Introduction to Ukrainian banking compliance: From EU Directive 2013/36/EU to NBU Regulation No. 64 or "tone from the top"

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Introduction to Ukrainian banking compliance: From EU Directive 2013/36/EU to NBU Regulation No. 64 or “tone from the top”

Stetsenko V.V.

This research is dedicated to the compliance reform in the banking field in Ukraine. Within this article we shall outline the definition for the “banking compliance”, why is it so important for the legislation harmonization process, integration to the EU banking field. Above that, we shall analyze the requirements of the internal policies and procedures development, and the standards they should be in line with.

The value of this research can be disclosed in the following statements:

• Effective banking compliance increases the reliability of the banking institutions, improves their readiness to day-to-day threats they face when providing deferred payment services as well as for the irregular economic threats (e.g. decrease of the consumer interest in financial services due to COVID-19 crisis, etc.);

• Effective banking compliance is a requirement of Ukraine under international regulations;

• In 2020, Ukraine must have and implemented and effectively functioning banking compliance according to the EU-Ukraine Association Agreement (the “EU Agreement”).

As of 11th June 2018, the National Bank of Ukraine (the “NBU”) has adopted a resolution No.64 (the “Resolution 64”). The purpose of this act is to develop compliance requirements for the banks and banking groups in Ukraine and bring them in line with the standards of the European Union. This reform is a part of Ukrainian obligations under the EU-Ukraine Association Agreement. The scope of this current research will be focused on the implementation of Resolution 64.

We would define compliance in general as a set of processes and procedures within a specific program to ensure adherence to government regulation and laws. Consequently, banking compliance would be focused on adherence to the internal bank regulations and procedures to the applicable government regulations and laws. In Ukraine, the applicable legislation would include inter alia Law of Ukraine “On Banks and Banking Activities”, Regulations of the National Bank of Ukraine, and the pertaining regulations.

From the compliance perspective, we would divide the requirements into two groups:

(1) Economic requirements. They would include requirements to the minimum capital, equity-to-obligations balance, reserve amounts, etc.;

(2) Legal requirements. They would include requirements to a limitation of the banking activities, procedures of the customer and transaction due diligence, risk-management requirements, etc.

As a general practice, the compliance scope would mostly focus on legal requirements. However, the specifics of banking services, the economic influence of the banking activity for the business, the day-to-day life of a regular citizen, and a state as a whole, brings withing the scope economic requirements as well. This approach brings banking compliance within the scope of interest of the EU when requiring bringing in line Ukrainian banks to the EU standards.

The legal framework of the EU assessment in this regard would ground mostly on the Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 “On access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC Text with EEA relevan ce” (the “Directive 2013/36/EU”) and the pertaining “Guidelines on internal governance under Directive 2013/36/EU” introduced by the European Banking Authority (the “EBA”) as of 26th September 2017 (the “Guidelines”).

The Guideline sets out the governance provisions outlined in the Directive 2013/36/EU and develops practical requirements to be applied by the relevant central institutions within the EU Member States (the NBU in Ukraine) to all banking institutions disregard of their internal management structure. The Guidelines apply from 30th June 2018. The Directive 2013/36/EU and the Guidelines are considered to be local regulation for implementing Basel capital standards (precisely Basel III).

Considering the established in the EU approach of implementation of such directives as Directive 2013/36/EU, the EU Member States were invited to adopt the amendments in their legislation with derogations for certain provisions of the Directive 2013/36/EU. EBA has issued a Guidelines compliance table together with the Guideline in order to indicate the level of adherence to the guidelines and comments specifying the derogation cases and the reasoning.

Exactly for this purpose the NBU has adopted Regulation No.64 that introduces “Provisions on the organization of the risk management system in banks of Ukraine and banking groups”. Regulation 64 defines main targets and principles for the management of risks, that arise out of all bank and banking group activities on all organizational levels, states minimum requirements for the organization of complex, adequate, and effective risk management.

Within that the NBU has set out the following risks covered by Regulation 64: credit risk, liquidity risk, interest risk of the banking book, market risk, operational risk, compliance risk, and other risks that arise from the banking activity.

It is necessary to mention, that each bank has to set out the factors, indications, and the thresholds of the essence for other risks and regulate how to discover such risks. Withing each underlined risk the bank must consider the risk of concentration of the obligations and assets within the diversity of products, business activities, types of securities, currencies processed, etc.

The NBU has adopted requirements for the protection system of risk-management that introduces three-layer protection:

(1) on the level of business departments and departments of bank loyalty support;

(2) on the level of compliance department; and

(3) on the level of the internal audit department for risk-management effectiveness evaluation.

Within this approach the major responsibility according to Art. 6 and Art. 28 the bank council as the supreme management body in the bank is fully responsible for the development and implementation of the effective risk-management system. The bank council was required to introduce a number of internal departments aimed to represent the above-mentioned three-layer protection.

We would like to outline the role of the compliance department outlined in Article 40 of Regulation No.64. Above the responsibility approach form the bottom to the top, the compliance department would bear the function of the internal legislator by producing all internal regulations regarding compliance issues. Moreover, the compliance department would be responsible to notify the NBU in regard to confirmed cases of conflict of interest, assessment of compliance risk for all processes within the bank (e.g. compliance risk profile, financial monitoring, etc).

Paragraphs 9, 10, 51-53 are dedicated directly to the requirements of the legal compliance of the bank. Other section of the Regulation No.64 cover issues of economic risks that can be calculated and include credit, liquidity, market risks, etc. The summary of such risks would be estimated for the Risk Appetite Statement ( the “RSA”) - internal document indicating the threshold that the bank would need to accept or avoid in order to reach out to its business targets, and the risk appetite for each target.

The regular assessment of the RSA would indicate the efficiency of the bank risk-management statement. Although such an evaluation would ground on the numbers and fixed economic condition statements such as the economic value of equity, liquidity, etc., the result would be subject to the impact of the compliance risk as well. According to the Regulation No.64, the compliance risk shows the probability of losses/ sanction, additional, future, reputational losses impacted by the non-adherence by the bank of the applicable laws and regulations, market standards, competition and ethics rules, and internal rules and procedures.

The current approach to the bank institutions' responsibility for non-fulfillment would be limited within the obligations set out in Regulation No.64. However, after the integration of the Ukrainian banking system under the branch of the European Central Bank (the “ECB”), there would be a serious number of obligations in the applicable Directive 2013/36/EU under the supervision of the ECB.

In this regard, we would face with the cases similar toCredit Agricole S.A vs ECBandBanco de Sabadell S.A. vs ECB, whereby the claimants require cancellation of the ECB fines imposed in the amount EUR 4.3 mln. and EUR 1.6 mln respectively. Unfortunately, there are no yet final decisions of the ECJ in this regard. However, there is a strong and justified practice of the ECJ jurisdiction over the local EU Member State's banks regarding the fulfillment of the so-called “Credit Requirement Directives”. The Directive 2013/36/EU is one of them.

As a result of this research and the document assessment we would outline the following statements:

1. There is a completely new compliance practice introduced to the needs of the Ukrainian business and financial sector which is banking compliance.

2. Banking compliance in Ukraine would not be limited to the implemented Ukrainian legislation and common requirements such as financial monitoring.

3. One day the banking compliance in Ukraine would be under assessment of the ECB.

4. The core requirements for the banking compliance do not limit to the economic standards, but rather to economic and legal standards that establish a balanced system of rules that let the financial institution to reach out their business targets on a risk-based approach.

5. The banking compliance question requires deeper assessment in the scope of the ECJ practice.

References

banking compliance management economic

1. Collins, D. A.. Diligent oversight of legal compliance: A four-step guide. The Corporate Governance Advisor (2008).

2. Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC Text with EEA relevance-https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32013L0036#d1e2311-338-1.

3. «Guidelines on internal governance under Directive 2013/36/EU » EBA/GL/2017/11 - https://eba.europa.eu/sites/default/documents/files/documents/10180/1972987/eb859955-614a-4afb-bdcd-aaa664994889/Final%20Guidelines%20on%20Internal%20Governance%20(EBA-GL-2017-1U.pdf.

4. «Guidelines compliance table» EBA/GL/2017/11 - https://eba.europa.eu/sites/default/documents/files/documents/10180/1972987/1c55bd94-4647-424f-a79a-fb5203f68439/EBA%20GL%202017%2011-CT%20GLs%20on%20internal%20governance.pdf.

5. Regulation No. 64 of the National Bank of Ukraine. https://zakon.rada.gov.ua/laws/show/v0064500-18.

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