Informing and testing investors: Bank of Russia approves changes to basic standard for protecting brokers’ clients
A broker will be obliged to notify investors of risks they accept by permitting the broker to use not only their funds, but also securities to the broker’s benefit.
This is stipulated in the new version of the basic standard to protect the rights and interests of brokers’ clients prepared with the engagement of the self-regulatory organisations National Association of Securities Market Participants and National Finance Association.
Currently, brokers’ contracts generally include the condition allowing them to use clients’ assets in leveraged transactions conducted by other investors. Thus, a broker receives additional income and, in exchange, might reduce fees for clients. However, if a broker becomes bankrupt, clients might lose their assets. According to the new rules, a broker must remind investors at least once a year of their right to prohibit the broker from using their assets. This will help investors choose between cost effectiveness and risks more prudently.
Brokers should provide clients with a brief description of the specifics and risks of some financial instruments. The lists of the instruments, as well as the content and form of these information documents will be stipulated in the self-regulatory organisations’ internal standards.
The number of questions used in the test for non-qualified investors will increase. Investors will still be required to answer four questions, but they will be chosen in a random manner not from eight, but from eleven questions regarding each type of complex financial instruments. This is done in the interests of investors to decrease the chance of passing the test after several attempts by using the brute force method. This reduces the probability of conducting a transaction without an adequate assessment by investors of their knowledge and risks.
Signing a brokerage contract, a professional market participant should inform clients of the ban on market manipulation and the restrictions on using insider information.
The amended version of the standard becomes effective on 1 March 2023, except the provisions about a new procedure for notifying clients of the risks of using their assets by brokers — these rules will become effective on 1 July 2023.