2 July 2013 Russian President signed into Federal Law No 146-FZ introducing amendments to Federal Laws "On Banks and Banking Activity", "On the Central Bank of the Russian Federation (Bank of Russia)" ("banking legislation") and other legislative acts of Russia.  

Federal Law No. 146-FZ (the "Law") has been adopted to bring Russian banking legislation regulating supervision and disclosure of information by credit institutions, banking groups and bank holdings on their activity in accordance with international practice. Key amendments relate to banking groups and bank holdings, participation interests in the charter capital of credit institutions, requirements to credit institution officials and BoD members, as well as risks undertaken by such credit institutions.  

Banking groups and bank holdings  

The Law specifies definitions of a banking group and a bank holding.  

The Law defines a banking group as an association of legal entities (before the amendments – of credit institutions) without its own legal identity, where one or more legal entities are controlled or significantly influenced by one and the same credit institution.  

A bank holding is defined as an association of legal entities without its own legal identity that includes not less than one credit institution (as well as other legal entities that are not credit institutions, if there are any) controlled by a legal entity that is not a credit institution, provided that the banking activity of the holding is not less than 40 per cent from its overall activity.  

For banking group and bank holding participants definition purposes, control and significant influence shall be defined in accordance with the International Financial Reporting Standards (the "IFRS") adopted in Russia. Before the amendments similar criteria were defined by the Law on Banks and Banking Activity.  

The Law provides a wider list of activities that shall not be performed by the management company of a bank holding and provides an obligation to notify the Bank of Russia on the establishment of such management company and its authorities.  

If a bank holding parent company does not comply with banking legislation requirements, the Bank of Russia may:  

1) impose limitations on transactions between a credit member institution and the bank holding parent company or member companies for up to six months;  

2) prohibit performance of certain bank operations with the bank holding parent company and member companies for up to one year.  

Acquisition and trust acquisition of shares in a credit institution  

The Law provides a wider list of events requiring prior consent of the Bank of Russia for acquisition of shares in a credit institution.  

The maximum amount of shares in a credit institution subject to acquisition without prior consent of the Bank of Russia has decreased from 20% to 10%. In addition, certain thresholds have been set forth for acquisition of shares in a credit institution which, when exceeded, require prior consent of the Bank of Russia.  

Also, the Law provides that parties acquiring shares in a credit institution shall comply with goodwill requirements.  

Parties acquiring more than 10 per cent of shares in a credit institution, and their sole executive bodies shall comply with goodwill requirements. Non-compliance with such requirements leads to withholding of prior consent to share acquisition, and when shares are acquired upon establishment of a credit institution, to refusal to perform state registration of such credit institution.  

If parties owning more than 10 per cent of shares in a credit institution or parties performing control over them (their sole executive bodies) have unfavourable goodwill, the Bank of Russia shall issue an order to remedy the breach or to reduce participation in the charter capital (termination of control). From the date when such order has been received till the date of its execution or annulment such owners shall have voting rights attached to shares not exceeding 10 per cent from the shares of the credit institution.  

Officials and BoD members of a credit institution  

The sole executive body, its deputies, collective executive body members, chief accountant, deputy chief accountants of a credit institution, chief representative or chief accountant of a credit institution branch shall comply with goodwill requirements. Non-compliance with these requirements leads to refusal of the Bank of Russia to approve nominees for these positions, and if a nominee for a credit institution to be established is not compliant, such non-compliance leads to refusal to perform state registration of the credit institution.  

The amendments, inter alia, specify:  

  • the list of officials subject to limitations provided by the Law on Banks and Banking Activity;
  • the list of entities where officials shall not hold chief representative or chief accountant positions.  

BoD members shall comply with goodwill requirements, too. If a court judgement of guilt has come in effect in relation to a credit institution BoD member for an intentional crime, or a court judgement providing an administrative penalty in the form of disqualification has come in effect, such BoD member shall be deemed withdrawn from the BoD starting from the effective date of the relevant court judgement.

A credit institution may impose certain official duties implying a right to dispose of monetary funds in the accounts of the Bank of Russia on persons holding other positions, subject to their compliance with qualification and reputation requirements.  

Risk and capital management and control systems

New clause 11.1-2. in the Law on Banks and Banking Activity provides requirements to risk and capital management systems and an internal control system for credit institutions.  

Heads of risk management, internal audit and internal control services of any credit institution shall comply with qualification and reputation requirements set forth by the Bank of Russia.  

Under the Law, BoD competence includes issues related to approval of risk and capital management strategies for a credit institution, banking risk management techniques and quantitative risk assessment model application procedure, as well as assessing compliance with such documents by executive bodies of a credit institution.  

Statutory requirements

The Law introduces a new statutory requirement for credit institutions – maximum risk per party related to the relevant credit institution (group of parties related to the relevant credit institution). Under a new clause 64.1 in the Law on the Bank of Russia, such requirement is represented by a percentage from the amount of credit institution equity funds (capital) and shall not exceed 20 per cent from credit institution's equity funds (capital).

A party related to a credit institution shall mean:  

1) a legal entity performing an activity controlled or significantly influenced by the credit institution;  

2) an individual (his/her immediate relatives) that (i) controls or has a significant influence on the credit institution; (ii) is a BoD member, chief representative or another official with competence over transactions the outcome of which may affect compliance with statutory requirements by the credit institution or may give rise to grounds for insolvency prevention arrangements;  

3) a party that is deemed as such under a resolution issued by the Bank of Russia's Banking Supervision Committee.  

For maximum risk amount to be determined per group of related borrowers, the Law provides a more precise definition for a group of related borrowers.

A group of related borrowers shall consist of borrowers: (1) where one of the borrowers controls or has a significant influence on another; (2) that are controlled or significantly influenced by a third party; (3) that are interrelated in such a way that financial decline of one party may lead to non-performance of obligations to a credit institution (banking group) by the other party. Control and significant influence shall be defined under the IFRS adopted in Russia.  

Information disclosure

The Law provides amount and terms for disclosure of information on the activity of a credit institution, banking group and bank holding. These amendments shall come in effect 1 January 2014.  

A credit institution shall disclose an annual accounting (financial) statement (before the amendments, a balance sheet and a profit and loss statement), an audit report on such accounting statement and its accuracy, on an annual basis; an interim accounting (financial) statement (before the amendments, a balance sheet, a profit and loss statement, information on capital adequacy, information on doubtful loan and other asset reserves), on a quarterly basis. In case of an interim accounting (financial) statement audit such statement shall be disclosed together with an audit report prepared by an audit company.  

Banking group head credit institution and bank holding head company shall annually disclose consolidated financial statements and a related audit report (before the amendments, consolidated accounting statements and consolidated profit and loss statements). In addition, banking group head credit institution shall every six months disclose interim consolidated financial statements (before the amendments no obligation was provided to disclose the information in such intervals).  

Furthermore, the Law provides an obligation for credit institutions and banking groups to disclose information on risks.  

Credit institutions shall disclose information on risks undertaken, their assessment procedures, risk and capital management on a quarterly basis; head credit institution of a banking group shall disclose such information every six months.  

Labour

Remuneration system in a credit institution shall be in accordance with the nature and scope of its transactions, performance results, level and combination of risks undertaken, and shall provide an opportunity to reduce or cancel payments if the credit institution performance results (in whole or in its respective business) are negative.  

If the Bank of Russia's regulations are not complied with, the Bank of Russia may require that a credit institution shall limit the amount of compensations and (or) incentive payments to credit institution employees for up to three years.  

Under the Law, BoD member competence includes approval of HR policy for a credit institution.  

The Law shall come in effect 2 October 2013, except for certain provisions coming in effect 1 January 2014 and 1 January 2015.