FinTech 2019 Comparisons

Last Updated March 22, 2019

Contributed By Allen & Overy

Law and Practice

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Allen & Overy is one of the largest and most innovative international legal practices, with approximately 5,500 staff and some 550 partners worldwide. Since opening its first office in London in 1930, the firm has grown into a global organisation with 44 offices in 31 countries across Europe, Asia Pacific, the US, South America, Africa and the Middle East. It has over 40 years of experience advising on transactions concerning the former Soviet Union and has been particularly active in Russia since opening its Moscow office in 1993. This office now houses three partners and some 20 lawyers advising on all aspects of English, Russian and US law, focusing in particular on banking and finance, corporate and M&A, dispute resolution, competition, capital markets and real estate. Strong connections with the leading financial services authorities allow the firm to support clients in dealings with local regulators, marrying regulatory expertise with deep and broad experience in the technology sector. It has advised on some of the cornerstone projects in the banking technology market and works with some of the most successful technology companies.

The Russian FinTech market has been growing rapidly over the last 12 months, and the Digital Economy Programme of the Russian Federation, approved by the Order of the Government of the Russian Federation No. 1632-р (dated 28 July 2017), has ncentivised its development. The course towards the digitisation of the Russian economy is a long-overdue process of qualitative change in the principles of operation of the financial market. New technologies have permitted increases in the volume and speed of transactions, fundamentally changing the principles of providing financial services, increasing their availability and expanding the product line for consumers, as well as significantly reducing costs for financial market participants. The growth of technology in Russia has been accompanied by the emergence of a significant number of technology companies.

In addition to the Digital Economy Programme, the Central Bank of Russia (CBR) has introduced a new basic document determining the development of innovative technologies in the financial market, entitled 'The Main Directions of Development of Financial Technologies for the Period 2018-2020' (referred to hereafter as the 'Main Directions'). The Main Directions include descriptions of the main trends in the direction as well as the goals and objectives of the CBR in this area, with a roadmap on the implementation of the relevant activities.

The Main Directions stipulate that the CBR considers big data and data analysis, mobile technologies, artificial intelligence, robotisation, biometrics, distributed registries and cloud technologies to be the most promising financial technologies.

As a part of the implementation of the Main Directions, the CBR, together with market participants, launched the 'marketplace project' in December 2017. The goal of this project is to organise a system of remote retail distribution of financial products/services and registration of financial transactions.

'Masterchain' is also one of the key projects initiated by the CBR and developed by the Association for the Development of Financial Technologies (the 'FinTech Association') since 2016. Masterchain is the national network on the blockchain, which is created to transfer value and related data between its participants. The platform is supported by the CBR and a number of major Russian banks. The project belongs to the category of financial technologies, and it will serve the monetary sphere and banking business processes. Masterchain is expected to be launched in 2019.

At the end of June 2018, remote identification of banks’ clients commenced. Since then, the collection of biometric data has become available at more than 400 bank service points in 140 cities in Russia. Remote identification is a mechanism that allows individuals to receive financial services remotely, confirming their identity in any bank using biometric personal data. To do this, a client must pass the primary identification test in one of the authorised banks, which have the right to register individuals in the Unified Identification and Authentication System (ESIA) and the Unified Biometric System. Such a bank will carry out the identification of an individual in their presence, register their identity in the ESIA, and also send their biometric parameters to the Unified Biometric System.

Another important step in the development of the FinTech market in Russia is the emergence of the draft legislation creating a legal framework for the market of cryptocurrencies and tokens in Russia (the 'Law on Cryptocurrency'), which initially consisted of the three draft laws: the draft law 'On Digital Rights', the draft law 'On Alternative Ways of Attracting Investments (Crowdfunding)' and the draft law 'On Digital Financial Assets'. On 18 March 2019 the draft law 'On Digital Rights', which introduces amendments to the Civil Code of the Russian Federation, was approved by the President of the Russian Federation and is to come into force on 1 October 2019. The law introduces a definition of digital rights. However, the law does not contain definitions of either tokens or cryptocurrencies. The main innovations of the Law on Cryptocurrency as a whole are the equation of digital currencies to property, as well as the restriction on investments in ICOs. The other two draft laws passed the first reading and are expected to be shortly considered at the second reading.

It is expected that the legislation regulating cryptocurrency and ICOs in Russia will finally come into force next year.

In order to develop the key FinTech areas in Russia, active actions from the CBR are expected, in particular the creation and development of digital financial infrastructure, the development of cybersecurity standards, the creation of a friendly regulatory environment for technology development, and the development of a system for protecting the rights of investors in digital assets and consumer rights relating to high-tech financial services.

The most popular business model today is that of a collaboration between traditional financial players and technology start-ups. Financial technologies and innovations are actively transforming the entire consumer industry, which is why it is now important for banks not to miss the opportunity of collaboration with FinTech start-ups. A good example of such collaboration is the partnership between Yandex and Sberbank (which is a major state-owned bank in Russia) to create a joint venture based on Yandex.Market. In this collaboration Yandex acts as a FinTech provider, and the bank as an infrastructure provider.

The current situation concerning the regulation of financial and regulatory technologies in Russia is this: although these technologies exist and are actively used by financial market participants, there is no legal regulation of them as such. At the state level there is recognition and understanding of this problem, and a general concept of legal regulation of these technologies has been formed.

Within the framework of the implementation of the Digital Economy Programme, the Russian Government has planned the development and adoption (by 2020) of regulatory legal acts promoting the introduction and use of innovative technologies in the financial market, including the improvement of financial services mechanisms in electronic form and ensuring their information security in order to introduce and use innovative technologies in this sector of the economy.

The legal regulation of FinTech should follow the general vectors of the development of the law, taking into account the following three main areas:

  • prevention of the laundering of proceeds from crime and the financing of terrorism;
  • taxation; and
  • protection of user rights.

Since the FinTech industry in Russia is still at its initial stage, FinTech industry participants are either subject to the already-existing legislation or remain unregulated.

Currently, there is insufficiently rapid improvement in the regulatory framework of promising FinTech segments, and the presence of regulatory restrictions impedes the development of financial technologies. Certain segments, such as cryptocurrencies, tokens and ICOs, for example, remain fully unresolved and, thus, any related activities are subject to high legal and regulatory risks.

In this regard it is necessary on the one hand to create a favourable regulatory environment for the development of innovations and new business models, as well as government programmes and initiatives aimed at reducing industry barriers and developing competition in the local market. On the other hand, it is of great importance to control and minimise the risks associated with the functioning of the FinTech market.

The regulatory platform ('sandbox') of the Bank of Russia was launched in April 2018 for the piloting and rapid introduction of new financial services and technologies that require changes in legal regulation.

The objectives of the Bank of Russia sandbox are to promote the development of innovation, the development of competition, the improvement of security, the availability of financial services and the reduction of time and costs for the introduction of new services.

The sandbox will be used to model the processes of applying innovative financial services, products and technologies to test hypotheses on the positive effects of their implementation. According to the results of piloting, a financial service or technology may either be approved, with the subsequent formation of a plan to develop the necessary regulatory framework for its implementation, or the initiative may be considered inexpedient.

To assess the need for piloting and the impact of financial services and technologies on the financial market, and to prepare proposals for changes in legal regulation, an expert council of market participants and an interdepartmental expert council are created at the CBR. In addition, an interdepartmental advisory council will prepare conclusions on the results of piloting, as well as the co-ordination of draft action plans required for the implementation of financial services and technologies.

Piloting on the regulatory platform can be initiated by any organisation that has developed or plans to use an innovative financial service or technology. The initiator company must submit an application to the CBR. The CBR and specialised agencies study the application and assess the potential risks, ask questions and decide whether to implement the services. Technological testing of the infrastructure of the organisation that submitted the application, or the infrastructure of the CBR, is also possible. The CBR names seven technological directions of projects for piloting, in order of priority:

  • distributed registries;
  • big data and machine learning;
  • biometrics;
  • mobile technologies;
  • digital profile;
  • artificial intelligence and robotisation; and
  • open interfaces.

At the same time, projects related to the introduction, development and use of cryptocurrencies, which are not regulated at all, are not supported by the regulator, despite the fact that there are no formal restrictions on the scope of applications.

This position does not apply to digital financial assets, tokens and ICOs, to which the first completed pilot was dedicated. Sberbank CIB and the National Settlement Depository tested the technology of conducting transactions to raise funds by issuing blockchain tokens (ICOs). In the absence of legislation on cryptocurrencies and ICOs, the results of the pilot have not yet been disclosed.

The Ministry of Economic Development of the Russian Federation has presented a draft law 'On Experimental Legal Regimes in the Field of Digital Innovations', which is also aimed at creating regulatory sandboxes for testing new technologies in Russia. The Ministry proposes to create sandboxes for systems based on big data, blockchain, neurotechnologies and artificial intelligence, quantum technologies, robotics, wireless communications, virtual reality, etc. In addition to legal relaxations, the draft law guarantees no increase in the tax burden on sandbox participants.

The key regulator in the Russian FinTech market is the CBR, which is responsible for:

  • regulation, control and supervision of financial markets;
  • registration, licensing and supervision of financial and banking activities;
  • registration, licensing and supervision of professional market participants; and
  • registration of financial activities, licensing, regulation and supervision of microfinance institutions (MFIs).

As mentioned earlier, the CBR is quite active in new regulatory initiatives, including the establishment of the regulatory sandbox and new legislation on digital assets.

The Federal Service on Surveillance in the Sphere of Consumer Rights Protection and Human Welfare (Rospotrebnadzor) is responsible for general consumer and user rights protection in the FinTech market, including data protection.

The Ministry of Finance of the Russian Federation participates in legislative initiatives in the area of digital asset regulation and is responsible for taxation of FinTech products.

The Government of the Russian Federation sets out the course for digitisation of the economy and is responsible for the observance and implementation of the Digital Economy Programme.

Technology start-ups (in the areas of, for example, insurance, financing or payments) may need to acquire licences, and prefer to partner with the regulated market players. As such, regulated market participants shall be obliged to provide services subject to licence requirements which may be based on the new technology infrastructure provided by a start-up. We are not aware of any mandatory contract or other requirements in this respect.

We believe that, currently, the most significant risks of applying enforcement actions lie in the field of cryptocurrencies and ICOs.

Trading cryptocurrencies and holding an ICO in Russia may be fraught with charges of fraud, tax evasion, insider trading and market manipulation, as well as conducting activities without a licence.

In addition to this, the CBR has been working together with the General Prosecutor’s Office of Russia on the closing of sites that have given the opportunity to purchase cryptocurrencies.

Mining of cryptocurrencies remains an unregulated activity in Russia and there is a risk that it can be qualified as a criminal offence.

In respect of other areas of the FinTech market in Russia, enforcement actions can be taken by regulators for violations of the current legislation primarily applicable to legacy players. For example, technology companies active in payments and transfers, or in financing, can be held liable for conducting unlicensed activities, for breach of anti-money laundering laws and data protection laws, as well as for breach of consumer protection legislation.

With the regulation of financial and regulatory technologies today in Russia, there is a situation in which these technologies exist and are actively used by financial market participants, but there is no legal regulation of them. As noted in 2.2 Regulatory Regime, above, there is recognition and understanding of this problem at the state level, and a general concept of the legal regulation of these technologies has been formed.

With the participation of the Bank of Russia, the 'FinTech Association' has been created. Currently, the Central Bank conducts its work in the following areas: support for FinTech, prevention of cybercrime, and RegTech. RegTech encompasses new approaches in regulation and supervision aimed at managing the risks of financial institutions. Regarding the regulation of FinTech, the Central Bank adheres to the following position: first supervision, then regulation, commensurate with risks.

The Decree of the Government of the Russian Federation of 28 November 28 2011 No. 977 'On the Federal State Information System' unified the system of identification and authentication in the infrastructure that allows the information and technological interaction of information systems used to provide state and municipal services in electronic form (as amended on 12 September 2013), introducing the Unified Identification System – Authentication (ESIA) and approving the requirements for it.

The ESIA fundamentally changes the banking market. The introduction of information to the ESIA is implemented in accordance with paragraph 5 of Article 18 of the Federal Law of 6 April 2011 No. 63-FZ 'On Electronic Signature' (as amended on 23 June 2016). According to paragraph 4 part 1 Article 1 of the Federal Law of May 5, 2014 No. 110-FZ 'On Amendments to Certain Legislative Acts of the Russian Federation', credit institutions are allowed to use the ESIA for simplified identification of individuals.

Russia continues to introduce new laws regulating the internet. Since 2014, it has adopted a number of laws addressing various internet-related activities and services, including messenger services, audio-visual services, news aggregators, information services and virtual private networks (VPNs). Currently, social networks are subject to the rules that govern 'organisers of information dissemination', defined as persons operating information systems and/or programmes for computers that are intended and/or used for the receipt, transmission, delivery, and/or processing of electronic communications from internet users (information services). Among other requirements, such rules require social networks serving users in Russia to register with the Russian media and data regulator (Roskomnadzor), and to store certain information about users and their communications on local Russian servers (the 'Local Storage Requirements'). As of 1 July 2018, the Local Storage Requirements have extended to information that users post or exchange on social networks, although only for limited time periods. Social networks are also required to provide Russian law enforcement agencies with access to such information.

A draft law 'On Amendments to the Federal Law On Information, Information Technologies and Information Protection' No. 223849-7, governing the activities of public networks, was introduced on 3 April 2018 in the State Duma, the lower house of the Russian parliament. Under the draft law, a public network is defined as any internet platform or resource allowing enrolled users to post electronic messages (including texts, pictures, audio, or video) and to exchange messages with other enrolled users. The draft law would apply if a public network has more than 100,000 users in Russia per day, and would impose new obligations on the owners of public networks. These include requirements to:

  • establish a local representative office in Russia;
  • identify users by their mobile phone numbers;
  • install software approved by Roskomnadzor to calculate the number of users; and
  • at the request of a user, delete any information violating Russian laws (and maintain a register of such requests).

At the request of Roskomnadzor, all major social networks would have to delete any “unverified publicly significant information presented as reliable information.”. All major social networks would be required to prevent users from publishing content that promotes “pornography or a cult of violence.”

Breaches may lead to monetary penalties of up to RUB50 million (about USD800,000), as well as potential blocking of all access by Russian users. These tough penalties are proposed in another draft law that is being separately considered by the State Duma.

The draft law was approved at a first hearing on 12 April 2018. It is unclear when further action will be taken.

The Association for the Development of Financial Technologies, which is represented by the CBR and a number of major Russian banks, conducts the following activities:

  • generating a list of priority areas of work;
  • co-ordinating the development of software, standards, platforms and protocols;
  • preparing proposals for the creation and amendment of legislation; and
  • implementing its own projects and participating in projects of other organisations.

The Expert Council on Legislative Support for the Development of Financial Technologies in the Russian Federation under the State Duma Committee on the Financial Market is a permanent consultative and advisory body that provides interaction between market participants.

As mentioned in 2.1 Predominant Business Models, above, the most popular business model today is that of a collaboration between traditional financial players and technology start-ups.

At the moment the robo-consulting segment in Russia is only at its initial stage. The key barriers to the development of robotic consulting are as follows:

  • the high cost of attracting customers, in combination with the low commissions of new robo-advising companies;
  • the lack of certainty in terms of the behaviour of consultants during periods of severe economic and financial crises; and
  • most assets being in the hands of people who prefer the more traditional methods of asset management.

Generally, large robo-advisers are associated with banks or management companies and offer either their own investment products or the products of partners.

The CBR has developed the draft Order 'On the Procedure for Accrediting Programmes for Electronic Computers, Through Which Individual Investment Advice is Provided, Including on the Internet Information and Telecommunications Network' (the 'Order'). This introduces a definition of when a computer programme through which individual investment recommendations are provided, including on the internet, is considered to be used to provide individual investment recommendations. The Order also establishes the authority for accrediting computer programmes of self-regulating organisations that unite investment advisers and establish their own order. In particular, the Order contains a list of documents required for the accreditation of a programme, which includes, among other documents, a description of the programme. To obtain accreditation, a self-regulating organisation must check the operation of the programme according to the specified detailed description.

As mentioned, robo-advisers are mostly associated with banks or management companies which offer their own investment products, or the products of partners. There are a few examples of robo-advisors in Russia, launched by FinEx in collaboration with a number of Russian banks. Currently, such projects are interested mostly in young investors with modest assets.

Despite the advantages of robo-advising, such as low fees and high speed of services concerning the formation of investment portfolios, there are a number of significant drawbacks, including:

  • investors receiving a standard variant of the portfolio and taking decisions themselves; and
  • the inability to obtain qualified automated advice on the selection of an investment portfolio without transferring funds to management.

In addition and to the best of our knowledge, at the stage of collecting information about the client, no robot manager is interested in the currency in which the investor plans to sell his or her accumulated and multiplied funds in the future, despite the fact that this is one of the key points when choosing the composition of a portfolio.

These problems will probably have to be resolved at the further stages of development of the service of robo-issuing in Russia.

It seems that a significant impact on existing services and on those that will appear in the future will be provided by the regulatory base being developed by the Central Bank, which introduces regulation of the actions of robo-advisers.

Over the last few years, lending in Russia has seen a slight shift from bank-based lending towards digital lending, following a tightening of regulation and the rise of alternative providers. Tightening regulation for banks and the easing of procedures for digital disruptors have facilitated the environment for the development of online lending in Russia.

The CBR has put regulations in place forcing banks to offer consumer credit only to those with good credit histories and low debt burdens, while alternative lenders are relatively unencumbered by these restrictions. As a result, online lending companies like MoneyMan are well positioned within the lending sector. However, they are still not able to offer low interest rates comparable with banks, as lending from the CBR to alternative lenders invokes higher rates. Currently the microfinance lending market share currently stands at just over 1% of total consumer lending in Russia, but the demand for short-term loans will accelerate this position.

Regulation of bank-based lending and microfinancing is different, and there is a separate law regulating microfinancing in Russia: Federal Law 'On Microfinance Activities and Microfinance Organisations' No. 151-FZ, dated 2 July 210 (the 'Law on MFIs'). According to the Law on MFIs, a microloan can be granted only in monetary funds in Russian roubles. The lender can be only a legal entity which is registered with the CBR as an MFI.

There is no specific regulation of underwriting in Russia, except for regulations on the formation of reserves for possible losses applicable to banks and MFIs.

Recently, industry participants have tended to conduct scoring checks on the basis of open or voluntarily submitted data. Checking clients through public sources can be legitimate, provided that the scoring is based on the collection and analysis of open data or the client has provided his/her consent to the usage of personal information. Otherwise, such scoring can be treated as a violation of the law and entail an administrative liability.

In the lawsuit VKontakte v Double (VKontakte v Double, No. А40-18827/17), VKontakte claimed that Double used, without permission, the intellectual property of the social network: its user database (Double makes money by giving banks the opportunity to assess the creditworthiness of borrowers by means of their open profiles). The courts differed in their assessment of this a claim. The first instance rejected the claim, while the second satisfied and ordered a halt to the illegal use of the information.

As mentioned in 4.1 Differences in the Business or Regulation of Loans Provided to Different Entities, above, online financing in Russia is mostly provided by MFIs.

The main sources of funding for MFIs are the funds of the founders of MFIs (about 45% of funding) and bank loans (also about 45% of funding). Funds of investors (ie, individuals) traditionally occupy no more than 10% of a funding structure.

The market for MFIs is differentiated into two categories: microfinance companies and microcredit companies. The latter are prohibited from attracting funds from individuals. Microfinance companies are allowed to attract funds from individuals in a limited number of cases envisaged in the Law on MFIs (for example, if an individual is a holder of bonds issued by the MFI).

We are not aware of any syndication of loans to be tested in practice, or of any regulation of such syndication.

Payment processing is highly regulated in Russia and, as such, the activities of all payment processors operating in Russia shall be in compliance with the current laws.

The procedure for making online payments should be based on the provisions of the Federal Law 'On the National Payment System' No. 161-FZ, dated 27 June 2011 (the 'Law on the National Payment System'). According to Articles 11 and 12 of the Law on the National Payment System, the money transfer operators are the CBR, credit organisations, and Vnesheconombank. An electronic money transfer operator is a credit institution, including a non-bank credit institution, which is entitled to transfer funds without opening bank accounts and other related banking operations. Thus, transfers of (electronic) money in the Russian Federation are provided by operators for the transfer of (electronic) money, to which increased requirements are applied. In addition, there is another type of non-bank credit organisation (NСO): a payment NСO. Such an NСO has a licence only for the transfer of funds.

Fund administrators are licensed by the CBR. To obtain a licence, a fund administrator must have sufficient equity capital and a CEO who is eligible for this position. A single fund administrator may have several retail funds under its management. A fund administrator licence is issued for an unlimited period of time.

The principal statute which regulates all types of retail funds in Russia is the Federal Law 'On Investment Funds' No. 156-FZ, dated 29 November 2001 (the 'Investment Funds Law'). The Investment Funds Law sets out the overarching regulatory framework.

The fund administrator operates in accordance with the Investment Funds Law, regulatory acts of the CBR, investment declarations and the rules of a fund administrator, as the case can be.

Regulation is general for all fund administrators irrespective of their activities.

We are not aware of any specific contractual terms that fund advisers seek to impose on fund administrators to assure performance and secrecy. The general rule is that the fund manager shall act in the interests of the fund, exercising its rights and performing its duties with respect to the fund in good faith.

The Investment Funds Law requires fund administrators to act in good faith and to exercise reasonable care in the exercise of their rights and the performance of their duties.

The main problem in assessing the actions of a fund administrator is the qualification of its actions in terms of their integrity and reasonableness. Currently, legislative acts do not contain definitions that would reveal the essence of the terms 'good faith' and 'reasonableness'.

The essence of the principles of good faith and rationality in relation to a fund administrator is effective management in the interests of the beneficiary. It is understood that in exercising their rights and performing their duties, fund administrators must exercise a level of care and discretion commensurate with the actions of a prudent manager in a similar situation and under similar circumstances.

In accordance with the Federal law 'On Organised Trades' No. 325-FZ, dated 21 November 2011, a trade organiser is a legal entity providing services for conducting organised trading in the commodity and/or financial markets on the basis of an exchange licence or a trading system licence.

Currently, the largest exchanges functioning in Russia are the Moscow Exchange, the St. Petersburg Stock Exchange (one of the first trading platforms for the organisation of securities and futures contracts trading in the Russian Federation) and the St. Petersburg International Mercantile Exchange.

An analysis of the current Russian legislation allows us to conclude that the legal status of special trading platforms has not been settled in Russia.

In accordance with the Law on Securities Markets, forex dealers can only effectuate trades in foreign currencies.

Cryptoexchanges are not regulated in Russia.

Securities, derivatives, foreign currencies and commodities may be traded on exchanges, with trading rules governed by different regulatory regimes. For example, the Moscow Exchange has different sections and different requirements applicable for different classes of instruments.

Cryptocurrency exchanges remain unregulated in Russia. Currently, cryptocurrencies may qualify either as security or cash equivalent. If they qualify as security then they can be traded on licensed exchanges. Operations with cash equivalents are strictly prohibited.

In accordance with the Regulation on Admission of Securities to Organised Trades (approved by the CBR on 24 February 2016, No. 534-P), securities may be included in the list of securities admitted to organised trading (the 'list') in the process of their placement and circulation.

The trade organiser lists securities by including them in the list. The exchange has the right to list securities by including them in quotation lists of the first (highest) and second level, which are part of the list. Securities with limited circulation, including securities intended for qualified investors, may not be included in the quotation lists.

Securities are included in the list on the basis of an agreement with an issuer of securities or a person liable for securities.

Securities of Russian issuers (with the exception of state and municipal securities that are limited either in terms of turnover or the circle of persons who can own such securities, the CBR’s bonds, and also securities intended for qualified investors) may be included in the list if they meet the following conditions:

  • compliance of such securities with the requirements of the legislation of the Russian Federation, including regulatory acts of the CBR;
  • registration of a securities prospectus, if such registration is required for public circulation of the securities in accordance with the legislation of the Russian Federation; and
  • fulfilment by the issuer of the obligation to disclose information in accordance with the rules for listing/delisting securities, or in accordance with the requirements of the Law on Securities Markets and other regulatory acts of the Russian Federation, including regulatory acts of the CBR.

The Moscow Exchange (the 'exchange') has its rules on listing of securities (the 'listing rules'). According to the listing rules the listing of securities is carried out by their inclusion in the list of securities admitted to trading by the exchange. The inclusion of securities in the list can be carried out with or without inclusion in the quotation lists.

The list consists of three sections: first level, second level and third level.

The first and second levels are quotation lists, and the third level is a non-quoting part of the list.

To include securities in the first, second or third level, the applicant submits an application and a set of documents in accordance with the listing rules (depending on the list section and the type/category of the security for which the application is submitted).

To be listed, the security and its issuer must comply with the respective requirements established by the listing rules for inclusion in the first, second or third level.

The fundamental handling rules for brokers and dealers are set out in the Law on Securities Markets. The broker must fulfil the orders of clients in good faith and in the order of their receipt. Transactions carried out on behalf of clients are in all cases subject to priority execution compared to the broker’s dealer operations when it combines broker and dealer activities.

If a conflict of interest between the broker and its client occurs about which the client was not notified before the broker received the relevant order, and the conflict of interest has the effect of causing losses to the client, the broker is obliged to compensate them in the manner established by the civil legislation of the Russian Federation.

The Regulation 'On the Rules for Maintaining Internal Accounting by Professional Participants of the Securities Market that Carry out Brokerage, Dealer Activities and Securities Management Activities', approved by the CBR on 31 January 2017, No. 577-P (the 'Regulation') contains requirements similar to the norms established by EU legislation.

The requirements of the CBR provide for a five-year period for keeping records; however, in accordance with the Regulation, this period starts from the date of termination of obligations from transactions and from the date of operations with assets. The obligation to keep records of telephone conversations and electronic communications is not provided for by Russian law.

The Regulation states that if changes are made in the records, information about such changes should be contained in the professional member’s internal accounting, with the date and time of their introduction.

The development and approval of standards of professional ethics of securities market participants, providing for measures to prevent conflicts of interest in the implementation of professional activities, have been delegated to self-regulatory organisations. In particular, such standards were developed in the National Association of Stock Market Participants (NAUFOR). These standards also provide for the approval by professional participants of internal documents defining measures to eliminate conflicts of interest and the procedure for their implementation, enshrining the application of the principle of 'Chinese walls'. Russian professional securities market participants began to actively use this principle in their activities only in 2016, when the CBR published draft methodological recommendations on the procedure for access to insider information and the rules for protecting its confidentiality.

The scope of protection of the rights and interests of the client is also closely related to investment advising. In Russia, the federal law regulating this sphere was adopted by the State Duma in December 2017. Recently, in December 2018, the federal law was significantly amended. On 21 December 2018 Federal Law No. 397-FZ 'On Amendments to Federal Law on Securities Market and Article 3 of Federal Law on Self-Regulatory Organizations in the Sphere of Financial Markets' dated 20 December 2017 (the 'Law'), came into force.

The respective changes introduce a concept of investment advisory activity defined as “provision of consulting services with respect to securities, transactions with securities and/or entering into derivative contracts by providing individual investment recommendations” ('Investment Advisory Activity') to Federal Law No. 39-FZ 'On Securities Market' dated 22 April 1996 (the 'Securities Law').

Investment Advisory Activity constitutes professional activity on the securities market which may only be performed by entities incorporated under Russian law or individual entrepreneurs, provided that they are  members of a self-regulatory organisation and entered in the register kept by the Central Bank of the Russian Federation (CBR) ('Investment Advisers').

Please note that Investment Advisers which are legal entities may also engage in other types of professional activity on the securities market, or the activity of a credit organisation.

In accordance with the Law, Investment Advisory Activity shall be carried out on the basis of investment advisory agreements. Before providing an individual investment recommendation, an Investment Adviser shall identify the client’s investment profile, requesting certain information (about, for example, the expected profit).

Requirements as to the form of individual investment recommendations will be established by the CBR.

With respect to securities and/or derivative transactions, an individual investment recommendation shall include:

  • a description of the financial instrument in respect of which such recommendation is given;
  • a description of the risks associated with the relevant financial instrument and/or the conclusion of a contract; and 
  • an indication of the presence of a conflict of interest with the investment adviser, or its absence.

A register of Investment Advisers is already kept by the CBR, with a procedure for keeping this register in place.

An analysis of the current Russian legislation allows us to conclude that the legal status of special trading platforms has not yet been settled in Russia.

See 7.5 Order-handling Rules, above.

We are not aware of any specific regulation permitting or prohibiting payment for order flow. The legislation in force does not contain a direct prohibition of payment for order flow. However, in cases where a broker uses hidden rewards in the execution of clients' orders, especially with OTC financial instruments, this scheme can be prohibited.

In contrast to the EU, there are not yet any regulations for the creation and usage of high-frequency and algorithmic trading in Russia. However, the Central Bank is concerned about this issue and in April 2018 it conducted research to assess the impact of high-frequency trading on the Russian financial market. Based on this research, the regulator concluded that the share of high-frequency trading in Russia is from a third to a half of the total trading volume, and found it necessary to develop a relevant regulatory framework. Hence, the press reported the CBR's intentions to introduce uniform rules for identifying owners of high-frequency trading systems by the end of 2018. Nevertheless, no relevant drafts have been published as of January 2019.

See 8.1 Creation and Usage Regulations, above.

We are not aware of any specific regulation requiring players involved in high-frequency and algorithmic trading to register as market makers. Under the Russian Securities Law, any exchange participant is able to act as market maker as a consequence of having entered into a special agreement with an exchange.

In Russia, only the general regulation of the 'best execution' principle is provided, without any specific rules applicable to high-frequency and algorithmic trading. This means that as a general rule the broker is obliged to perform trading operations taking into account the transaction price, costs, time, default risks, market availability and other relevant information for the client. If the client's interests or other circumstances force the broker to step back from the principle of best execution, the broker is obliged to explain its actions upon the client’s request.

See 8.1 Creation and Usage Regulations, above.

We are not aware of any specific regulation permitting or prohibiting payment for order flow. The legislation in force does not contain a direct prohibition of payment for order flow. However, in cases where a broker uses hidden rewards in the execution of clients' orders, especially with OTC financial instruments, this scheme can be prohibited.

In contrast to the EU, in Russia there are not any specific regulations for the registration of financial research platforms at the moment.

Use of non-public information in any securities transaction is regulated in Russia by the Federal Law 'On Countering the Unlawful Use of Inside Information and Market Manipulation' (the 'Insider Trading Law'). The Insider Trading Law prohibits the use of insider information and provides that all regulated entities (issuers of securities, professional participants of securities markets, exchanges, their controlling persons, executives, banks, insurers, auditors, etc) shall draft and provide the lists of inside information and their insiders.

The Insider Trading Law defines inside information as any precise and specific non-public information the disclosure of which may significantly affect the price of a particular financial instrument, foreign currency and/or commodity. Inside information does not cover any information which becomes public through disclosures, forecasts and other analytical reports based on public information and recommendations.

In accordance with the Insider Trading Law, a deliberate distribution of false information in public (eg, via mass media or the internet) resulting in a substantial deviation in price, supply, demand or volume of trading shall be treated as market manipulation.

We are not aware of any specific regulation on conversation curation.

We are not aware of any specific regulation on platform providers acting as 'gatekeepers'.

There is no specific regulation of underwriting in Russia. For more information, see 4.2 Underwriting Processes, above.

Any insurance business in Russia shall be licensed by the Central Bank of Russia. As a result of the CBR's policy, in recent years there has been a tendency towards consolidation of the insurance market and strengthening the financial stability of domestic insurers.

Insurers must be incorporated in the Russian Federation (although reinsurance business may be carried out by foreign companies). Also, there are some restrictions on foreign investors in the Russian insurance market. If the share of the foreign insurer in such entities is more than 49%, they are restricted from providing certain types of life insurance and insurance of state-owned organisations. To form a subsidiary of a foreign insurer to allocate or transfer shares in a Russian insurance company to a foreign shareholder, a special permit from the Central Bank is required. This can be refused if the overall share of foreign investment on the Russian insurance market exceeds 50%.

Russian law provides for two basic types of insurance: personal insurance (such as life and health insurance) and property insurance (property insurance, liability insurance and business risks insurance).

Life insurance activity may not be combined with other types of insurance activities, ie, an insurer may only offer either life insurance or health and property insurance.

For any insurance company, the charter capital is RUB120 million. Capital of RUB240 million is required to offer life or medical insurance, and the threshold for reinsurance companies is RUB480 million.

To the best of our knowledge, there is not yet any specific regulation of RegTech providers. However, in accordance with the Main Directions, RegTech is one of the key areas for development in Russia.

Examples of RegTech application areas in Russia are as follows:

  • knowing your customer;
  • identifying suspicious activity and preventing fraud;
  • automation of preparation procedures and reporting; and
  • compliance control.

It is expected that analysis of the prospective RegTech applications will be conducted and recommendations and requirements for the use of relevant solutions by financial market participants and specialised companies will be developed.

Since RegTech is quite a new area for development in Russia, neither regulation nor industry customs are in place yet.

Since the RegTech industry is still at its initial stage in Russia, its participants are either subject to the already existing legislation or remain unregulated. There is not yet any specific regulation of RegTech providers in Russia imposing a duty to speak up in case of suspicious or unlawful behaviour.

The most obvious problem of the development of blockchain technology in Russia is associated with the lack of a legislative framework for its proper application. Without a regulatory framework, projects cannot be launched into the legal field. However, there are already a few examples of significant projects pioneering the application of blockchain technology in the financial sector in Russia.

First of all, the Masterchain platform is the national network of the Russian Federation on blockchain, created to transfer value and related data between its participants. The platform is supported by the CBR and a number of large Russian banks. Masterchain is expected to be used for issuing and storing mortgage certificates, bank guarantees and letters of credit, as well as for identification of banks’ clients. The main result of the development of the Masterchain platform should be the creation of a common infrastructure that will facilitate effective interaction between financial institutions. This will reduce the costs of creating various services and allow the quick implementation of new solutions by all financial market participants. We believe that free access to the platform will allow it to be widely used by a wide range of companies, both public and private.

Other blockchain projects which are worth mentioning include an open blockchain platform for factoring operations developed by M. Video, Alfa Bank and Sberbank, the first bonds settlements in respect of which are conducted by usage of blockchain technology issued by Russian mobile services provider MegaFon. RosEvroBank has also created a client identification system based on the Microsoft blockchain.

According to many banking experts in Russia, blockchain technology will allow financial institutions to make transactions as transparent, fast and efficient as possible, and, most importantly, secure. In addition, the use of blockchain technology provides significant savings in operational costs, regulatory reports, real-time interbank payments, customer identification and other benefits.

As mentioned, the development of blockchain technology in Russia is hampered by the lack of a legislative framework for its proper application. Without a regulatory framework, projects cannot be launched into the legal field. However, there is a package of two draft laws which have been adopted in the first reading and one draft law recently signed by the President of the Russian Federation.

On 18 March 2019 the draft law 'On Digital Rights', which introduces amendments to the Civil Code of the Russian Federation, was approved by the President of the Russian Federation and will come into force on 1 October 2019. The law introduces a definition of digital rights. However, the law does not contain definitions of either tokens or cryptocurrencies.

The draft law 'On Alternative Ways of Attracting Investments (Crowdfunding)' has managed to pass the first reading. If the State Duma accepts it, commercial organisations and individual entrepreneurs will be able to attract investments using information technology. For this purpose, special operators of investment platforms will appear. Smart contracts can be used to enter into and execute contracts between investors and investment attractors.

The draft law 'On Digital Financial Assets' refers to cryptocurrency as assets, but prohibits its use in Russia as a means of payment. It also reinforces the use of smart contracts and permits mining (the creation of cryptocurrency) as an entrepreneurial activity. The State Duma Finance Committee has prepared a document for the second reading, but the chairman of the State Construction Committee reported on the deficiencies identified in the draft law. Lawyers have discovered conflicts of digital asset norms with corporate law. This draft law also defines the Distributed Digital Transaction Registry. It is expected that the draft law 'On Alternative Ways of Attracting Investments (Crowdfunding)' and the draft law on 'On Digital Financial Assets' will shortly be considered at the second reading in the State Duma.

There is not yet any regulation of blockchain assets. According to the draft laws mentioned above, tokens and cryptocurrencies are differentiated and are both related to digital financial assets. Neither tokens nor cryptocurrencies can be used as a means of payment in Russia. According to the draft laws, cryptocurrency is defined as a type of digital financial asset created and counted in the distributed registry of digital transactions by participants of this registry in accordance with the rules for maintaining a register of digital transactions. Tokens are defined as a type of digital financial asset issued by a legal entity or individual entrepreneur in order to attract financing and accounted in the register of digital transactions.

There is not yet any regulation of 'issuers' of blockchain assets or of initial sales of blockchain assets. The draft law 'On Alternative Ways of Attracting Investments (Crowdfunding)' has also managed to pass only the first reading. If the State Duma accepts it, commercial organisations and individual entrepreneurs will be able to attract investments though an investment platform. Special operators of investment platforms will appear for this purpose. Smart contracts can be used to enter into and execute contracts between investors and fundraisers. Investments are possible by means of extending loans or by purchasing securities, or by purchasing tokens which may provide for various rights. The total amount of investments attracted by one person using investment platforms during a calendar year cannot exceed the amount established by the regulatory act of the CBR. The same will apply to investors which are not qualified investors from a Russian law perspective.

There is not yet any regulation of blockchain asset-trading platforms.

There is not yet any special regulation of funds that invest in blockchain assets.

There is not yet any regulation of virtual currencies. Please refer to 12.3 Classification of Blockchain Assets, above, for details in respect of cryptocurrencies' and tokens' status in accordance with the draft laws.

There is no special regulation in place in respect of the usage of blockchain data. However, the Federal Law 'On Personal Data' dated 27 July 2006 No. 152-FZ (the 'Law on Personal Data') applies to the usage of personal data in blockchain projects. The Law on Personal Data works for centralised information systems where there is a certain operator who is responsible for fulfilment of the relevant duties. Decentralised distributed systems like the blockchain do not fit the existing personal data legislation. It is unclear who is the operator of personal data in the public blockchain, because it is the operator who is responsible for the performance of relevant duties. According to the Law on Personal Data, an operator is a person, independently or jointly with other persons, organising and/or processing personal data, as well as determining the purposes of personal data processing, the composition of personal data to be processed, and actions (operations) performed with personal data. In a public blockchain, registry data is available to all participants and can be stored and, therefore, processed by all participants. The blockchain architecture does not allow the use of traditional mechanisms for controlling the dissemination of personal data provided by law to their subjects. In addition, the cross-border nature of the public blockchain aggravates the already difficult issues of determining the applicable law and jurisdiction of regulators in the cross-border environment of the internet. It is unclear which legislation on personal data (ie, of which country) will be applicable to the processing of the same data in a public blockchain, the participants of which are persons located in different countries. How will conflicts between conflicting requirements of personal data laws of different countries be resolved? These and other issues remain unclear in respect of the application of the Law on Personal Data to public blockchains.

Open banking remains unregulated in Russia. However, the Bank of Russia implements measures for the development and implementation of open API principles on the financial market in Russia.

The FinTech Association, established by the CBR together with Russian financial organisations, has opened a separate area: the development of open APIs.

The framework of this includes the possibility of using the principles of open APIs in the financial market, both in terms of providing access to open information of credit institutions, including information on the location and time of operation of ATMs, branches, POS-terminals, and the possibility of third-party access to private information about the client (for example, information about the accounts) and the implementation of so-called active operations at the request of the client, including financial transactions.

Pilot projects, the development of standards and guidance documents on the use of open APIs by financial market participants, as well as proposals for their implementation in Russia, taking into account the accumulated Russian and international experience, are planned for this activity.

In Russia, regulators and the FinTech Association also conduct joint research and development aimed at adapting the principles of the Second Payment Directive to the conditions of the domestic market. Members of the Association, together with the Bank of Russia, have provided their developments in the field of instant payments, which users can carry out in one action, and the payment processing time will be as short as possible (a few seconds): the Fast Payment System. This system will operate using an open interface (open API).

Since there is no specific regulation in respect of open banking, banks and technology providers have to comply with the current legislation on data security. To the extent that open banking contradicts this legislation, it cannot be used without changes to the current legislation.

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Allen & Overy is one of the largest and most innovative international legal practices, with approximately 5,500 staff and some 550 partners worldwide. Since opening its first office in London in 1930, the firm has grown into a global organisation with 44 offices in 31 countries across Europe, Asia Pacific, the US, South America, Africa and the Middle East. It has over 40 years of experience advising on transactions concerning the former Soviet Union and has been particularly active in Russia since opening its Moscow office in 1993. This office now houses three partners and some 20 lawyers advising on all aspects of English, Russian and US law, focusing in particular on banking and finance, corporate and M&A, dispute resolution, competition, capital markets and real estate. Strong connections with the leading financial services authorities allow the firm to support clients in dealings with local regulators, marrying regulatory expertise with deep and broad experience in the technology sector. It has advised on some of the cornerstone projects in the banking technology market and works with some of the most successful technology companies.

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