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Strengthening risks of liability with respect to obligations of finacial institutions

Pepeliaev Group advises that, from 1 July 2021 a significant amendment is expected in terms of the regulation of the status of persons controlling the activity of credit institutions and insurance companies and non-public pension funds (“financial institutions”), and their liability.

Draft Law No. 909987-7 adopted by the State Duma (the Russian Parliament's lower chamber) and submitted for consideration to the Federation Council (the Russian Parliament's upper chamber), provides the Russian Central Bank (also the “Bank of Russia”) with the right to independently determine persons that control Financial Institutions (the “controlling persons”) based on the criteria of bankruptcy legislation not only in cases of the insolvency of such institutions, but also during their standard activity. In addition, the draft law allows the Central Bank to raise claims against the controlling persons to have subsidiary liability imposed, and claim that their assets be seized until the corresponding petitions are filed.

Which persons are covered by the new rules?

The legislative amendments relate to the following financial institutions (within the meaning of article 180 of the Federal Law “On insolvency (bankruptcy)” (the “Bankruptcy Law”)) and their controlling persons:
  • credit institutions;
  • insurance companies;
  • non-public pension funds.

Who can be recognised as a controlling person?

In accordance with the new rules of industry legislation[1], a person is recognised as a controlling person of a financial institution in accordance with provisions of insolvency legislation, namely articles 61.10, 184.13, 187.12, and 189.23 of the Bankruptcy Law.
In addition, a controlling person can be a person who is exercising or has exercised control over a financial institution defined in accordance with IFRS recognised in Russia.

comment.jpgSince the Bankruptcy Law interprets broadly the concept of a controlling person, from the position of any other connections of a person with the controlled legal entity rather than corporate only, the draft law in question significantly widens the group of persons to whom the new rules will apply. Now not only in a case of bankruptcy but also during the standard activity of a financial institution, any person that is able to give binding instructions to such institution or in any other way determine its actions, including with respect to concluding transactions and determining their terms and conditions, can be recognised as a controlling person. It should be remembered that for credit institutions the period of such control is not limited to three years preceding the origination of signs of bankruptcy.

New obligations are imposed on financial institutions with respect to filing reports with the Bank of Russia

Financial institutions will be obliged to determine their controlling persons on a permanent basis in accordance with the criteria of the Bankruptcy Law, to update information concerning these persons and submit it to the Bank of Russia in the form, according to the procedure and within the deadlines, which will be established by the Bank of Russia.
The institution must notify controlling persons that the information has been sent to the Bank of Russia within 1 business day from the date of sending.
With respect to each financial institution, the Bank of Russia will maintain a list of controlling persons of such institution. Information about these persons will be transferred to the Federal Financial Monitoring Service (known by the abbreviation Rosfinmonitoring)
comment.jpgThe current procedure provides for the need to disclose to the general public information on persons controlling or exerting a material influence on banks participating in the system of compulsory insurance of individuals’ deposits in Russian banks and a number of not-for-profit organisations, non-public pension funds, insurance companies, and management companies and microfinance companies[2].

It is still unclear whether the new list of controlling persons is additional in terms of information on persons controlling or exerting a material influence on the corresponding institutions, or will replace it in full. Please be reminded that the last of the named categories of persons establishes certain requirements, in particular with respect to their financial condition .

The draft law does not provide a new procedure for management companies and microfinance companies[3].

The Russian Central Bank will be able to determine independently persons controlling financial institutions

A decision to recognise a person as a controlling person can be adopted by the Committee of Bank Supervision of the Russian Central Bank if the person meets criteria established by the Bankruptcy Law. The corresponding decision must contain the reasoning for its adoption, including information concerning the circumstances based on which it was adopted.
The financial organisation must notify the corresponding persons that they have been recognised by the Bank of Russia as controlling persons within 1 business day from the date when the information was received from the Bank of Russia. Within 30 days this information is published on the Bank of Russia’s website.
A person included by the Bank of Russia in the list of persons controlling a financial institution is excluded from this list upon the expiration of 3 years from the date when the specified person stopped meeting the signs of a controlling person established by the Bankruptcy Law.

How to challenge inclusion in the list of a financial institution's controlling persons?

Irrespective of whether the person was included in the list of controlling persons based on the information received from the financial institution or at the initiative of the Bank of Russia, a person included by the Bank of Russia in such list is entitled to appeal such a decision to the Commission of the Bank of Russia for the consideration of appeals against inclusion in the lists of controlling persons. In the case of a refusal the inclusion can be challenge through a court procedure.
The appeal must be considered by the Bank of Russia’s commission within 30 days; the consideration procedure will be established additionally.

The new presumptions of the status of a controlling person in a bankruptcy case

The Bankruptcy Law is amended by a new presumption pursuant to which a person controlling a financial institution is a person included in the list of controlling persons of the corresponding financial institution by the Bank of Russia, unless proven otherwise
comment.jpgIf the defendant fails to provide a well-grounded response to the petition to impose subsidiary liability or to recover losses, then the burden of proving the absence of grounds for liability can be imposed on the defendant.

The Bank of Russia is granted right to file petitions to impose subsidiary liability and for the adoption of preliminary provisional remedies

Now the Bank of Russia can file a petition to impose subsidiary liability on persons controlling financial institutions.
In accordance with article 47 of the Commercial Procedure Code (part 1.1 and the additions in part 4 of article 99) if the Bank of Russia identifies a negative amount of the financial institution's own funds (capital) the Bank of Russia is entitled to file a petition with the state commercial court to have preliminary provisional remedies adopted in the form of the seizure of monetary funds, securities and real estate of controlling persons in the amount necessary for replenishing the financial institution’s own funds (capital) and bringing them up to their standard amount.
Such petition can be filed before a petition is filed to impose subsidiary liability on the specified persons or to recover losses.
In order for the court to accept the petition for court proceedings, it should contain information allowing grounded presumptions with the minimum necessary extent of accuracy to be made that the defendant specified in the petition is the controlling person. At the same time, the obligation to provide a counter security cannot be imposed on the Bank of Russia.
comment.jpgThe consideration by the court of the case involving challenging the inclusion in the list of persons controlling the financial institution prevents neither preliminary provisional remedies from being adopted nor a petition to impose subsidiary liability or to recover losses from being considered.

Guarantees and compensations for controlling persons

The petition in connection with which the court should take measures aimed at ensuring the property interests of the Bank of Russia must be filed within 30 days from the date when a ruling to adopt preliminary provisional remedies was issued.
If the Bank of Russia failed to file the petition in time or the petition was dismissed, the controlling person with respect to whose property the preliminary provisional remedies were taken is entitled to claim from the Bank of Russia the recovery of losses or payment of compensation. However, by virtue of article 98 of the Commercial Procedure Code the amount of compensation is determined by the court depending on the nature of the violation and other circumstances taking into account the requirements of reasonableness and fairness within the limits from RUB 1,000 to RUB 1,000,000.
comment.jpgSince the amount of compensation can be incommensurate with the amount of losses caused as a result of the seizure of expensive assets, controlling persons need to timely form the evidence base proving the amount of losses caused in fact.

What to think about and what to do

Managers, members of management bodies, participants and beneficiaries of financial companies, and persons planning to acquire such status need to assess whether they have signs of controlling persons, including in terms of the Bankruptcy Law.
It is necessary to monitor inclusion in the list of persons controlling a financial institution and, if there are grounds, to timely appeal the inclusion in such list.
If you have the status of a controlling person we recommend regularly assessing the planned actions and decisions from the standpoint of potential liability.

Help from your adviser

Pepeliaev Group’s experts have extensive experience of supplying services in the area of risk management in relation to the requirements of legislation on financial institutions and bankruptcy legislation, and on the protection of the interests of controlling persons when dealing with the Bank of Russia in disputes on subsidiary liability and on the reimbursement of losses.  

[1] Article 11.1-3 of the Federal Law “On banks and banking activity”, article 30.1 of the Law of the Russian Federation “On organising insurance business in the Russian Federation”, and article 6.2-1 of the Federal Law “On non-public pensions funds”.
[2] The Bank of Russia’s Regulation No. 622-P “On the procedure for disclosing information on persons controlling or exerting a material influence on banks participating in the system of compulsory insurance of individuals’ deposits in Russian banks, and on the procedure for disclosing and submitting to the Bank of Russia information on the structure and composition of the shareholders (members) of non-governmental pension funds, insurance companies, management companies, microfinance companies, including persons controlling or exerting a material influence on such funds and companies” dated 26 December 2017
[3] The Bank of Russia’s Regulation No. 626-P “On assessing the financial position, on the requirements for the financial position and on the grounds for recognising as unsatisfactory the financial position of the founders (members) of a credit institution and other persons provided for by Federal Law No. 281-FZ dated 29 July 2017 “On amending certain items of Russian legislation with regard to improving the mandatory requirements for the founders (members), management bodies and officers of financial institutions” dated 28 December 2017.

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