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Financial market offered new regulation of investor categories and determination of their investment profiles

30.06.2016 17:03 / The Bank of Russia

The Bank of Russia Consultation Report posted on the regulator’s website for the discussion with market participants covers new approaches to classification of financial market investors, to conclusion of their transactions and determination of investment profile and strategy.

The document points out that current criteria of subdividing investors into qualified and non-qualified ignores a number of factors, first and foremost, the level of financial literacy of the population and its actual understanding of how various financial instruments operate, as well as capabilities to bear risks arising from investments in complicated financial instruments. In particular, any private individual holding securities worth 6 million rubles or more enjoys the right to be considered a qualified investor. In its turn, protection of those investors who lack special knowledge and experience comes down to their qualification as non-qualified investors and introduction of limitations and restrictions as far as investments are concerned. At the same time, a low level of financial discipline for many clients of financial organisations, aggressive advertising of risky financial instruments and failure to provide clients with information on potential risks, formal designation of qualified investors by financial companies, lack of incentive for mediators to get the best financial reward for their clients, etc. are out of focus. Such situation produces disillusions among investors at large as regards the outcome of investments. Moreover, the most unprotected unqualified dream chasing investors turn out to be the easiest victim of such situation.

To solve these problems the Bank of Russia after having analysed the current situation in the internal market and having studied international experience put forward a set of new criteria to classify investors by their level of knowledge and/or experience in the financial market, as well as the existence of investments and savings with them into three categories: non-qualified, qualified and professional. The report lists requirements for each category which the regulator suggests to fix at the legislation level, as Bank of Russia regulations and standards of self-regulated organisations (SRO).

Besides, the regulator offers market participants to discuss requirements for transactions in the financial market by various types of investors, for example, by providing non-qualified investors with a possibility to invest in the simplest and least risky financial instruments and inhibiting investment companies to go ahead with unsecured transactions for the benefits of this category of investors.

The report also has a rationale to set up the institute of independent financial advisors insentivised in choosing the optimal investment strategy for clients. The Bank of Russia believes that a non-qualified investor acting according to instructions of its financial advisor in some cases can be upgraded and recognised as qualified. However, if the results of transactions with those financial instruments that have non-acceptable risk levels turned out to be negative, the financial advisor will have to reimburse such client (with the exception of lost profits).

The document offers various levels of control over activities of financial advisors from independent specialised SRO-based arbitration committee to the Bank of Russia.

Issues of informing clients on financial instruments including potential losses are offered for discussion as separate subjects. The regulator finds it expedient to foresee the introduction of a general Risk Scale for basic instruments traded in financial markets, as well as Passport of Financial Product/Service with a brief explanation of the gist of a certain financial instrument. The document also contains a number of suggestions to regulate financial instruments advertising.

To provide individual balance of investment purposes and methods the Bank of Russia finds it necessary to select individual investment strategy for a client similar to the way it is done in foreign countries. At the same time, the regulator does not exclude a possibility to use new technologies such as robotic advisers which benefits and risks are also described in detail in the document. It is noted that combined use of financial advisor technological systems within certain validation requirements to the said systems would be an optimal solution.

The report focuses on the set of measures describing the responsibility of financial organisation and financial advisor for determining clients’ investment profile, as well as classifying investors, providing them with information and offering them financial instruments.

The establishment of new criteria to classification of investors and new principles for determination of the list of investment instruments including through the investment profile determining mechanism will help the regulator increase the level of protection of investors in the financial market, thus augmenting household trust in financial markets. In its turn, a higher trust in the market, safer protection of financial service users and the growth of financial literacy of the population seem to be key instruments in order to achieve Bank of Russia priority targets including assistance to economic growth and increase of well-being of the population as written down in the Guidelines for the Development of the Russian Financial Market in 2016-2018.

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