State Duma approves draft law in second reading on protecting non-qualified retail investors
This draft law elaborated with the active engagement of the Bank of Russia is establishing a framework for the comprehensive protection of retail investors’ rights and interests. This will help newcomers in the financial market settle transactions with account of their needs, knowledge, experience, skills, and financial standing.
The draft law stipulates two categories, namely non-qualified and qualified investors.
Qualified investors may continue their operations in the financial market as before.
As regards non-qualified investors, without required testing, they will only be entitled to purchase the simplest and lowest-risk instruments, for instance, shares put on quotation lists, government securities of the Russian Federation (federal government bonds), bonds of Russian issuers having a certain credit rating, investment units of exchange-traded, open-end and interval unit investment funds, and foreign securities meeting established criteria (provided that information is disclosed).
Non-qualified investors willing to acquire other instruments, conduct margin transactions and financial derivative transactions will be obliged to undergo a test for the understanding of respective instruments and risks inherent therein. Such testing will be carried out by professional market participants. Should non-qualified investors fail the test, they will be allowed to resort to the ‘last word’ principle, that is, to settle a desired transaction to an amount of no more than 100,000 rubles (or to an amount of one lot, if its price exceeds 100,000 rubles). Moreover, non-qualified investors shall be notified of potential risks under any circumstances.
Professional market participants shall arrange the testing according to the rules that will be stipulated in the basic standards on the protection of investors’ rights. The requirements for such basic standards are to be set by the Bank of Russia.
Should professional market participants fail to comply with the procedure, they will be obliged to reimburse losses and expenses incurred by investors, and, if needed, to buy out the financial instruments purchased by their clients.
Those qualified investors who received this status before the effective date of the law will preserve their status. Moreover, testing is not mandatory if an investor already has the experience of relevant transactions.
After its approval, the law will become effective on 1 April 2022. Therefore, financial market participants will have sufficient time to get prepared for the new regulation.