The article originally published on if24.ru

The authorities want to impose regulatory restrictions on private investors’ actions in the financial market

Photo credit: Vladimir Astapkovich / RIA Novosti

Amendments to the law on securities introduce a new investor ranking system: now an investor’s rights will depend on the amount they have at their disposal, their experience, passing qualification exams, and other criteria. The law introduces four investor categories: “specially protected non-qualified investor”, “ordinary non-qualified”, “ordinary qualified” and “professional investor”. The latter category, for example, would need at least 10 million rubles in financial resources or have at least one year experience of intensive financial transactions in the market.

The desire to protect ordinary Russians and their wallets does not stop here. Not so long ago the media widely discussed the government’s initiative to ban ordinary citizens from speculating on the stock market or even having foreign currency deposits. Harsh restrictions, however, do not always benefit the investors and the national economy, experts surveyed by Invest-Foresight say.

Freedom Finance Investment Company analysts

– The law dividing investors into four categories (from the current two) passed the first reading at the State Duma, which means any radical changes in the text are no likely to happen. Only minor detail will be up for discussion. In practice, placing new obstacles in front of new or low-budget investors willing to try themselves with financial instruments, would only result in more barriers and red tape, which brokers would eventually circumvent, one way or another. However, the restrictions seem substantial at first sight, mainly because of the investment threshold. According to market participants’ estimates, novice investors would lose access to up to 70% of the securities they have available now.

In our opinion, the concept that investors with more money to spare do a better job at trading or earn more in the stock market is a misconception not statistically confirmed. And introducing tests in order to move a client to a higher category in absence of a common testing platform would result in this test being a mere formality. Direct prohibition on certain investor categories buying foreign securities through domestic brokers would result in these investors turning to foreign brokers — which cannot be controlled or restricted in any way.

Instead, the authorities should focus more on monitoring the activities of licensed Russian brokers, instead of forcing the clients to seek other, more dubious investment options in foreign jurisdictions. Today restrictions for non-qualified investors are mainly related to leverage level, rather than limiting the choice of instruments. This allows novice traders to try various market instruments in practice, without losing more than they can afford.

Sergey Khestanov, Advisor to CEO, “Otkrytie Broker”, Associate Professor, RANEPA

– Some restrictions must definitely be in place for investors with a limited budget. But these restrictions have to be reasonable. This is common global practice. But devil, as usual, is in the detail: where is the border between a “qualified” and “non-qualified” investor, and what exactly has to be prohibited? In my opinion, this reasonable threshold is the limit set by the Deposit Insurance Agency for insuring deposits, which is currently set at 1,400,000 rubles. What non-qualified investors should be banned from is trading with high credit leverage (over 1 million rubles).

Lazar Badalov, Associate Professor, Department of Global Economy and World Finance, Financial University

– The authorities’ desire to limit investment activities by ordinary citizens is understandable and is an attempt to minimize the risk of money loss due to unreasonable investment. Of course we see various Ponzi schemes growing and offering high revenue levels to coax gullible people out of their money, then simply disappearing. Then cheated investors complain to the Central Bank asking that it brings some discipline to the sector, but there is nothing the Central Bank can do: it is not competent to prosecute fraudsters.

It was because of these numerous stories of hoodwinked investors that the government introduced the “qualified investor” category in 2015, and is now expanding this practice to investment in various financial instruments. The disappointing thing is that while the idea in general sounds quite reasonable, it gave birth to various radical initiatives, such as limiting the people’s right to foreign currency deposits. These measures will not reduce risks — the effect will actually be quite the opposite: instead of abandoning foreign currency deposits, the people will go into the grey zone. Too much regulation will have a negative impact on the national economy in general.

Alexander Borodich, Founder, Universa Blockchain platform

– Ranking investors into categories will reduce the legal financial market in the long run. Under the new law, specially protected qualified investors will only be allowed to invest in securities in the first and second quotation list, as well as into mutual funds. As a result, the customer base of licensed Russian forex dealers will be substantially reduced. Access to more interesting instruments will only remain in foreign jurisdictions. The problem, however, is that many foreign financial companies are not licensed by the regulators, which may result in loss of money.

Many private investors are looking toward hi-tech startups, as many governments have finalized regulation of token sales in 2019.

Konstantin Ordov, Professor, Chair of Financial Management, Plekhanov Russian University of Economics

– The only aspect in which non-qualified investors should be limited is their tendency of becoming anti-investors by taking loans and mortgages in foreign currency. The recent news of a ban on opening foreign currency deposits is an absolute fake, I hope. This doesn’t make any economic or patriotic sense.

We are getting used to the Finance Ministry, as the main buyer of foreign currency, proclaiming total dedollarization. But a foreign currency deposit in a Russian bank is not about syphoning capital out of the Russian jurisdiction. Moreover, it is definitely better than keeping money under the mattress, which will probably be the only alternative for those who want to keep their savings in the long run, without dealing with professional players in the financial market, should this initiative be implemented.

I have a feeling that financial authorities are no longer capable of increasing the volumes of ruble deposits, and resort to this sort of scaremongering to force the people to move their savings from foreign currency to Russian rubles. The only problem is to achieve this, they would need to ban foreign currency exchange altogether and close the borders on those who want to travel outside Russia.

Daniil Popov, Executive Director, AKTIVO

– Instead of banning things, I think the government should instead improve the people’s financial literacy, as restrictions that might protect a small group of people would at the same time inconvenience numerous investors who know what they are doing. Restricting foreign currency deposits will certainly benefit the Russian business, but not all of it — just the part that deals with ruble deposits.

Generally, I think the Central Bank is going overboard with protecting non-qualified investors. This applies to limiting the amount of contributions to closed mutual investment funds, including crowd investing; and now to restricting the work with foreign currency instruments. To develop the practice of investment, the country must facilitate access to as many alternatives as possible. Perhaps it is not conservative instruments that should be limited, but high-risk ones, such as Forex. A foreign currency deposit is not risky because it does not offer high returns. Mainly people choose to store their savings this way due to high volatility of the Russian ruble.

Peter Rudenko, Head of Investment project, Banki.Ru financial marketplace

– There is nothing wrong about a broker advising the customer on what instruments would be most suitable, and why. This helps the investor meet their investment goals and the broker retaining a loyal customer in the long run. But passing a law banning an investor from investing into whatever instruments they want (effectively, limiting a person’s ability to manage their own money) is overkill. A ban on investing in foreign shares prevents investors from diversifying their portfolio and making it less risky. At the same time, non-qualified investors will have access to Russian securities from the highest quotation lists. It is not clear why the regulator thinks these instruments are less risky than similar foreign ones. Investor qualification is also extra burden on the business, which will increase the cost of services to the user. It is also an additional motivation for the investors to open accounts with foreign brokers, which offer a much wider range of instruments. Qualification will not bring new investors; it will only make entering the stock market more complicated. New investors will be attracted to new investment opportunities and instruments, insurance for their funds in the broker accounts, similar to the bank deposits, and government protection for private investors and private property.

By Anna Oreshkina, Olga Blinova