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FFMS-CB Transition – Complicated, But Not Painful

22.08.2013 18:10 / Interfax

The first day of Autumn signifies a new life for the non-banking financial market – its supervisor is now the Bank of Russia, not the Federal Financial Markets Service.

On Thursday, one and a half weeks prior to the event, Deputy Chairman of the Central Bank Sergey Shvetsov outlined new supervisory priorities at his first press conference as elected Head of the Bank of Russia Financial Markets Service.

Stronger non-banking oversight is inevitable, admitted Shvetsov, stressing that a “highly complex task” is to choose a pace of change that would help achieve goals without undermining the industry.

Another Service priority is investor rights protection, including minority shareholders.

The new Head of Service also promised to “retain the human resources potential” and raise salaries approximately 1,5 times. At the same time, his sidekick will be a Bank of Russia not FFMS staffer – starting this September, CB Financial Stability Department Director Vladimir Chistyukhin will act as Shvetsov’s first deputy.

“What we have heard is a balanced opinion of the Central Bank and the future Financial Markets Service Head, all of this is completely in line with what we have identified as priorities”, Chairman of the Board at National Association of Stock Market Participants Alexey Timofeev told Interfax.

Improved non-banking oversight is a key priority for the Bank of Russia’s financial markets service. The task is “highly complex”, since the “sector has developed the way it has and the business model that is in place today has determined the level of oversight that we have”, admitted the CB Deputy Chairman.

The tightening of supervision “must be fast-paced enough to make progress, and at the same time, it must present no threat to the industry”, emphasized Shvetsov. He remarked that the Bank of Russia understands the need for a “careful and balanced” approach.

Earlier, a number of financial market participants voiced concerns that the transfer of powers from FFMS to the CB could lead to non-banks receiving the ‘bank treatment’, due to the Bank of Russia applying tried and tested regulatory norms and approaches.

However, the new Head of Service has promised lax reporting rules for financial market participants. “We plan to implement a project that would ease the reporting burden”, he said. Shvetsov explained that the project is primarily “IT-related”.

The Bank of Russia will eventually be delegated reporting regulation functions for non-banks, which could be followed by a “slashing of reports”, said Shvetsov.

Another priority for the Central Bank Financial Markets Service is consumer and minority shareholder rights protection. The challenge here is that “the Russians have a traditionally low level of financial awareness”.

“As long as awareness is not there, we are destined to roll out rather simple and fairly trusted standard products. Therefore, one of the Bank of Russia – financial market SRO joint efforts is aimed at raising product standards and consumer rights protection”, said Shvetsov.

The new Service is planning to focus on minority shareholders rights protection, one of the problem areas traditionally listed by experts among primary threats to the Russian investment climate.

Shvetsov said that the Bank of Russia plans to “set up a system that would enable share buyers to purchase the risks of their own choice”, i.e. company and industry-related business risks.

“Other risks, including fraud, are not and cannot be assessed, and today these risks form a sizeable spread between the company’s wish to sell stock at a certain price and the investor’s wish to buy”, stated the future Head of Service, pointing out that the CB/SRO effort is designed to narrow this spread.

The internal investor, a category yet to be formed, has been dubbed “the cornerstone of Russian financial market stability”, said the Bank of Russia Financial Markets Service Head.

According to him, foreign investors represent “money that is big, long and at times cheap”, and a focus on external investors would make Russia “vulnerable to outside shocks”. To prevent this, it is essential that “the critical mass of the stock exchange players in our market is related to Russian investors in some way”.

Still, the CB does not intend to block outside competition. A major task “today and in the future” is the promotion of fair competition, said Shvetsov.

“We will not build any barriers to keep the foreign market away. We will continue in the direction of becoming an active global market player. Our aim is supporting both internal and external competition. The new rules will be harmonized with international practice and G20 guidelines”, he said.

The future Head of Service expressed hope that to FFMS customers “the 1 September watershed will pass unnoticed”.

He said that the groundwork has been laid down for signing work contracts with most of the Moscow and regional FFMS staff by 1 September. “On 2 September the same phone lines will continue to operate, and so will the staff”, promised Deputy Chairman of the Central Bank.

“The licensing applications, the approval and registration documents submitted to FFMS prior to 1 September will be processed by the Bank of Russia in the same exact manner as today. No need to resend anything”, stressed Shvetsov.

According to him, FFMS regulations due to be registered by the Ministry of Justice after 1 September are a different story. “So far, I have no clear answer how these regulations will proceed. The ones published prior to 1 September will remain in force until the Bank of Russia replaces them with its own regulations. Which we will, if necessary. If there is no need for replacement, a regulation may be in force indefinitely. We are not questioning the regulatory base”, pointed out the CB Deputy Chairman.

The Bank of Russia intends to retain FFMS liaisons with licensed participants, including Advisory Boards and SROs.

One of the new service’s new decisions will be to keep the advisory boards that exist today, said Shvetsov. “We will reinstate them, offering members an option to stay on the new Bank of Russia advisory boards”, he said. Advisory boards were earlier called a FFMS “success” by Head Dmitry Pankin.

With regard to SROs, Shvetsov reiterated that the Bank of Russia had drafted a financial markets SRO Act. “The draft introduces mandatory membership on the one hand, and on the other – closer liaison with licensed participants than in today’s FFMS, delegating to SROs a number of contract standard and practice functions that all SRO members will be obligated to follow”, explained Shvetsov.

The Bank of Russia will share responsibility with licensed participants, they will have more influence on regulation. “There will always be dissent. Decisions will be based on consensus reached by a majority of licensed participants. The rest will have to comply”, he said.

Supporting the opinion of acting FFMS Head Dmitry Pankin (who has refused to join the CB), Shvetsov hopes that all six deputy heads will be transferred to the CB. However, Deputy Head of FFMS Julia Bondareva, appointed the service liquidator, will join the CB later. Shvetsov says the liquidation of FFMS could be completed this year.

Apart from Bondareva, Deputy FFMS Heads are Sergey Kharlamov, Elena Kurytsyna, Igoir Zhuk, Oleg Pilipets and Yana Pureskina.

Financial Stability Department Head Vladimir Chistyukhin is due to start as First Deputy Head of the Bank of Russia Financial Markets Service in September.

“On 2 September, a directive on the distribution of functions between Deputy Heads will be signed, making it all clear. I think, acting deputies will continue what they are doing in FFMS. Vladimir Chistyukhin is due to take over insurance, licensing, registration, microfinance and regional branches”, said Shvetsov.

He added that no Bank of Russia departments will be transferred to the new service.

The average FFMS paycheck, named one of the reasons FFMS merged with the ‘wealthier’ Central Bank, will be raised 1.5 times versus 2012, promised Shvetsov. According to him, this means the entire compensation, not just the salary.

Future Head of Service has also confirmed that maintaining the human resources potential of the service is one of his top priorities.

Shvetsov will continue to be in charge of monetary policy at the Central Bank, despite his new status. “I oversee the draft of the new monetary policy that we are due to finish in September”, he said.

A new Monetary Policy Manager will be appointed by the CB Chairman, however, “there are many managers at the Central Bank who are perfectly able to switch to this role”, said Shvetsov.

Shvetsov was effectively put in charge of monetary policy in June, following the transfer of Alexey Ulyukaev, First Deputy Chairman and Monetary Policy Manager under ex-CB Head Sergey Ignatiev, to Head of the Ministry for Economic Development.

It is rumoured that after the G20 summit in September, Russian Sherpa and Head of the President’s Expert Directorate Ksenia Yudaeva could join the Central Bank.

Sergey Shvetsov also stated that he intends to resign from the Moscow Exchange Advisory Board, which he currently heads.

According to Shvetsov, he has commitments to the exchange that will remain outstanding until the next Shareholders Meeting (Advisory Board members are elected annually), slated for 1H 2014. Shvetsov says that his appointment as Head of the Financial Markets Service does not constitute a force majeure for the exchange.

He also said that he plans to consult interested parties regarding his Moscow Exchange Advisory Board membership. “I will tender my resignation from the Exchange Advisory Board”.

The Bank of Russia is a major MICEX-RTS exchange shareholder, owning a 22.474% stake. Historically, the MICEX Board of Directors has always been chaired by a Bank of Russia representative, while FFMS staff have never been Board members.

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