The NBU has introduced new criteria for the importance of financial market participants, which make it impossible for some players to obtain employee reservations. Although financial sector professionals have become both conscripts and volunteers defending Ukraine since 2014, some financiers must remain at their jobs as the viability of the Ukrainian economy depends on it.
The National Bank's new rules create serious reservation problems for banks, insurance companies and other financial market actors. This threatens the survival of a number of banks and insurers. Industry associations are already asking the NBU to urgently review the criteria.
Mind looks into who may now be subject to mobilisation and why not all companies are ready to agree with such rules.
What has changed? Yesterday, on 29 March 2023, NBU Resolution No. 32 came into force. It defines the criteria for the importance of financial industry players.
According to the document, only a few market participants will be considered critically important:
- systemically important banks;
- insurance companies that have a licence for life insurance or compulsory motor third-party liability insurance and meet solvency standards;
- lessors that are members of a banking group in which the responsible person is a systemically important bank and the value of its new financial leasing agreements concluded during the last reporting year exceeds UAH 1 billion;
- payment market participants classified as systemically important or important payment systems, important payment system participants, and important technology operators based on the results of their activities in 2022.
This category also includes legal entities that work with the financial sector and meet several criteria. For example, they provide services to systemically important banks that are ancillary to payment services, and their activities are directly related to servicing ATMs, payment terminals, and performing interbank payment transactions for at least 35% of the number of relevant devices/operations of a systemically important bank.
It also applies to legal entities that have obtained a NBU licence to provide cash-in-transit services to banks and a NBU approval for cash handling and storage operations. However, provided that such a company collects and transports cash worth more than UAH 5 billion (including government funds) on average per quarter, and collects cash in at least 1,000 outlets and at least 1,000 ATMs and/or self-service software and hardware systems.
In order to be recognized as systemically important, a company must meet at least three among the following seven criteria:
1) the total amount of taxes, duties, and payments (except for customs ones) paid to the state and local budgets during the reporting tax year exceeds the equivalent of EUR 1.5 million at the official NBU exchange rate for the same period (confirmed by a certificate of the supervisory authority where the company is registered);
2) the amount of foreign currency inflows, except for loans and borrowings, for the reporting tax year exceeds the equivalent of EUR 32 million at the official NBU exchange rate for the same period (confirmed by a certificate from the servicing bank);
3) the company is of strategic importance for the economy and security of the state in accordance with the Resolution of the Cabinet of Ministers of 4 March 2015 No. 83;
4) the enterprise is important for the national economy or for meeting the needs of the territorial community;
5) the absence of arrears in the payment of the unified social contribution (confirmed by a certificate from the relevant regulatory authorities or an extract from the State Tax Service's information system);
6) the average salary of the insured employees at the enterprise for the last calendar quarter is not less than the average salary in the region for the fourth quarter of 2021 according to the State Statistics Service (confirmed by a certificate provided by the enterprise);
7) the company is a resident of Diya.City.
The importance for the economy is determined by the right of an enterprise to reserve employees who play an essential role in the enterprise and therefore can be exempted from mobilisation. These are specialists without whom companies will not be able to operate: managers, chief accountants, lawyers, dedicated professionals, such as IT specialists, etc.
At the same time, existing reservations will not be cancelled at this time, in accordance with the current Cabinet of Ministers' resolution.
At the end of January, the new Procedure for Reservations for Conscripts on the List of Conscripts during Martial Law came into force. According to it, the reservation is valid, among other things, for employees of state bodies and enterprises that have mobilisation tasks or meet the needs of the Armed Forces. It also applies to enterprises, institutions, and organisations that are critical to the functioning of the economy and the livelihoods of the population during a special period.
What does this mean for the financial market? The first thing that attracts attention is the ethical component of the changes. It is obvious that the change in the format and mechanism of employee exemptions is dictated by the requirements of wartime. "And if we look at it from the standpoint of governing a country at war, it is likely that the reservation system itself, regardless of the specific format, cannot be fair in principle. One way or another, it will raise questions in society," admits Ivan Svitek, CEO of Unex Bank. According to him, the bank is a complex system that requires the participation of many highly qualified specialists of different profiles.
"The most vulnerable are not large systemic banks, which usually have multiple duplications of functionality due to their larger staff, but small financial institutions that do not have the possibility of such duplication," Svitek said. The staff of small banks makes up only a few per cent of the total industry staff, but the proportions of small banks in innovation can be significant.
How will the possibility/impossibility of reserving an employee be determined? The basis for submitting lists for the reservation of people liable for military service is not only the factor of the importance of a particular specialist. "There are five other criteria, except for Diya.City residency, which gives a company the right to request a reservation for 50% of its employees," explains Yuliya Liashko, the lawyer at Juscutum. At the same time, it is incorrect to say that there is no chance for reservation for institutions that do not comply with the requirements of the NBU Resolution. "However, it is much more difficult for smaller financial market actors to meet at least three criteria that would allow them to reserve employees," she adds.
According to Vyacheslav Cherniakhovsky, Chairman of the Insurance Business Association, if an insurance company is not a critical one, it will not have enough average salary or tax payments to meet the required three criteria.
Who will be impacted by the innovation? According to Cherniakhovsky, almost 70 small insurance companies, i.e. every second one in the market, will not be able to book even their key employees.
"The NBU's decision on the insurance companies completely contradicts the general approach publicly stated by representatives of the parliament and the government (in particular, Yuliya Sviridenko, First Vice Prime Minister of Ukraine and Minister of Economy) that it is now crucial for Ukraine to ensure the functioning of the economy, save jobs and fill the budget with taxes and fees. After all, the main burden of financing the Defence Forces falls on the state budget," Cherniakhovsky said.
In his words, in small insurance businesses, each important function (IT, legal, insurance claims, financial monitoring, etc.) is often covered by only one or two people.
"If these people, not to mention the management of the head office and branches, are drafted into the army, the company will be forced to stop working. In most companies, some employees have already gone to war, either voluntarily or by conscription. Insurance traditionally employs a lot of women. Thus, we are talking about a very small number – 5–20 people per company who need to be 'reserved' so that businesses can function normally and fulfil their obligations to customers," explains Vyacheslav Cherniakhovsky.
The situation with banks is by no means easier. "Only 15 out of 65 banks are systemically important. We are collecting suggestions from the remaining 50 banks and will appeal to the authorities. Because if key staff – chief accountants or IT specialists, for example, – are drafted, a big problem may arise," says Andriy Dubas, President of the Association of Ukrainian Banks.
What are the risks? Non-systemically important banks, as well as non-core insurers, are partly either regional players or significant in their industries. For instance, insurance companies specialising in military risks, aviation insurance, or ship/cargo insurance are members of associations that are critical to the country, such as the Nuclear Insurance Pool, etc. They do not work with life insurance or MTPL, but now they may be put on the verge of survival if their key employees are mobilised due to the NBU's decision.
The medium and small bank segment also includes players that are significant for a region or industry, such as fintech. And while previously a bank would identify a list of key people important to the bank and send this list for reservation, it will be difficult to get a reservation without meeting the criteria.
What do financial market participants offer? Mykhailo Komisaruk, a shareholder of Family Bank, believes that the reservation conditions should be identical for the industry, with individual adjustments to the criteria: "These could be reputational indicators, such as no ties with the aggressor country, no violations in financial monitoring, and economic indicators, such as average salary, profit/paid taxes per employee, etc."
Oleg Kravchenko, Chairman of the Board of Etalon Insurance Company, one of the oldest companies in the market, is convinced that the reservation criteria need to be eased, as many insurers do not meet them. For example, the right to reserve will be granted to ICs that have either a life insurance licence – and there are only nine such companies, or a MTPL licence – and there are about 40 such insurers.
Other factors are already in place for insurers that will determine their importance. For instance, compliance with the NBU's basic requirements. Thus, the company must comply with solvency and capital adequacy ratios and the riskiness of operations.
"We hope that we meet the reservation criteria. Several processes need to be completed to say for sure," says Oleg Kravchenko.
"All our male employees have already volunteered to go to the front," says Rostyslav Kravets, Head of Kravets & Partners Law Firm. He believes that the National Bank's proposals contradict the Constitution of Ukraine. "Earlier, the Cabinet of Ministers approved the criteria for strategic enterprises to be eligible for reservations. Given the state of the economy, these include all financial sector companies that pay taxes and create jobs. I don't believe that highly specialised bank experts should be subject to mobilisation. Why are programmers and accountants exempt from mobilisation in a large bank, but not in a small one?" Kravets asks rhetorically.
At the same time, members of the field-specific associations hope that the government will hear their arguments and manage to take into account the interests of financial system employees during the war.
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