Elvira Nabiullina: Speech - Federation Council's Financial Market
Development Board meeting
Speech by Ms Elvira Nabiullina, Governor of the Bank of Russia, at the Federation Council's
Financial Market Development Board meeting, Moscow, 8 December 2020.
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Good afternoon, dear Speaker and fellow colleagues,
There is no denying the fact that the financial sector plays a critical part in the context
of our efforts to deliver on the national development agenda. Financial intermediaries
and the stock market work to ensure that savings transform into investment, businesses obtain
the resources they need for development, and consumers gain the tools to grow their wealth.
It is within our regulator's mandate to oil the gears of all these mechanisms and make sure
the financial sector provides excellent performance. This means that the costs of businesses
and consumers related to their financial objectives should go down. And this means,
as the Speaker has mentioned, that we should secure the emergence of long-term money.
My deputy, Sergey Shvetsov, is here today to tell you more on our financial market agenda.
In my opening remarks, I would like to expand on a number of key points in our operations
as a regulator, which have, in my view, major implications.
It would be fair to say that this year has spurred transformation in the financial sector. Among
key developments are accelerated digitalisation, the Bank of Russia's switch to soft monetary
policy, falling interest rates in the economy, pandemic-induced borrowers' problems and a large
volume of restructured loans.
For all its problems and obstacles, the year has laid bare the degree to which financial
institutions and banks are prepared for unexpected circumstances. The resilience of banks
and other financial institutions, and their so-called ability to adsorb the shocks the epidemic
has brought about, suggest that rehabilitation of the Russian financial sector is an accomplished
fact.
This is why recent months have seen - despite the difficulties - the financial sector evolving
and carrying on with providing support to the economy, as borrowing from banks has been
on the rise, and the stock market has been growing at a faster pace.
Our current priority is to strike the right balance between the objectives of supporting economic
recovery and long-term projects as part of our national development agenda. It is essential
to ensure that a maturing financial market relies on the principles of trust and competition and -
this is of paramount importance - the principle of customer interest protection (rather than only
on a short-term gain strategy).
You are aware that lending continued this year, unlike in prior times of crisis. More so, we have
seen record growth in mortgage lending, which is the point the Speaker has made. For all these
welcome developments, our central focus should remain with the real target, which is to make
housing more available to people, and not to stage a kind of race for records. Our housing
market has indeed a lot of growth potential: it is true that mortgage lending has yet to become
as common as it is in many other countries. However, we should bear in mind, first, that
mortgage debt has been taking years to accumulate there and, second and most important,
the accumulation of this debt should tally with a rise in household incomes. Hence the need
to prevent the emergence of a bubble in this market and the real risks this bubble would carry,
in order of priority, for people, developers and banks. This sector needs a long-term development
plan based on market principles.
I cannot agree more with the Speaker on this subject: the government's concessional lending
programme indeed helped stave off market failure at times of crises. At this point in time
however, we are seeing that demand for mortgage loans is in a way increasingly translating into
a stampede, leading to unjustified price growth in several regions. Ultimately, developers
and banks stand to take advantage of this programme, rather than consumers.
It would do no harm to support them; however, our key objective is the availability of housing.
We should focus increasingly on targeted support programmes, which includes the efforts
to support the overall supply and demand balance. Let me explain: there are more and more
consumers willing to make use of low rates and take out mortgage loans. They could service
the debt, but they have no money for the down payment. It is common knowledge that
a mortgage loan with a low down payment is risky, which means that people might lose their
homes. The banking system would in turn have to deal with more underperforming loans,
ultimately leading to a rise in interest rates for all. That is why it is in our interest to stem growth
in this lending segment, in line with global practices.
Therefore, we are discouraging banks from issuing such loans. Also, a housing savings project
is in the works and will hopefully gain support. This is when savings for housing become a down
payment. They would be kept in a special account, with the terms of a future mortgage loan
to be fixed when opening this account. We have had a discussion on this subject, so hopefully
this arrangement will become standard practice.
Focus should also be turning to the issue of long-term housing rent, an item that should possibly
be higher up on our agenda. This is in fact an alternative to mortgage loans, which enables those
who cannot afford to take out a mortgage loan, but do need better housing conditions.
Now let me say a few words about financial resources for the real sector. Corporates have
indeed been more active borrowers this year and credit portfolios have been on the rise. Having
said this, we realise that this growth has occurred on the back of the need to plug holes -
to fight the consequences of the pandemic and lost revenue. The currently low interest rates still
have the potential to encourage growth in lending - as a business growth strategy.
Advancements in the stock market enable corporate customers to attract resources on more
favourable terms, which is key to long-term projects. We look to low inflation to carry positive
implications for such long-term investment strategies.
The financial market should meet the needs of any companies, large and small.
We are championing both crowdfunding and factoring for small-sized companies, as well
as the Growth Sector of the Moscow Exchange.
A lot of our efforts are now focused on so-called green finance - a business strategy
of environmental responsibility and human capital development aiming to deliver on objectives
far beyond profits. Companies embracing this strategy should enjoy financing on more
favourable terms.
We all understand that advancing financial innovations are encouraging competition, in this
way giving impetus to a reduction in consumer and business costs.
You are well aware of our recently launched and operating Faster Payments System
and the marketplace. We are also exploring the potential launch of a digital ruble -
we are indeed prepared for an open discussion on the issue and all its nuances. Hopefully,
we will hold a dedicated digital ruble meeting with the senators before the end of this year so that
we make the right assessment of prospects and risks a national digital currency would involve.
Now, the last point I would like to comment on in a little more detail is an issue the Speaker
has already raised, and one we are very concerned about. This is the issue of stock market
development. This market is undergoing drastic and rapid changes. Retail investment
is becoming a mass phenomenon, with the numbers of retail investors growing very rapidly.
In two years alone, the number of individuals who opened brokerage accounts rose more than
fourfold to 8.5 million people (equalling the number of accounts). This is a positive development,
which we all acknowledge, and the real sector is poised to benefit from it. Still, our concern
is about people. Do they really understand the risks of the stock market? Is there enough
transparency in the operations of financial institutions and their offerings?
It was only deposits that consumers dealt with until recently. The deposit is a fairly simple
and reliable product with up to 1.4m insurance coverage. At this juncture, however, deposit
interest rates are in decline, as are other interest rates in the economy, including loan rates,
which makes people try their hand at the stock market. With many of them being inexperienced,
we can ill afford a stock market that has deceived their expectations.
We have passed a non-qualified investor protection law, which we previously had a thorough
discussion about at the Federation Council. Everyone understood that the law should be enacted
fast, and market players were deeply concerned then, which all resulted in the compromise
decision that the law would come into force in 2022. The discussion was extended,
but at the time we assumed a smoother growth in the number of individuals entering the stock
market. Ultimately, we came to have a really soft and compromise version of this law with
deferred enactment.
Yet, we are seeing, in current market developments, intensive inflows of non-qualified
investors - ordinary citizens entering the stock market. What we have to report now is that
financial companies, taking advantage of the transition period before entry into force of the law,
are touting and hard-selling products unfit for non-qualified investors. When a deposit account
matures, the customer is offered an alternative investment product instead of deposit extension.
An inexperienced investor is flooded with the windy talk of capital protection, guaranteed yield,
and the likes of structured bonds and structured instruments.
Our view is that this situation calls for decisive action.The reasons for this are, regretfully,
the misuse of consumer trust becoming commonplace, and offerings including structured
products of a complicated nature without guaranteed yield or return of investment - unlike
stateguaranteed interest income.
We therefore intend to launch, before the non-qualified investor protection law enters into force,
so-called key information documents. A key information document is essentially a clear,
transparent description of a financial product. These documents will lay out product specifics
and risks. The seller will be obliged to make the investor - the so-called investor who is just
an individual - acquainted with these documents.
No less important is the law the Speaker has spoken about, setting forth the rules for selling
investment financial products. This is where the Federal Antimonopoly Service could step
in and make the difference. Misselling should be punishable.
We are working on this draft law jointly with the Finance Ministry, and hopefully the Federation
Council will in turn assist in passing it as soon as possible. A number of regulations may even
need tightening there. Apart from this future law, it is our responsibility to protect investors from
product offerings or financial instruments whose risks they are unable to evaluate, from products
they may buy at banks on the assumption that they are buying a sort of bank deposit. That is,
it turns out that people do not realise that they become retail investors when they buy these
products and assume some risks. As I see it, urgent action is needed to rectify this situation.
This is what we propose. The decision we are bringing up for discussion today
has taken us quite some time to formulate given all the compromise solutions
we had to consider. We propose that direct restrictions be imposed on the sale to non-qualified
investors of structured financial products, that is, products with leverage and those with a forex
component in an asset base.
Once the testing system is fully operational and we are convinced of its efficiency, these
restrictions will be gradually lifted. We believe that at this juncture it is our responsibility to protect
our investors. We might as well move forward some of the law regulations - those making
customers' qualification tests mandatory - from April 2022 to at least 1 October 2021.
At the time, we went along with market players and provided for a fairly comfortable and soft
transition period in the law. We had an extensive discussion with Federation Council members.
It stands to reason however that the major shift in the situation calls on us to take meaningful
action to protect consumer rights.
I admit that financial institutions themselves are unlikely to welcome this proposal, and their
feedback will be negative. This is where we count on you to help, just as we have always
counted on your support of our initiatives related to efficient consumer right protection
in the financial market. The key reason for this is the nature of financial institutions: they
are financial intermediaries which should operate in the interest of businesses and consumers,
just like the Speaker said. We therefore believe that now is the time for prompt and serious
discussion of this matter to make a decision.
I am now handing over the floor to Sergey Shvetsov, who will enlarge on these and other
initiatives I have presented. I truly wanted to make sure that my opening remarks highlight this
most acute problem - the need for protection of our consumers who are entering the stock
market.
Thank you for your time.