Crux (#6 June 2018)

Legal Digest

The last few months have seen new legislative changes and developments in various dimensions of business regulations. In this section the UJBL editorial team has enlisted the help of experts to comment on some of them. Our latest digest includes, to a greater extent, initiatives that touch upon requirements of the internal policies of banks for asset evaluation and calculation of credit risks; new rules for receiving loans from non-residents and procedure for granting permits for transferring funds to foreign bank accounts; procedure for issuing individual licenses for using foreign currency as a payment instrument; methodology for working out criteria for risk assessment of businesses; foreign exchange regulation and more.

By its Regulation No.225- of the NBU approved the assessment and coordination procedure for the internal provisions of banks on asset evaluation and calculation of credit risks. What impact will these changes have on banking activities?

Yevhen Holomozyi Associate, SDM Partners

On 17 April 2018 the National Bank of Ukraine adopted new Regulation No. 225- (the Regulation). The Regulation sets the principal requirements of the internal policies of banks for asset evaluation and calculation of credit risks. Additionally, the Regulation specifies criteria and procedures for the NBUs approval of such policies. The distinctive feature of the Regulation is the broad field for discretion and professional judgments by both banks and the regulator.

In particular, a bank may solely choose criteria, approaches and principles for grouping debtors and, in some instances, apply non-statistic methods for calculation of the probability of default of the coefficient. Meanwhile, the NBU establishes rather vague criteria for (non) approval of policies, such as the substantiality of the approaches to be applied, or correctness of the adopted hypotheses. Moreover, the procedure for the approval of policies is also rather uncertain.
For example, the NBU may require additional clarification regarding the polices or respective information, though the number and grounds for such requirements are not specified. Thus, policy adoption may become a time-consuming and tiresome procedure.

Therefore, the impact of the Regulation will, to a great extent, depend on the NBUs steps and measures. On the one hand, such provisions may indicate changes to the NBUs approaches to market regulation and the growth of confidence in the professional judgments of banks. On the other hand, the lack of precise criteria and clear procedures for the approval of policies may significantly slow down and complicate the granting of a loan.

By its Resolution No. 45 of 26 April 2018, the National Bank simplified the procedure for issuing individual currency licenses and expanded access to external lending resources. How do you evaluate this innovation?

Pavlo Shovak Senior Associate, Asters

On 26 April 2018, the National Bank of Ukraine adopted Resolution No. 45, which amended (1) rules for receiving loans from non-residents and (2) procedure for granting permits for transferring funds to foreign bank accounts. It would be a vast overstatement to say that the amendments extend access of business to foreign capital markets. The major and sole change is that Ukrainian borrowers may now freely compensate loan-related expenses not only to recognized export credits agencies but also to entities in which the state has a shareholding or the Government itself subject to certain requirements. As to the permits for transferring funds to foreign bank accounts, the major amendment relates, in our view, to the list of documents which may be presented by an individual to verify the source of funds. Before the introduction of amendments, individuals were generally required to present income tax returns or an income certificate issued by the tax authorities to verify the source of their funds.
In some cases, this was hard to implement in practice because individuals in Ukraine are generally not required to submit annual income tax returns while there may also be issues with obtaining income statements from the tax authorities, particularly by individuals who depend on the income of other family members. Now the list of documents, which may be used to verify the source of funds, is not exhaustive. Given the fact that bank officers generally apply quite formalistic approaches to interpretation of legislation, we positively assess this notion and hope that it will be properly implemented and applied.

However, the Resolution does not change the core ideology of currency control in Ukraine. The Government still tries to keep private wealth within the country by imposing different restrictions and limitations, which can hardly be called a beneficial tax and legal environment for investors. For this reason, the business sector expects the Ukrainian Parliament to adopt the Draft Law of Ukraine On Currency, which should substantially change the rules of game. However, this will depend greatly on the National Bank of Ukraine, which is expected to have quite broad powers in determining the scope of transactions subject to licensing.

NBU Resolution No. 48 updated the terms of issuing licenses for using foreign currency as payment instrument. What changes are to be expected in practice for issuing such licenses?

Sergii Papernyk Head of Banking & Finance and FinTech, EVRIS

On 5 May NBU Resolution No.48 of 3 May 2018 On Approval of Amendments to Regulation on the Procedure for Issuing Individual Licenses for Using Foreign Currency in the Territory of Ukraine as Payment Instrument came into effect.

By its Resolution the National Bank of Ukraine continues to liberalize foreign exchange legislation and introduce a risk-oriented approach to the banking system of Ukraine.

According to the changes adopted, in order to obtain individual licenses for using non-cash foreign currency on the territory of Ukraine as a payment instrument, it is no longer required to submit statements of authorized banks with the details of accounts which an applicant plans to use for conducting a foreign exchange transaction.

From now on, grounds for refusal to issue an individual license or its revocation are not mandatory for the regulator and shall be applied at its discretion. However, the list of such grounds was expanded. Now, liquidation of a license holder (legal entity) and location of a holders counterparty in the aggressor state (Russia), occupier state or state, and/or in a state which is included in the list of countries (territories) that do not comply with recommendations of international organizations carrying out activities on combating the legalization (laundering) of proceeds from crime, may also be the grounds for refusing or revoking a license.

When considering issuing a license, the National Bank now has the right to request and obtain from an applicant additional information, documents required to clarify the circumstances of foreign exchange transaction, its content and participants (counterparties), including beneficial owners (controllers). Furthermore, the regulator has the right to apply to state authorities, institutions, agencies, authorized banks and other business entities and individuals to obtain information, documents and findings regarding participants in a foreign exchange transaction.

The new Resolution is an important step towards simplifying currency regulation. However, the market requires a comprehensive solution, which would make foreign exchange transactions in Ukraine as accessible as they are in developed countries.

In May the Cabinet of Ministers approved a risk-oriented approach in the activities of inspection bodies. What impact will these changes have on the accuracy of risk assessment by business entities?

Igor Reutov Attorney, Gramatskiy & Partners

On 20 May 2018 the Government adopted the new Methodology for working out criteria for risk assessment of businesses (the Methodology), approved by the Decree of the Government No.342 of 20 May 2018. The Methodology outlines the process of risk assessment for controlling bodies when they plan inspections of business entities. The requirement to adopt such methodology is stipulated in the Law of Ukraine
On the Basis of State Supervision over Business Activity No. 877-V of 5 April 2017, through its implementation at Government level was far from perfect.

It should be mentioned that the new piece of legislation is a more transparent regulation compared to existing methodology. Thus, the Government has changed the approaches to risk assessment of businesses and introduced a general scale for risk assessment. According to the newly-adopted scale, a business entity is considered to be of high risk if its estimation is equal to 41-100 points, 21-40 points is medium risk, 0-20 points insignificant risk. The scale implies equal treatment of all business entities when their exposure to risk is analyzed. It replaces the illogical requirements of current methodology that state that no more than 10% of business entities should be deemed to be of high risk, 10-30% medium risk and 60% and more insignificant risk.

All other provisions of the new Methodology mainly reiterate the provisions of the old Methodology adopted in 2013, although the new regulation is more specific and precise. It should be pointed out that the Government has adopted the Methodology for working out criteria, and not the criteria. The criteria are developed by controlling bodies and this makes the life of businesses far from certain.

Resolutions of the National Commission for State Regulation of Energy and Public Utilities No.311 and No. 1469 regulated the main provisions for the organization of revenue from electricity metering on the market, as well as licensing conditions for carrying out economic activities on supplying electricity to consumers. What impact will these changes have on the electricity market in the country?

Alexander Tretiakov Senior Associate, Antika

Approved by the National Regulatory Commission on Energy and Utilities of Ukraine, the new license condition on conducting business activity with energy supplies to consumers and Code of Commercial Counting of Energy are both legislative acts which continue to implement a new system of energy market established by the Law of Ukraine On Electricity Market adopted in 2017.

The license conditions finally align the conditions of suppliers activity to the provisions of the new law. Among other interesting changes, it is worth noting the obligation of suppliers to purchase solar and other energy from renewable sources from private persons in cases where production exceeds energy consumption. There are also new provisions regarding accounting and reporting with regard to their consumers, their types and other statistics.

The approved Code of Commercial Counting of Energy is a more interesting legal act. First of all, there was no similar legal act before it to regulate this area. The main reason for this is the free and competitive energy marked established by the law. The Code establishes provisions regarding how and in what manner the energy accounting should be provided by each of the energy market members. For example, the right to engage a third person or special companies who provide accounting services is set by the Code. Also, the requirement for these types of companies are established. The Code also clearly differentiates accounting done by a supplier remotely and accounting provided by a consumer in every case setting the rules and conditions for this.

In general, both legislative acts, approved by the NRCEU, do not introduce critical changes to the market, rather they regulate in detail the procedures and rules set out by the Law On Electricity Market. At the same time, from the documents it is clear that energy reform is continuing and we can hope that by 2019 (where a new market structure should finally become fully operational) every required legal basis for it will be adopted and actually tested in practice.

The Verkhovna Rada adopted the Law On Currency (Draft Law No.8152) in the first reading. What impact will the introduction of this norm have on organization of foreign exchange regulation and implementation of foreign exchange supervision in Ukraine?

Dmytro Savchuk Associate Partner, Lavrynovych & Partners

As the authors of Draft Law No. 8152 On Currency emphasize, its aim is the adoption of a currency regulation regime that stipulates free performance of currency transactions, improvement in Ukraines investment climate and attractiveness, as well as fulfillment of Ukraines obligations under the UkraineEU Association Agreement.

If the Draft was to be adopted in its fourth and final reading, an old Decree of the Cabinet of Ministers of Ukraine On the System of Currency Regulation and Currency Control and the Law of Ukraine On the Procedure of Payments in Foreign Currency would be terminated and, additionally, other changes to legislative acts would be implemented.

The Draft Law is progressive and deals with the following current issues for conduct of business:

1. Cancellation of the license regime for investing abroad. For conducting an investment transaction only relevant compliance procedure in the servicing bank would be need to pass.

2. Currency control termination for purchasing/transfer of currency in a sum up to UAH 150,000 in the equivalent of foreign currency.

3. Cancellation of boundary terms for settlements in foreign currency for import/export operations.

4. New rules for buying/selling foreign currency, specifically those according to which exporters would not be required to sell foreign currency earnings and importers could purchase foreign currency without reference to the respective import contract.

Notwithstanding the mentioned liberalization, the NBU reserves its right to establish temporary restrictions (for a 6-month term) in case of risk being revealed on the currency market (signs of financial volatility in the banking system, high pressure on the balance of payments, identification of issues that bring threats to the stability of the banking/financial system).

Relaxing regulations does not mean all-permissiveness. Thus, according to the Draft, the main role in control over currency transactions would be performed by servicing banks, and the State Fiscal Service and NBU would monitor for compliance with currency legislation.

It is planned that currency liberalization will be gradual. As envisioned by the authors of the Draft, a cancelation of barriers would be provided only after enactment of the law regarding the declaration of personal assets by individuals and the law regarding the international tax information exchange (for preventing possibilities for tax evasion and currency collection in offshore jurisdictions).

But critics of the Draft emphasize that it has a declarative and framework nature and it does not contain particular mechanisms for implementation of currency deregulation. Instead, it farms out all the issues to the NBU.

Anyway, subsequent terms on the new Draft Laws coming into full force (regarding assets declaration of individuals and tax information exchange with foreign jurisdictions) affects the interests of our officials, so it is proper and full implementation depends on their political will.

Draft Law No.7466 On the Effective Management of Ownership Rights of Copyright Holders and (or) Related Rights was approved. What impact will this initiative have on the system of collective management of property rights in the sphere of copyright and related rights?

Dmitriy Makiyan Lawyer, ADER HABER

There are different views on the content of the adopted Law of Ukraine On the Effective Management of Ownership Rights of Copyright Holders and (or) Related Rights (No.7466). However, as we are concerned, this act starts a new stage in development of Ukrainian legislative regulation and copyright protection. It introduces new rules for doing business, which relates to the use of copyright objects within their activities, and makes them more transparent.

There are no legal acts able to fully solve the problems of copyright protection in Ukraine at once, but the first steps are being taken and this is a positive one.

Particular attention should be paid to the introduction of an electronic system of administration in this field, which is going to simplify communication between copyright owners, users and collective management organizations from 1 July 2019. If successful, it will bring further Ukraine towards the introduction of e-trust services and simplify interaction between business entities and copyright holders.

In addition, the new Law will change the rules of registration and accounting of the activities of collective management organizations, which is aimed at attracting new legal entities to conduct activities in this area. Furthermore, the principle of 50-25-25 is being provided for the remuneration system, which in future is going to unify the approaches to its calculation.

In general terms, the new Law has advantages and disadvantages, just like any legal novelty. According to our deep conviction, it is the duty of our legal community to maximize new legislative provisions to Ukrainian practical realities. Beyond that, in the presence of any legal disputes between the subjects of such relations, they will be decided in court. This will additionally set up a new judicial practice in this area, which will be able to solve issues that were not affected by the new law. Moreover, its quality will depend on the fruitfulness of the legal communitys work.

The Verkhovna Rada adopted Draft Law No. 6027-d On the Amendments of Certain Acts of Ukraine Regarding the Renewal of Crediting. What impact might this initiative have on long-term lending?

Viktoria Kovalchuk Partner, ESQUIRES

In Ukraine 55% of all credits are considered "troubled" ones. Banks lose money, which result in negative consequences for depositors. This situation has negative effects on the results of financial activity of the banking system and economy, creates difficulties for creditors and borrowers, and reduces public confidence in the banking system.

The Verkhovna Rada has adopted Draft Law No. 6027-d On the Amendments of Certain Acts of Ukraine Regarding Renewal of Crediting. The Draft Law is aimed at reducing credit resources for simplification of access for economic entities and individuals to the credits, reduction of financial burden on borrowers, strengthening of creditors rights, settlement of gaps, which are used by debtors in order to avoid fulfillment of obligations.
The Draft Law contains both positive and negative provisions for long-term crediting. As for the negative points, changes in the Civil Code of Ukraine regarding strengthening the obligations of the guarantor and narrowing of a regulation regarding liabilities of an heir to apply for the certificate on the right to inheritance are planned.

The fact that unfair borrowers will not be able to remove objects from under a mortgage by a reconstruction or by a construction is positive. It is planned to increase responsibility for organizations, which obtained the license for provision founds as a loan, and reduce the financial burden of borrowers, that will promote economic revival and stepping up crediting for the improvement of housing conditions. Elimination of an illegal removal scheme of property from encumbrance of the creditor is important. Despite it, without changes there is also the question of interest on loans.

There is no doubt that the instrument of liquidation has become one of the most widespread gaps in the field of credit relations and recovery of long-term crediting. It is simply not enough to adopt the Draft Law.
To reduce interest rates and to improve the long-term crediting system in Ukraine, big measures are necessary, a part of which will be performed by the state and a part by banks and other market participants.

All these changes are aimed at restoring long-term crediting.

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