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The gap in Russia’s regulatory framework for financial intermediaries, including in the forex market, needs urgent attention as it harms the reputation of market participants and hinders investor confidence, the Central Bank of Russia (CBR) said in a consultative report on the matter, published on its website on Monday.
In the report, the CBR has made an analysis of modern intermediation models used by financial entities and identified bottlenecks in the regulation of financial intermediaries in the country. It intends to discuss the issues with market participants and, based on the outcomes of the discussion, to formulate a concept to upgrade the regulation of broker activities.
Overall, investor confidence in the Russian financial markets is rather low, despite the relatively stable regulation of financial intermediaries in the country, according to the CBR report. One reason for this is that there are numerous fraudulent market participants that harm investors and nevertheless remain unpunished due to gaps in the legal framework.
The Russian central bank discusses the ways to proceed from rules-based to principles-based regulation of intermediation services. The Russian regulator believes that it is necessary to employ a uniform approach to both regulated and non-regulated segments of the financial intermediation. Currently, brokers fall under certain regulatory requirements solely if they employ a certain type of legal model. This should be changed and brokers should be regulated regardless of the legal form of their activities. In this regard, the bank refers as an example to the EU Markets in Financial Instruments Directive (MiFID), which applies across all member states and various financial segments.
Regulation of financial intermediaries in Russia is strongly limited, the report indicated. For one thing, the legislation is rather old and does not consider innovations, such as market participants’ broad usage of technologies on a daily basis. The use of such technologies has transformed the market. The regulatory framework should pay greater consideration to the development of high technologies in the area of financial services and currently there is lack of control in this area, the bank noted.
The lack of transparency is another problem. According to the CBR, brokers should be clearer about the type of services and tools they offer, their trading conditions, costs and associate risk. Protection of the proprietary rights of brokers’ customers is another issue that need not be ignored. Brokers need to be actively responsible for protecting investors’ interests. All this would set up conditions for strengthening investors’ confidence in financial intermediation and ensure a further development of the sector.
The CBR started requiring as of the beginning of 2016 locally-based forex brokers to be licensed in order to operate in the country. However, foreign brokers are still allowed to target local citizens without any significant restrictions and most market participant continue to operate in the country through their foreign units. Last week, the central bank announced it intends to determin its position regarding binary options trading in the country by the end of 2017.