Digital markets, funding and payment servicesi Collective investment schemes
There are several legal forms that can be used for collective investment purposes in Russia, ranging from purely contractual, such as 'investment partnership agreements', to corporate ones, such as joint stock companies or incorporated investment funds. At the same time, available legal forms are not very well suited for modern-day crowd-investing purposes. The main hurdles are high incorporation costs, restrictions on the transfer of investment interests or other burdensome requirements.
The standard choice for a large-scale collective investment scheme remains a 'unit investment fund'. This legal form has been successfully used in the domain of collective real estate investments. The fund must be run by a professional investment management company.
Another option that is suitable for small-scale collective investments is a typical limited liability company (LLC). In this case, investment opportunities are marketed on an online platform, but actual transactions take place offline, since the transfer of interest in an LLC is subject to notary certification. The total number of members in the LLC is capped at 50.ii Automated digital advisory services or 'robo-advisers'
Until recently, digital advisers (also known as 'robo-advisers') have been beyond regulatory reach. In fact, there were no requirements applicable to investment advisers at all. This changed in late 2017, with the adoption of amendments into the Federal Law on Securities Market, according to which there will be a new type of professional market participant, namely investment advisers. The same amendment law states that if investment advice is provided by means of software, including via internet, such software shall be accredited by the Central Bank. This provision is interpreted to include robo-advisers within the scope of regulations that will be broadly applicable to investment advisers. The law came into force on 21 December 2018.
Investment advisers must be registered with the Central Bank and be members of one of the relevant SROs. SROs for investment advisers shall develop basic standards, setting out more detailed regulations for their members. The basic standards for investment advisers are yet to be developed.iii Crowdfunding and crowd investing
For the sake of this chapter, we will differentiate between the two concepts. Crowdfunding generally refers to cases where a broad community supports a project in exchange for symbolic tokens (perks) or future products (presale). By its very nature, crowdfunding is less risky and usually subject to less oversight from regulators. In Russia, it is not subject to any specific regulations. There are several platforms on the Russian market that let companies or groups of individuals raise funds in the form of donations or presale orders.
In contrast to crowdfunding, crowd investing implies that there is an investment interest (i.e., participants expect to receive profits from the success of a project, and such profits may vary or be non-existent). In the context of crowd investing, investee companies usually offer some sort of an interest in their capital or cash flow, be it a participation interest in an LLC, shares of stock in a joint-stock company or units in an investment fund. Transactions with all these instruments under Russian law require the physical presence of a purchaser, which is one of the obstacles to the widespread introduction of crowd investing. In fact, the only model that proved viable in these circumstances is online-to-offline, where investment opportunities are marketed online and actual transactions are entered into offline. At the moment, such platforms themselves are not subject to any licensing requirements, nor are they bound by a duty of care or loyalty to prospective investors. This is likely to change with the introduction of a legal framework for crowd investing, which has been proposed by the Central Bank (covered below).iv Crowd or peer-to-peer lending
There is no special legal framework for crowd lending (also known as peer-to-peer lending). In 2016, in its analysis of the peer-to-peer lending market, the Central Bank acknowledged that 'Russia fits the unregulated market model, since no definition of this type of activity exists in the legislation and there is no special regulation.' Despite this fact, a lot of peer-to-peer lending platforms on the market (but not all) are registered as microfinancing organisations (covered in more detail below), which allows them to extend loans themselves, instead of just bringing individual borrowers and lenders together on an online platform.
It is contemplated that certain regulations for peer-to-peer lending will be adopted soon. In fact, the Central Bank has already initiated discussions among market participants, created a working group and invited various platforms to submit certain reports on a voluntary basis.
Apart from peer-to-peer lending model, there is also a growing market for peer-to-business (P2B) lending, where individuals may extend loans to companies. Notably, such P2B-lending platforms operate despite the restriction set forth in Article 807(4) of the Russian Civil Code that explicitly prevents companies from raising public debt unless by means of a regulated bond offering or in other cases specifically set forth in the law.v Microfinancing
As mentioned above, some platforms combine activities of pure peer-to-peer lending (serving as a marketplace for individual borrowers and lenders) and microcredit (extending loans). In fact, the microfinancing industry (bearing similarities to what are known as 'payday loans' in the United States) is a big industry in Russia, with 2,007 microfinancing organisations (MFOs) registered with the Central Bank as of December 2018. The status of an MFO is required for an organisation to be able to extend loans on a regular basis (without being required to obtain a full-scale banking licence).
There are two types of MFOs: microcredit companies (MCCs) and microfinancing companies (MFCs). MCCs are not subject to capital requirements, but also limited in their sources of funding and the size of loans they may extend. MFCs must have at least 70 million roubles in their own capital but may also extend bigger loans and issue bonds. Despite the large number of MCCs, the market is dominated by MFCs that collectively account for 55.6 per cent of the total consumer loan book of 133.7 billion roubles as of the end of Q2 2018.
In the context of the growing segment of digital lending, since 2015, MFOs may issue loans of less than 15,000 roubles per one borrower with the means of remote 'simplified identification', which allows for full digital onboarding subject to certain rules.
Similar to other jurisdictions, interest rates for consumer loans are capped in Russia. Specifically, the full value of a consumer loan may not exceed by more than one-third of the weighted average interest rate calculated by the Central Bank on a quarterly basis for particular types of loan.vi Payment services
Payment services is a regulated activity in Russia. The main piece of legislation is the Federal Law on the National Payment System (the NPS Law), which is supplemented by numerous detailed regulations. The NPS Law describes different types of activities within the national payment ecosystem and imposes requirements depending on the type of activity. Credit institutions, including banks, may engage in most types of payment activities, whereas non-banking credit institutions are limited to certain activities (such as payment-clearing services and processing). As of February 2019, there were 33 active payment systems listed in the register maintained by the Central Bank.vii Open API
Unlike the European Union, where PSD2 will oblige banks to provide access to their customers' account information through application programming interfaces (API) to third parties, banks in Russia are not subject to such obligation.