The Prospects for Risk-Based Supervision in Ukraine

This approach involves a structured process aimed at identifying critical risks facing financial institutions and assessing their management of those risks. Supervisors focus on risk profiles and risk management capabilities of individual companies to have an early warning system for any rapid changes in their financial position. The range of risks considered by supervisors includes financial risks, such as credit, market, and liquidity risks, as well as non-financial risks, such as operational, transactional, and reputational risks. Risk-based supervision takes into account the general aims of regulation, which are to ensure that institutions are financially strong and can meet their obligations to customers. This approach requires compliance with rules, but the focus is on estimating the risks to which regulated companies are exposed or their failure to meet their obligations. In contrast, rules-based supervision is characterized by numerous, detailed rules, and the purpose of monitoring visits or off-site monitoring is to find contraventions of laws and regulations, regardless of their relevance to the company's ability to meet its obligations. The rules-based approach may involve a detailed examination of information submitted to the regulatory authority, but the focus may be on reconciling data or counting the number of securities rather than assessing the company's financial vulnerability. Risk-based supervision does not operate without rules, and supervisory authorities have detailed rule books, such as the FSA's Handbook. Companies are fined for breaches of rules, and the evidence for these breaches is often based on an analysis of the nature of the product and examining the records of all sales. The rules have to be in accordance with the objectives of regulation and should not overburden companies with excessive demands for information or unwieldy procedures. In Ukraine, the regulatory process adopted by each of the regulatory authorities appears to be familiar to regulatory authorities in developed countries. The process begins with licensing or authorization of a company, based on payment of a fee, having sufficient capital to meet the capital requirements laid down in the law, and meeting the 'fit and proper' requirements. Companies have to submit quarterly financial reports to the regulator and meet other mandatory reporting requirements. The regulatory authorities monitor the activities of the companies, and as part of that activity, they arrange on-site visits, which may either be full-scope visits or visits directed at specific aspects of the company. The laws give the staff of the regulatory authorities the right to enter the company's offices and examine documents either on pre-arranged visits or unannounced. The on-site staff write a report following the visit, which is presented to the senior management of the company, and may indicate that the company should undertake remedial action or recommend enforcement action. The procedures adopted by the Commissions and the National Bank of Ukraine all form part of the processes involved in risk-based supervision. However, what is missing from the whole process is any recognition of the need to identify the key risks to which individual companies are exposed or at the company's management of risk, still less at the company's capital in relation to risk. The laws and regulations are themselves inadequate to the task of risk-based supervision, with very significant gaps, including the inability to identify the beneficial owners of financial institutions and to ensure that inactive companies left the market. The National Bank of Ukraine has benefited from extensive training in risk-based supervision, but it also suffers from gaps in laws and regulations, including once again the inability to identify the ultimate or beneficial owners. Each of the three regulatory authorities, the State Commission for the Regulation of Financial Services Markets, the Securities and Stock Market State Commission, and the National Bank of Ukraine, carry out on-site visits and off-site examinations or reviews.