Banks At Stock Market: Expirience Of Civilized Lobbing

Posted by Law Article on July 14th, 2009 at 02:52pm

Alexander SITOUKHO

Eastern European Asset Protection Center

http://ap-center.net/

A man has three fundamental types of reactions at everything that happened in our life: escape and avoid, endure and adapt, attack and change.

At the same way the relation to any legislative act and whole legal framework form. One can escape making shady business. One can adapt being engaged financial and legal engineering. And one can struggle for own interests and expand his possibilities.

The situation in the field of banking law rather differs from other fields. Stability and reliability are the main criterions which estimate bank’s activity. Bank is under rigorous state surveillance and there is no analog in any other business. So the strategy like avoiding is not used here. The most spread instrument is notably banking law. It is a source of masterly contract shames which often can direct not so much to the increasing profits as to the avoidance of losses and consequently to the fulfillment of standard acts which far from the perfection.

Meanwhile the state is developing and progressively we can hear about working of just as separate banks so their associations which directed to the improvement of the legal framework. And many different methods are used here such as the cancellation of offensive standard acts in the legal form, the development and the promotion of necessary draft laws and subordinate regulatory acts, public discussion of such projects. That activity is named as lobbying in the developed countries. It has uncoordinated character in Ukraine and good coordinated and planned shares are exclusion but not rule.

But awareness of necessity of efforts’ consolidation, combinations of financial and intellectual resources are increasing. Ukrainian lobbying assumes a professional character and a concept infrequently is apprehended as a swearword. Conditions for appearing civilized lobbying are the best in the banking area. The most intellectual and financial potential is concentrated here. Banking business has gradually lost instruments for getting super profits so it is interested in any reducing of the state control.

But let’s return to the origin subject. We told that one of the methods of reaction to the environment is an active influence and changing it by the convenient manner for you. But before you start to influence it is necessary to find out what exactly is not really so, what does not suit? And than you have to define the problems give it another words “make from a diagnosis”.  It gets easier because when the illness was diagnosed it is the half of the treatment. But it is not so easy to define problems as it seemed at first sight. And you know that to understand what exactly is not so it is necessary to know how should it be and what does “so” mean? And usually it is the main origin of the problem. And if you continue the medical analogy the health is not an absent of the disease but the presence of the energy, freedom of acts and ability to get pleasure from the life.

So prior to looking for and analyzing problems including legal problems it is necessary to understand how should be needed the “perfect” conditions of that system which we are going to “treat”. Such formulation gives us not only accurate understandings of the problems but offer a lot of variants of their solving.

Underneath as an example for instance of one of the concrete situation we would like to demonstrate how such problems are unmasked which impede with normal work of commercial banks in certain area. It is a matter of equity market.

Nowadays banks are principal gamblers at this market. Further their role will change. How the analyze of international practice shows the developing of Ukrainian stock market can take after the European model and just banks act the main part there. From principal gambler they will become main players.

In such situation two influential organizations which responsible for the creation of favorable conditions for banking business – Association “First Stock Trade System” (PFTS) and Association of Ukrainian Banks  (AUB) decided to combine their efforts. Mission of shares was substantial improvement of legal conditions for the work of commercial banks at the stock market. In accordance with the described above procedure method these associations decided to expose real problems on the assumption of the bank’s model as a principal element of financial system and universal financial institute. It is necessary to emphasize that using such model was controversial until recently. From the aspect of the equity market the principal question is that the bank can singly go into security trading or it must create detached legal entity for it. Until recently there is a purposeful pressure on the state’s and some of international organizations’ part for benefit of this function. Now this pressure is not felt and banks act how it is profitable for them. Some of them set up a trader, some – independent management separated it by the “Chinese screen”. We have some examples when two systems function in one bank properly the commercial bank which ensures standard functions of crediting, cash service  etc. and investment bank which engages placing securities, speculative operations, servicing strategically investors and corporative management.

But how clarified if operating at the equity market every one of them had the same problems with different complexity and origin. Some of them in results of legislation in past set up by means of theoretical nonsense without any evil design and now they are far in past necessities of the market and some – in results of complicated political game. There are some which appear because of passivity and unorganized of market participants and obviously directed to the creation of maximal favorable conditions for separate state organizations and their public officers.

It doesn’t take much time to expose problems technically. Already in some days extensive list of problems (more than 50 clauses) was formed which interfered normal work of commercial banks at the stock market. People always readily share their complexities especially with such persons who can help to obviate them.

Received problems were analyzed and divided into two groups: conceptual and legislative.

Such high abstract definitions as total immaturity of stock market and impossibility are included in the first group. And in connection with it there is a diversification of bank’s risks, absence of bank’s refinancing mechanisms through stock market instruments including mortgage-related securities and private pension fund shame. Long lists of “paint full points” of present legislation are included in the second group. And at some of them it should be worthwhile to pay attention a little bit more.

Corporate governance. There are plenty of problems with which operators of stock market will come on them sooner or later.  The most substantial was an overstated extends of the controlling bloc of the stock. In that case the controlling bloc of the stock is understood as an interest number of securities of the public company’s legal capital which is necessary to make amendments in the company’s legal capital. Its size is specified in the Act of Economic societies in the territory of Ukraine. The owner tooth and nail attempt to gather and retain this bloc of stock, and odd interests circulate at the market. The main problem which prevents bank activities at the stock market is a prohibition of the corporate bonds issue in the amount of more then 25 % of the legal capital (clause 13 of Securities Exchange Act). We reminded features of European model are showed clearly that at the Ukrainian stock market and it except banking monopoly establishes added to everything else principal rising by issuing debt securities i.e. bonds.

In the capacity of the specific problems of the corporate governance appropriate just of banks are named as follow: necessity to obtain a clearance of National Bank of Ukraine to the taking over of the commercial bank (article 34 of Banking Act); existence of such definitions which are not interpreted uniquely as “untarnished business reputation”; inadequate strict control through the “qualifying shareholding”. Numerous difficulties were noted also which shareholders of non-resident banks undergo (Ukrainian bank system does not welcome coming of foreign colleagues much and among them there are real monsters by our standards which are able to give national banking services a hard time).

Financial instrument. It is the most paint full course. The stock market incurs a heavy deficit of liquid financial instruments, in course of time the situation just grows worse. It is given the impression that public organs take the responsibility for the market regulations and act on the principle of “the less – the better”. And the most graphic example is a bill of exchange. It is possible to write books about the fate of entities. This security and the stock market had no luck. Firstly, the financial or bank bill of exchange – security which issues by banks without trade covering (that naturally considering on what banks cash money) was displeasure with the National Bank of Ukraine, and it was prohibited. Financial bill of exchange quickly got a reputation as an instrument of uncontrolled issuance of money stock and has rested in peace crushed by the precocious Circulation of bill Act. Of course we have to agree that to develop and incalculate the difficult agreed system of the regulation of this effect financial instrument regulation is more difficult then just close it out … But the memory of financial bill of exchange lives in baker’s hearts and its rebirth is one of the priority future tasks. Security and Stock market State Commission maintained the initiate of National Bank of Ukraine. Having mentioned that the bill of exchange – the security exceptionally is documentary (its identity is such in accordance with Circulation of bill Act) and greatly unique furthermore behindhand explained requirements of article 13 of National depositary system and features electrical security exchange in Ukraine Act. And Security and Stock market State Commission prohibited bill of exchange at the organized markets (stock markets and the First Stock Trading System). Bill of exchange problems are not completed just it. Bankers named numerous other less but also hardly pleasant features of legal regulation in this field.

Taxation. Traditionally it is a “dark area” of Ukrainian legislation, in the labyrinth of which not only one entity has disappeared. There are two problems concerning the stock market. Firstly, it is an incomplete citizens’ taxation of income from the securities services (Decree on income tax), that impediment the entrance to the market and involving in the turnover a huge internal investment potential. Secondly, it is a necessity of the reserves’ formation for covering for losses due to banking profit which was provided by the resolution of the NBU # 629 dated 30 of December 1999. The last document generally is one of the main limiter for banking vent to the stock market. Prescribed rules by this document are such that in many cases a bank has invested a substantial sum to the securities has to block the same sum in the reserve. Certainly it is necessary to insure risks but all over again to observe precautions.  And it is the same when a suspicious mother who protect her child from the street dangerous and inclose him at home. It is possible to suppose what can happen when she lets him go out…..

Exchange regulation. System of exchange regulation serves as an interface, a gate which helps to receipt of foreign investors’ funds to the stock market, and well-to-do national investors engage in humble attempts to place their capitals abroad and play the international market. Ukrainian system of exchange regulation is archaic and its base is Decree on exchange regulation and exchange controls. Moreover, learning such document, co-relation its rules with other acts which regulate security market give a ground for the most explanations. We can start from the definition of the currency values which provided at the first paragraph of this Decree. Nowadays the procedure of licensing of the exchange operations which stand in the way of banks to the work with foreign dept of the state (Eurobonds), other securities which nominated in the foreign currency is the main problem in the area of the suppression of the stock market and exchange regulation.

Conditions of professional activities. Security trading is one of the professional activities at the stock market (State Regulation of Ukrainian Security market Law). Before describing the problem with which banks face in this area has secondary character it is necessary to notice about that casus which has been playing hob in the traders’ mind for a long time. Now there is no official explanation in Ukraine who can work with securities and how? There are two polar points of view. First, the capable legal entity or the nature person can free discount the news without restriction. Second, any pidding securities trade has to be done through the intermediary of the professional security broker.  Early there was a special report of the Securities and Stock Market State Commission which established criterions of professional activities: from what amount can every desirous conclude a deal and to what just a security broker? But this report was successfully defeated through the legal proceedings. And the Securities and Stock Market State Commission is not in a hurry to eliminate the misconception.

Plenty of contradictions among Securities and Stock Markets Act and Banking Act; exaggerated reporting which benefit just regularly certified them by auditors; requirements of  bankers’ state certification which refer to the securities operations; draconian licence conditions of professional activities implementation (report of SSMSC # 60 dated on 14 March 2001) refer to other not very pleasure conditions of the professional activity.

Large quantity of problems appropriately needed the next step such as the priority resolution.

It was carried out at the special organized round table of PFTS and AUB in April of last year on the subject “Commercial banks at the stock market: conceptual problems”.  In contrast to many similar arrangements this round table pursued the accurate object such as determine main issues of making combined efforts of PFTS and AUB and also banks which are their members.

Question of making combined efforts and their coordination generally is very important for effective lobbing. Frequently it happens that at the same time several organizations try to solve the same problem spending the resources and wasting time, complicating the situation. Recently the tendency of the coordination of such actions is outlined in the area of legal regulation. It initiated in the result of the establishment of Coordinate Council of self-regulating organizations where entered PFTS, Professional association of registrars and depositaries, Ukrainian association of investing last year. The collaboration of PFTS and AUB (was effected by the collaboration contract) pursues the same object too. Another example is a lately concluded collaboration contract between PFTS and League of insurance organizations of Ukraine as the most lobbing organization which actively struggle for insurers’ interests. 

Let’s return to the subject of the establishing of favourable legal conditions for the commercial banks’ activities at the stock market. “The mainstream of legislation improvement of banks’ activities at the stock market” is a document which became the result of the mentioned round table. It was approved by the governing body of two associations. And it serves the fundament for qualitative and productive works. Not just special actions of the removal of local problems on its ground. This document became the important element of the settable strategy of the development of whole Ukrainian bank system.  

This example shows that nowadays there are some conditions for the real business influence to the state activities in Ukraine. Civilized lobbying is an internal part of legislation process in any developed society gradually become possible in Ukraine too. It is not just an instrument of standing interests but also the most important for lawyers is to establish the surface for the appearance of the qualitative legislation.

There is one more circumstance which made to perceive the formation of the lobbing institute in Ukraine enthusiastically. The law making process gives the opportunity to the layer completely to evince his capabilities, rise to the new phase of the profession skill and the personal growth. Taking part in such projects lead to the formation and strengthening of the active life position. The revival of Ukraine is possible just owing to such people.

Tags: банки, лоббизм, фондовый рынок