financial services markets after the entry into effect of the Law for previous periods of their activities and application of sanctions for violations committed by entities of financial services markets before the entry into effect of the Law.

For example, in accordance with the new wording of Article 12 of the Law of Ukraine “On State Regulation of Securities Market in Ukraine”, a legal entity may be held liable for committing an offence in the securities market, in the system of funded pension insurance not later than three years from the day of commission of the offence regardless of sanctions.

However, the Law does not specify whether a three-year period may be applied to offences committed by entities after the entry into effect of the Law or to offences committed within this period and before. Other issues arise, in particular, whether the regulator has the right to bring individuals to responsibility for periods when it had no such powers.

This issue is sufficiently relevant for the entities directly involved in the financial services markets because, according to the law, such entities should be brought to responsibility under the provisions of the laws in force at the time of the offence, and the new regulators have no powers to inspect, control or apply any measures under such laws.