Implications of recent developments for UBOs and related parties of banks and non-banking financial institutions

On 19 December 2011 the three Ukrainian financial regulators[1] (the NBU, the NSEC and the FSMC) will become endowed with new authority to supervise not only banks and non-banking financial institutions in Ukraine, but also their related parties and their ultimate beneficial owners ("UBOs").

The financial regulators will be vested with much wider powers to supervise activities of banks and financial institutions, and also to restrict transactions of banking and non-banking financial groups in certain cases.

What the new law says

The relevant changes were adopted by the Verkhovna Rada on 19 May 2011 by virtue of Law of Ukraine No. 3394-VI "On Amendments to Certain Laws of Ukraine Regarding Supervision on a Consolidated Basis" (the "Amendments"), which comes into effect on 19 December 2011. The Amendments establish consolidated control over banking and non-banking financial groups, which implies, inter alia, the following:

(1)         From 19 December 2011 the NBU, the SSEC and the FSMC will have the right to establish certain additional requirements, including, inter alia, restricting a banking or non-banking financial group or its participants from carrying out certain activities or transactions in Ukraine or in other countries if the relevant national regulator considers such activities or transactions to be too risky;
(2)         The UBOs of a financial group must appoint from among their group's participants an entity responsible for the group's fulfillment of the requirements established for the group on a consolidated basis, notifying the group's national regulator about the group's ownership structure or business activities, including any changes, and for preparation of consolidated reporting information. Such entity should be approved by the national regulator of the group (the NBU, the SSEC or the FSMC);
(3)         No participant of a banking group may hold corporate rights/shares in one of the group's non-financial institutions constituting more than 15% of the consolidated regulatory capital of the whole group, or in all such entities constituting more than 60% of the consolidated regulatory capital of the group;
(4)         Participants of a banking group may carry out transactions generating a credit risk (the list of such transactions is yet to be approved by the NBU) for their non-financial institutions in an amount not exceeding 20 per cent of the consolidated charter capital of the whole group, or in an amount not exceeding 5 per cent of the consolidated charter capital of a single entity of the group;
(5)         Banks will be prohibited from creating their branches, representative offices or subsidiary banks in countries in which banking supervision and control does not comply with the Basic Principles of Effective Banking Supervision of the Basel Committee of Banking Supervision. If a Ukrainian commercial bank has an operating branch, representative office or subsidiary bank in such a country, it will be obliged to decrease participation in the capital of the subsidiary bank or to close such branch, representative office or subsidiary bank;
(6)         The NBU will have the authority to force a banking group to change its ownership structure if it is unclear to the NBU, or if the NBU is unable to control the transactions of the group; and
(7)         Additional sanctions may be imposed on a banking group, such as prohibiting a bank from carrying out transactions with its related entities for a breach of the banking legislation, not only by the bank itself but also by any participant of the banking group.

Actions to consider

In view of the adopted Amendments, any group of companies having in its composition two or more banks or non-banking financial institutions should determine whether its activity may be classified as principally banking or non-banking financial services and, therefore, whether the group should submit to the banking and non-banking supervisory control by the relevant regulator. The ultimate responsibility for taking such a decision under the Amendments now rests with the UBOs.

Conclusions and recommendations

The NBU as the principal author of the Amendments has publicly announced that the Amendments are directed at ensuring financial stability and protection of interests of banks' depositors and investors of financial institutions. However, it remains to be seen how the Amendments will be applied by the market participants, and whether their application in practice will achieve the intended goals.

As an initial step, we recommend banking and financial groups as well as their shareholders to determine with their Ukrainian counsel how the rules will be applied in their individual cases, and to be compliant with the new rules as soon as they come into effect.