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Ministry for Economic Development Slams SROs

31.10.2014 00:00 / Kommersant

The Ministry for Economic Development questions the effectiveness of self-regulation. Problems have been identified and listed in a Report on SRO Activity to the President. The lowest point is SROs not being financially motivated to keep participants under tight scrutiny. Return to state regulation in a number of industries, including audit, is likely to put increased pressure on business, warn experts.

Self-regulation is in need of reform, states the Ministry for Economic Development report draft, circulated among business and nationwide SRO associations two weeks ago. It is due to be finalized and submitted to the President. “The analysis covered critical SRO functions, which allowed to reveal systemic problems”, according to the Ministry for Economic Development press office. The document says SROs are inefficient and the results of their activity lack value for the society. In certain sectors, the switch from mandatory licensing to SRO membership has failed to improve the quality of state management, complicating market entry to boot. “The reaction to the problem has been SRO commercialization and a thriving intermediary market that offers SRO membership without compliance”, MED reports. All of this clearly indicates that SROs should be made more responsible and their mandatory participation in industries where they proved ineffective possibly be cancelled. “Drafting SRO reform proposals is a separate task for the next stage”, highlights the ministry press service.

Today, SRO participation is mandatory in 11 industries, including surveying, building, energy, audit etc. SRO membership is voluntary in yen, including the securities market, NPFs, housing cooperatives and microfinance. In the future, SRO membership will be mandatory for financial companies.

The Ministry for Economic Development does not specify industries in need of serious reform. There have been, for instance, issues with auditing market SROs. In some cases, control functions performed by auditing SROs are doubling Rosfinnadzor. Besides, the authors of the draft question the quality of SRO oversight in auditing. The Ministry quotes market participants as saying ‘the SRO is not interested in strict control, since it leads to inevitable termination of SRO membership and thereby, loss of income, i.e. mandatory fees”. The income, according to the Ministry for Economic Development, is substantial. Apart from auditors’ joining fees (RUB 1k to RUB 40k), SROs charge a fee for the audit of the auditor (max. RUB 50k), a compensation fund contribution (RUB 3-5k), annual membership fee (RUB 3-250k, depending on company type and its earnings). Compare this with the cost of an auditor license (issued by Minfin prior to 2010), which amounted to a little over RUB 1k. Drastic measures like suspension or SRO membership termination are rarely used against auditors. The five SROs, which conducted a total of 6.1 thousand scheduled and unscheduled audits in 2013, have expelled 359 members.

The Ministry for Economic Development was not the first to unveil the shortcomings of self-regulation. Thus, in July, the Minfin Audit Council suggested that Rosfinnadzor run additional checks in companies that had audited problem banks — Ogni Moskvy (license revoked, audited by Norma-Profaudit) and Moscoblbank (rehabilitated, audited by Razvitye Business System).

However, auditing SROs think that now is not the time to abandon self-regulation. “This institution takes a much longer time to develop than these past five years”, says General Director at Sodruzhestvo SRO Olga Nosova. The return to state control over auditors could put pressure on business. Tougher control means auditors will not have the chance to point out the problem to the client and give him time to rectify it, under fear of losing business. “The inevitable formal approach of state regulation, as opposed to self-regulation, means death to business”, says an auditor.

Olga Shestopal

Financial markets megaregulatorProject Group №1