Ukraine—Strengthening the Regulation and Supervision of the Nonbank Financial Market (EU-FINREG)

Ukraine’s financial sector is bank-centric, highly fragmented, and largely nontransparent. Approximately 80 percent of financial assets are controlled by banks, where recent reforms have exposed systemic weaknesses, institutional insolvencies, and practices that are liable to abuse. The result has eroded public confidence in banks and in the regulator’s prudential supervision and left a banking sector where more than 52 percent of the system’s assets are state-owned and controlled. Financial, regulatory, and legal reforms for the nonbank sector are still lagging.

Through EU-FINREG, DAI assisted the Ukrainian authorities in strengthening the regulatory framework and supervision practices for the securities and investment business, insurance, pensions, nonbank credit institutions, nonbank payment institutions, and other nonbank financial services to help build up a sound regulatory environment for nonbank financial services. Regulation of nonbank financial services—such as mobilization of capital for small and medium enterprises, corporate finance, vehicle and home loans, insurance, or wealth management—is a prerequisite for fair and efficient markets, consumer protection, and market development, thereby contributing to sustained economic growth.

Sample Activities

• Enable the approximation of Ukraine to European Union standards and best practices in a broad range of financial services, including securities and investment businesses, fund management, insurance and nonstate pension funds provision, leasing and factoring services, nonbank credit institutions, and payment services.
• Define solvency standards and market entry rules for nonbank financial institutions.
• Strengthen the capacity of regulatory authorities to monitor nonbank institutions—and apply legislation and associated rules and norms—by using appropriate methods, tools, and guidance.
• Increase through capacity building the operational independence and enforcement powers of the National Securities and Stock Market Commission.
• Consolidate nonbank financial institutions and build a sound regulatory environment for nonbank financial services.

Select Results

• Supported the drafting of law No. 1069-2, On Amendments to Some Legislative Acts of Ukraine on Improving Functions in State Regulation of Financial Services Market, adopted by the Parliament of Ukraine in September 2019. The law will reduce the number of regulators in the nonbanking financial services markets by allocating the functions of the National Commission between the National Bank of Ukraine and the National Securities and Stock Market Commission.
• Prepared and submitted a brief review of the revised law to international financing institutions and donors operating in Ukraine.
• Reviewed the final draft of the Law on Insurance Intermediaries on its compliance with EU Directive 2016/97 of the European Parliament and of the Council on Insurance Distribution.
• Prepared and delivered the Final Draft Law on Collective Investment undertakings to harmonize the regulatory framework with the Undertakings for Collective Investment in Transferable Securities Directive 2009 and the Alternative Investment Fund Managers Directive.
• Conducted comparative analysis of legal solutions for resolution of asset management companies and analysis of the state and resources managed by the investment funds industry and asset management companies.
• Delivered a comparative analysis of the regulatory framework for nonbank financial services, including leasing and factoring, with recommendations for improvements.
• Prepared a comparative analysis of the EU legislation and the draft Law of Ukraine, On Amendments to Some Legislative Acts of Ukraine, on protecting investors from abuses in the capital markets to enhance transparency for insurance-linked securities and provide policymakers with evidence-based solutions.
• Developed framework with amendments and draft laws on establishing liability for the dissemination of inaccurate information in an investment prospectus, along with a proposal for appropriate regulation.
• Organized study tours to Bulgaria and Croatia for National Securities and Stock Market Commission officials, and members of the task force for drafting the law on collective investment undertakings, to learn best practices.