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Financial Market SROs Call for No Haste with Megaregulator

15.10.2012 18:34 / Interfax

Financial Market Council, comprised of several professional associations, will shortly announce its position on the megaregulator. An open Council meeting took place 11 October to discuss the matter.

The meeting was attended by heads of National Stock Market Participants Association (NAUFOR), National Stock Market Association (NFA), National Asset Management League (NLU), RTS non-commercial partnership, Professional Registrator, Transfer Agent and Depositary Associaton (PARTAD), All-Russia Insurers Union (VSS) and National Microfinance Market Participants Partnership (NAUMIR).

In early October President Putin stated that the controversial concept of unified Central Bank-based financial regulation should be debated with experts, and decisions must follow as soon as possible. "The government proposes FFMS unification with Central Bank. The idea has its followers, and opponents as well. I suggest that the banking and investment communities and all interested parties join in the debate", said Putin.

BEATING THEIR OWN DRUM

NAUFOR Head Alexey Timofeev says a similar debate took place in Britain over redistribution of functions between the financial market megaregulator (FSA) and the Bank of England. "It was debated for two years and every angle was considered", he said, pointing to a 500-page document outlining the grounds for a new division of powers between the British regulators. "In our case, as far as we know, it`s a two-page document", he complained. In Britain, prudential oversight was transferred to the Bank of England.

"There should never be 500 pages, nobody reads more than two", claims PARTAD CEO Victor Pleskachevsky.

"However quick the President wants us to be, the debate must take enough time to make it worthwhile. It is not just a split of powers between state bodies, it is in my opinion a new model of the financial market in general", said Head of NAUFOR.

He said that using the Central Bank as basis for the megaregulator requires detailed explanation and a search for possible alternatives.

Timofeev said that the Central Bank taking over carries several risks. For instance, the Central Bank could apply measures designed for banks to non-banking financial companies, which is unacceptable. Besides, the Bank of Russia`s main goal is to keep the national currency stable, and thus non-banking regulation could be relegated to a minor function.

Timofeev pointed out that conflict of interest is a Central Bank-specific risk. "The Bank owns Russia`s major exchange, as well as the largest financial market operator (Sberbank), and it also an active market player", he said.

Pleskachevsky says the megaregulator should be a separate entity. "Definitely not part of the Central Bank, they have more than enough conflicts in store", he said, adding that Minfin should not control this body either, since the regulator has "more importance".

"Any reform of this kind should be instrumental in creating an efficient developing market, regulation and oversight. If these tasks are fulfilled, the regulator and whether the functions should be split or unified becomes secondary", said Head of NFA Konstantin Volkov.

Peter Lanskov of PARTAD noted that there are two financial markets in the world: market-oriented and bank-oriented, with a mix of the two in today`s Russia. "I haven`t seen any tectonic shifts in our market that would show that the market model has failed in Russia", he said. He highlighted the necessity of feedback between the regulators and the community, which is currently lacking. "Everywhere in the world regulators use collegiate management", he said.

Timofeev thinks that the new megaregulator could block a long overdue reform. He stressed that establishing a constant and close feedback with the market has never been a priority for the Central Bank because of its nature. "Recently, we haven`t seen a single bill or stock market development initiative emerge from the state bodies. All of the proposals were drafted and developed by SROs", said Timofeev.

VSS Head Andrey Kigim gave several examples of insurers` initiatives backfiring on companies. His proposals include a stronger role for SROs in the financial market: setting a clear SRO status and creating an open dialogue on reforms between the market participants and the regulator.

Head of NAUMIR Mikhail Mamuta concurred that the crucial point is not who will regulate, but in what manner the market will be regulated. He also noted that SRO membership could be made mandatory for licensed market participants, with the SRO assuming several regulatory functions such as standards of conduct oversight.

"Tougher control is of course fine and well in terms of financial stability, but we all realize that this will raise maket participants` costs, miracles won`t happen here. What the market gets in return, what advantages are in store, is still unclear", said Head of RTS Non-Commercial Partnership Roman Goryunov.

He thinks that the issue of FFMS funding could be solved by delegating part of its functions to the SRO.

NLU Head Dmitry Alexandrov put forward a list of demands to the megaregulator, including mandatory participation of megaregulator executives in market sector SRO conferences, mandatory debates on all bills and concepts, creating a stock market development roadmap.

"As for Head of megaregulator candidates, my attitude towards Kudrin is neutral. Had Tina Kandelaki been offered the position, foreign investment would have soared", joked Alexandrov.

Finam Holding owner Viktor Remsha said that the stock market is not a bare necessity for people. "The megaregulator should have market development as a task along with regulation and control", he said. In his opinion, a regulator not responsible for market development is like a company run by an accountant. "The accounting will be perfect, only in a few years there will be nothing to account for", said Remsha.

WHY ARE WE HERE?

This was the question several meeting participants raised.

"I don`t really get why we are here, is it to reveal something we don`t already know? We need more than talk of the Central Bank, we need solutions that rise to the post-crisis challenges Russia and the rest of the world face", said ORT Registrar Director Alexander Gordon.

Deputy Finance Minister Alexey Savatyugin, representing the Higher School of Economics, where he is fellow professor teaching financial market regulation, had a few questions as well. Question one was why banks were not present at the meeting. CEO at RTS Anatoly Gavrilenko replied that the eight financial market SROs must arrive at a common opinion first. "The banks will be transferred nowhere, they`ll stay as they are", said one participant.

"Bankers are also interested. Imagine their pure innocent regulator, the Central Bank, touched by the filty hands of lowdown speculators, with their questions and stupid nonsense", said Savatyugin.

"Question two is why do you care all of a sudden?", he demanded.

Savatyugin referred to last year`s liquidation of the Federal Insurance Oversight Service, the functions of which were delegated to FFMS, and insurers "kept mum about this". "Shortly before that the private pesion funds inspection is disposed with, to zero controversy. Prior to that the Federal Anti-Monopoly Service lost the commodity exchange regulation function. This was all part of the megaregulator trend. It only takes one final step now, and suddenly everyone is on the case. I think more pressing issues are worthy of such extensive debate", he said.

The "why are we here" question was voiced many times. "I had been told there would be a war on the megaregulator, so I came", said a senior Russian bank executive, who left early. "This is opinion manipulation", "Democracy will lead to no good", "Cheap comedy", other sources told us.

PRELIMIARY STANDPOINT

However, the meeting produced preliminary opinions on the megaregulator, expected to be later signed by the SROs:

- The regulatory model must provide effective regulator-community interaction, the professional community must have a say in decision-making on regulation and oversight, also through the community boards mechanism;

- The regulator must engage market participants in bill debates, from concept stage on;

- The regulator must be prepared to explain its motives to the public, and be liable for action or inaction;

- SROs must have a clear status, with their roles, rights and responsibilities, as well as liabilties;

- SRO must receive certain functions of the regulator in order to streamline its work and to make financial market regulation more flexible;

- The fragmented regulation system of private pension funds, insurance, licensed participants inhibits effective regulation;

- Prudential oversight for conglomerates and key market participants should be focused in one authority, with relevant powers to regulate all key institutions, including non-banks;

- Regulation should be consistent: the reform must not affect market conditions by diverting resources for reconciliation and rewriting of the entire legal base;

- Financial authority reform should only take place following a thorough study of each scenario`s strengths/weaknesses and every potential conflict of interests.

Project Group №1Roman GoryuinovAndrey KigimPetr LanskovAlexei SavatyuginAlexey Timofeev