What Changes Await the Russian Retail Investor?
Over the past two years, the number of retail investors in Russia has grown significantly. According to the Bank of Russia, 24.7 million people have brokerage accounts in the country. The range of the possible transactions of retail investors depends on whether the investor is qualified or unqualified.
Advisor on Legal Issues to the Director of the NGO “Forum Analytical Center.”
More financial instruments are available to qualified investors than to unqualified ones. They can create more diverse portfolios and increase the efficiency of their investments, minimizing risks through diversification. Qualified investors can make transactions with foreign securities (Eurobonds, shares, futures) that are not traded in Russia, depositary receipts of ADR/GDRs, and shares of foreign investment funds, as well as invest in hedge funds and participate in a pre-IPO or IPO.
According to the Bank of Russia, existing approaches should be revised – both the criteria for dividing investors into the qualified and unqualified, as well as the range of operations available to unqualified investors. Representatives of the Bank of Russia believe that novice investors are not always aware of the potential risk of trading with leverage and as a result not only incur losses, but also are left with debts from margin transactions. According to the 11 largest brokers, since the end of February 2022, the debt of customers to brokers has reached 2.5 billion rubles, distributed among 27.8 thousand portfolios.
The proposals of the Bank of Russia to change the current approaches to regulating the activities of investors in Russia formed the basis of the “Concept for Improving the Protection of the Rights of Retail Investors,” published by the Bank of Russia on 20.07.2022. The main directions of implementation of this Concept are:
- improvement of approaches to the assignment of the status of a qualified investor,
- prohibition of particularly risky instruments for unqualified investors,
- limiting the risks of margin trading, and
- strengthening the responsibility of financial intermediaries and investment advisers.
As adjustments to the criteria for recognizing an investor as qualified, it was proposed to:
- increase the size of the required assets of the investor from 6 to 30 million rubles, with liabilities to the broker deducted from the value of net assets;
- take into account only liquid assets (cash, liquid securities which are not subject to encumbrance, requirements for a credit institution to pay the monetary equivalent of precious metals, assets received on account under repo transactions);
- establish requirements for documents confirming the presence of assets (including the period during which the documents are valid);
- exclude higher economic education as an independent criterion, providing for the possibility of its use together with other conditions to reduce requirements;
- consider qualifications in the field of financial markets only according to the professional standards of “Securities Market Specialist” or “Specialist in Financial Consulting.”
The Bank of Russia proposed revising the list of instruments available to unqualified investors, making available exclusively to qualified investors transactions with:
- foreign financial instruments;
- complex bonds with structural income, with the exception of the simple structured products provided for in part 13 of Article 11 of Federal Law No. 192-FZ, which are currently available to unqualified investors through testing;
- OTC derivative instruments, except those for which increased reliability will be ensured (100% capital protection, simple payment criteria, reliable underlying assets, redemption during a cooling-off period), to which access will be provided through testing.
To protect unqualified investors who make transactions that result in uncovered positions, it was proposed to:
- reduce the maximum amount of leverage, and
- provide for the mandatory notification of investors in a leveraged transaction that it is made using borrowed funds.
To increase the safety of the assets of unqualified investors, the Concept provides that if a broker provides for separate accounting of assets, an unqualified investor can give the broker the right to use the assets only after:
- passing special testing, and
- receiving from the broker a notification of risks and then submitting a declaration of their acceptance (by analogy with the right of the last word after testing).
The Bank of Russia also proposed to improve the procedures for testing investors:
- gradually increase the number of test questions (from 8 to 11),
- take into account the impact of investment experience/knowledge about the instrument on the test result, and
- set a fixed times to pass and intervals between attempts to pass the test.
This Concept provides for the formation of unified electronic registers of qualified investors and unqualified investors who have taken the test.
Finally, the Bank of Russia proposed the following to strengthen the responsibility of financial intermediaries:
- establish requirements for notification through mobile applications, as well as for the functioning of remote services for investors, and
- expand the concept and criteria of individual investment recommendations to increase the responsibility of investment advisers.
It was also proposed to establish at the level of legislation that the responsibility for the unlawful recognition of an investor as qualified, or the unlawful provision of access to complex financial instruments by an unqualified investor, is borne by the one who did it and entered information about it in the registers.
This Concept of the Bank of Russia drew numerous comments from financial market participants. Notably, the National Association of Stock Market Participants (NAUFOR) felt that the measures proposed in the concept could cause significant negative consequences for the Russian financial market and increase the risks to unqualified investors.
A letter sent by NAUFOR to the Bank of Russia notes that efforts to limit the risks to unqualified investors should be cautious and gradual – in order to preserve the achievements of the Russian stock market, give the industry and infrastructure the opportunity to replace the securities of issuers from “unfriendly” countries with securities of other issuers, and allow investors to make changes in their portfolios – and should be accompanied by measures to stimulate investors and infrastructure transformation.
Support for NAUFOR’s position was offered by SPB Exchange, which in recent months has been the only Russian platform where an unqualified investor can purchase foreign shares. SPB Exchange plans to expand the number of depositories used to hold foreign assets due to the risk of blockages by foreign regulators, as well as the desire of the Bank of Russia to restrict access to these assets by unqualified investors. SPB Exchange offers to store securities in infrastructure organizations in Hong Kong, China, Kazakhstan, and a number of other countries.
The Ministry of Finance of Russia also opposed the increase in the property qualification for obtaining the status of a qualified investor, as this will not allow the testing of the understanding of the market of such an investor – since the size of the investor’s assets does not provide real information about his knowledge of the specifics of various financial instruments. Also, the Ministry of Finance stressed that the securities of issuers from friendly countries should be available for purchase by unqualified investors.
However, not all the measures proposed by the Bank of Russia were criticized by the financial community. Many experts agree with the proposal to reduce leverage – as for creditors who are not aware of all the risks of this type of trading, large margin trading opportunities can lead to large debts and the loss of assets.
Currently, the Bank of Russia is continuing its work on the Concept, and changes to some of its individual provisions are possible.