Concept for grouping customers on the stock market formulated
Following the release of the consultation paper on the concept of regulatory investor categories in the stock market and identification of their investment profile, market participants submitted their feedback. The Bank of Russia analysed and took into account some of these suggestions.
The finalised concept keeps the regulator-introduced breakdown of investors into three categories: professional, qualified and non-qualified investors, with the latter additionally classed into 1) those holding up to 400 thousand rubles on their brokerage account and 2) those holding 400 thousand + rubles. Non-qualified investors are understood to have no special knowledge of the stock market; yet, they want to use their financial instruments to maximise their savings. While developing this concept, the Bank of Russia’s key focus was on the need to improve protection of this investor type and draw more investors to the stock market.
In accordance with the proposed classification, the specially protected non-qualified investor (with less than 400 thousand on its brokerage account) will have access, by default, to instruments including shares traded in the organised stock exchange, bonds, ETF (of Tier 1 and 2 Quotation Lists) and investment units (for non-qualified investors). They will also be able to enter into the organised forex and precious metals market. This type of investors will be able to buy other financial instruments in line with their investment profile; the broker would need to provide to the non-qualified investor product passports, that is, data on the profile and the risks of exchange-traded and over-the-counter (OTC) instruments. Such passports would be prepared by the exchange house and self-regulatory organisations.
The Bank of Russia is also ready to consider the option of making some 3 Tier instruments available to this category of investors, with criteria for such instruments currently under discussion.
The specially protected non-qualified investor will also have access to margin and derivative trading provided that such investor has qualified in special-purpose online examinations. Any loss that may be incurred by such client is meant to be limited to the amount of funds it provided to the broker.
The other non-qualified investors with funds over 400 thousand rubles in their brokerage account will have access to the same instruments as a specially protected category, with their investment profile unspecified, as well as to 3 Tier securities and margin trading, with no need for preliminary testing. They will also be able to buy any other financial instrument consistent with its profile.
This category will also enjoy the ‘final say is with the client’ option. Under this principle, access to advanced instruments inconsistent with the investment profile will still be open on condition that entry-level investors claim to have the appropriate experience and insist that their assets be placed as they wish. In such case, however, the client will be provided a certain reflection period at the end of which the said investor will be able to exercise its final say right.
‘If we want many investors to come to the stock market so that it becomes attractive to millions of our citizens, our priority task should be protection of non-qualified investors who are beginners’, explains Sergey Shvetsov, First Deputy Governor of the Bank of Russia. ‘We should, as first priority, ensure that beginning investors are protected from the risks they do not understand and from possible loss related to such risks’.
The concept envisages for all entrants to the stock market to have the option of risking the amount within 50 thousand rubles once a year, by investing into any investment product.
To be awarded the status of a ‘qualified investor’, the client will need to meet one of the following requirements: 1) to hold a qualification certificate; 2) to have at least one year’s experience in investment / at least two years’ experience of working at an organisation which is a qualified investor at law. Those having no less than 1.4 million rubles on their brokerage accounts will also be able to obtain this status after they pass the required online examination or in the case they have at least half a year’s experience in investment activities. The status will also be granted to holders of financial assets to the total of 10 million rubles and more. The regulator accepts the so-called grandfather clause whereunder the status of all investors qualified as of the date of the new requirements enter into force will be confirmed (regardless of their experience with the financial market).
Qualified investors will be able to use advanced investment instruments and services subject to their investment profile, to be listed in line with standards for self-regulatory organisations. This investment category will also have the ‘final say is with the client’ option which, however, will have to be exercised immediately in this case.
The regulator intends to regard the following investors as professional ones if they meet at least one of the following criteria: they hold international certificates, they have at least there years of professional experience with an organisation which is a qualified investor at law (financial institution) or they hold assets in excess of 50 million rubles.
According to the Bank of Russia’s concept, the investment profile will be determined by an independent investment adviser or a broker’s employee whose responsibilities exclude customer acquisition and offers of investment instruments.
The regulator’s special focus will be on action to prevent conflict of interest between sales and investment counselling. Such requirements are meant to be set by the self-regulatory organisation itself. According to the authors of the concept, as more entry-level investors are beginning to enter into the market, the introduction of robo-advising will help reduce the costs of profiling and counselling services.
The Bank of Russia is also ready to enable the broker to request client data (from the Pension Fund, the Federal Tax Service and credit bureaus) with the client’s consent.
Financial institutions may be held liable for wrong client classification, as well as for offers of financial instruments which are noncompliant with their investor profile (in the latter case, financial advisers will have fiduciary responsibility).
It will also be up to a financial adviser to make the case for the appropriateness of the proposed level of risk; any disputes in this area will be referred to a self-regulatory organisation’s dedicated disciplinary committee. If the customer makes a complaint against a financial institution, all data submitted will be used to the benefit of the customer in cases supporting documents are missing.
This concept will be used as a basis for a roadmap for development of changes to financial regulation which the Bank of Russia intends to finalise in 2017.
The regulator will then move to set up requirements for disclosure of information on investment life insurance, as well as those for placement of funds by insurers. Currently, with no mandatory information disclosure by insurers, investors, who may be classed as non-qualified, may fail to understand this product.
There remain the risks of non-payment of the non-guaranteed part (investment income) and the guaranteed part in the case of bankruptcy. The Bank of Russia intends to set up requirements for information disclosed by insurers, providing access to this instrument to non-qualified investors, subject to their asset profile (similar with unit investment funds, for qualified and non-qualified investors). There are plans to discuss these proposals with market participants.