26 August 2013

“Mega-Regulator” Law Alters Financial Markets Governance

​On July 24, 2013, President Putin signed into law new financial markets regulatory legislation that will transfer the responsibilities of the Federal Service for Financial Markets (FSFM) to the Central Bank of Russia (CBR) beginning on September 1, launching a multi-stage process that will eventually eliminate the FSFM. The bill originated from First Deputy Prime Minister Igor Shuvalov’s earlier demands that state economic institutions provide new proposals to improve banking and financial regulations.
“Mega-Regulator” Law Alters Financial Markets Governance
The FSFM has historically been tasked with regulating financial markets, supervising exchanges, and overseeing credit and commodity markets. The FSFM was also responsible for pension funds as well as ensuring legislative compliance regarding insider trading and market manipulation.
Once the law is fully implemented, the Central Bank will fulfill all of the previous capacities of the FSFM in addition to its traditional roles of monitoring monetary policy and maintaining oversight over the banking sector. The Central Bank will take on the role of a “mega-regulator” by regulating financial markets, including insurance, bonds, stocks, derivatives, and securities operations, conducting credit and monetary policy, and overseeing the investment of pension funds.
The transfer of the FSFM’s duties to the Central Bank will be accomplished in three stages. During the first phase, the two entities will continue to operate as separate institutions through late 2013. The second phase involves the FSFM operating as an independent institution within the Central Bank until January 1, 2015. After that date, phase three will commence, and the former responsibilities of the FSFM will be transferred over to the Central Bank (thereby eliminating the FSFM). According to Deputy Head of the Central Bank Sergey Shvetsov, “phase one is currently underway, dedicated to resolving numerous technical issues related to data transfer, new workplaces for FSFM staff, payroll etc.” (Moscow International Finance Centre) He went on to note that roughly 1,300 FSFM employees will be transferred to become Central Bank employees sometime in the third quarter of 2013.
This merger between the two financial entities will place Central Bank Chairman Elvira Nabiullina in charge of overseeing 4,500 financial institutions and 10,000 companies with traded securities. In addition to its banking portfolio, the CBR will also have control over all non-banking financial institutions.
Along with the Central Bank’s expanded regulatory powers, the number of Central Bank board members will increase from 13 to 15. The terms for the CBR’s board of directors and the chairman will also be increased from four to five years. In addition, the mega-regulator law removes the one-year limit on the CBR’s loans to other banks, which will allow it to extend liquidity to the banking sector for longer periods of time. 
The amendments passed along with the bill also slightly change the CBR’s mandate regarding ruble stability, while also allowing the Central Bank to promote conditions for economic growth. The provisions regarding economic growth represent a possible response to critics who have criticized the Central Bank for not taking sufficient action during the financial crisis. However, price stability still remains the CBR’s primary mandate, and monetary policy changes will have to be balanced against inflation concerns. 
According to Finance Minister Anton Siluanov, the concept of the mega-regulator bill arose from the need for additional regulation and supervision of the Pension Fund of the Russian Federation. Another motivating factor lies in the market anxiety caused by the recent financial crisis. According to Nikolay Chitov, chairman of the private Housing Finance Bank, “the unified regulation of Russia’s finance sector, and a more systematic approach will help to avoid a U.S.-like collapse in the future.” Essentially, the hope is that with one centralized manager, the Central Bank will be better able to supervise market activity and risks and respond to financial crises as they unfold.
As a presidential aide, Elvira Nabiullina spoke in favor of the concept of a financial mega-regulator, and added that such legislation might possibly deter companies and individuals from using offshore bank accounts. Nabiullina was quoted in ITAR-TASS as saying “we all need to stimulate economic growth and the banking system, and the Central Bank has to play a role in this [process]”.
Despite support from some in the banking sector, critics such as Vasily Solodkov, director of the Higher School of Economics Banking Institute, are worried that expanding the influence of the Central Bank will decrease competition among banks. The FSFM’s Yury Danilov also speculated in RIA Novosti that the “idea of a mega-regulator emerged to cover up the government’s failure to create an international financial center” and that the concept itself “did not envisage the creation of an independent regulator.” Doubts have also been raised as to whether the Central Bank will remain focused on its original objective of price stability at a time when Russia’s inflation rate has been hovering around 7% this year.
In terms of possible consequences, the mega-regulator law could yield both positive and negative results. On the one hand, it offers the opportunity to streamline some regulatory rules and pension reforms that would make the system more transparent and consistent. Also, the merger may mitigate the unease regarding Russia’s financial future by providing confidence-building regulation that could provide “insurance” in the event of future market crises.
However, this law also has the potential to add another layer of government bureaucracy, which could make it more difficult for the Central Bank to respond to any future market failures. In addition, concerns have been raised that the mega-regulator law provides a means for the Russian government to centralize Russia’s regulatory bodies into one entity as a way of controlling the Central Bank’s economic policies.
Much of the law’s success or failure will depend on its implementation and whether the intended modifications are used to reform Russia’s financial system for the future.