Risk for the qualified: why do we need categories of investors?

The influx of private investors into the stock market is accelerating, and regulators are worried about the fate of novice players. How is the issue of qualification of investors in Russia and other countries solved?

Russia already has a regime of restrictions on financial transactions for persons who do not meet the criteria for qualified investors, and in the near future the list of types of such transactions may increase or transactions will become possible only through additional procedures.

This is a global practice: in most countries, special legal regimes are used to protect the rights of retail investors. Among the main tools are the requirements for market participants to disclose information about financial instruments in an understandable and complete form and control over compliance with this requirement.

Pavel Vasiliev,

director of investment and securitization

Sberbank products:

The main tasks in protecting the rights of investors are the fight against misselling (misleading the buyer of the product) and improving the quality of information disclosed to investors. Sellers of financial products must not provide false or incomplete information, everything must be clear and reliable. This is true both when selling a product, and throughout the entire cycle of working with a client.

Another measure is the introduction of a mandatory “cooling off period”, during which an investor who has made an impulsive, but undesirable investment for him, could exit it without loss.

In the long term, it seems appropriate to develop regulation not so much in the direction of distinguishing between “available” and “inaccessible” products to investors, but rather in the direction of useful information and care for the client, allowing him to make a reasonable choice, and in the event of a mistake made and quickly realized – fix it.

Structured products tend to occupy a niche between risky assets – stocks, commodities, alternative investments – and conservative bank deposits, classic bonds. At the same time, they allow for a fairly “fine tuning” of the risk and return profile. Thus, through structured products, an investor can be provided with a fairly wide range of products with different risk profiles, which will satisfy almost any investment interest.

In our opinion, it is permissible to reduce the “property qualification” for qualified investors to the maximum level of guaranteeing deposits in the state insurance system – 1.4 million rubles. The logic here is simple: if the state has set a level beyond which even such a simple form as a bank deposit is not guaranteed by the state, it is understood that a depositor placing more than this amount can assess his financial condition. And, therefore, the same level of assets is sufficient to recognize him as a qualified investor.

What restrictions already exist?

The number of retail investors in the Russian market has doubled for the second year in a row. And the chairman of the Bank of Russia, Elvira Nabiullina , believes that the trend has not been exhausted, but it is necessary to regulate the process more strictly. For example, in December, she criticized the active offer of investment products to clients who are not satisfied with the return on deposits: “Now we see how financial institutions are trying to use the period that was given for adaptation (to changes in legislation. – Approx. ed.) , so that, pardon the expression, sell people products that are not suitable for unqualified investors. In February, Russian President Vladimir Putin instructed the government and the Central Bank of the Russian Federation to introduce amendments to the legislation that would additionally protect the rights of unqualified investors.

Some of the financial assets are still available only to qualified investors – the most experienced and knowledgeable about financial instruments, protected from risks by a financial “cushion”. In Russia, in particular, the list of securities available only to qualified investors includes investment units of closed-end mutual funds of the following categories: hedge funds, venture investments, credit, direct investments and long-term direct investments, as well as other securities. At the same time, Russian legislation provides for the possibility for the Bank of Russia to establish special criteria for products that are available “by default” only to qualified investors (for example, for structured bonds), so that unqualified investors can also purchase them.

Individuals can obtain the status of qualified investors if they have a certain level of assets on their accounts, confirmed profile qualifications or experience in the stock market. It is enough to meet one of the following parameters:

own property in the amount of more than 6 million rubles (in the form of money in accounts and deposits in banks, agreements on depersonalized metal accounts and securities);

experience in an organization that has dealt with securities or derivatives. If the organization itself belongs to qualified investors (for example, it is a brokerage company), work in it for two years is taken into account, in other cases – three years;

certificate in the field of professional activity in the securities market of Russian or international standard;

Additional measures to protect the rights of investors came into force on January 1, 2021, these are changes in the work of brokers related to the provision of additional information to the investor. Thus, a broker, before accepting orders for transactions with securities or derivatives from a client that does not fall under the definition of a qualified investor, must provide him with information in an understandable and accessible form about the following:

on the expenses reimbursed by the client to the broker in connection with the execution of these instructions, as well as on the amount of the broker’s remuneration or the procedure for determining it.

Previously, brokers were not required to disclose information about bid and ask prices to the client before each transaction. However, many did so voluntarily, usually through apps or trading terminals.

New restrictions

In the coming year, the market is preparing for the entry into force of additional rules for working with financial assets.

Thus, from April 1, 2022, amendments to the law “On the Securities Market” ( Law No. Z06-FZ of July 31, 2020) should come into force in Russia, further limiting the list of assets available to unqualified investors. A number of securities available to unqualified investors can be purchased after being tested by a broker. Moreover , the start date of testing may move as early as October 1, 2021.

The current version of the test questions does not follow the “driver’s license test” model where you have to learn the answers to a large number of questions. The test aims to test a basic understanding of the logic of products and the risks that an investor takes on by purchasing a product of the appropriate type. It is designed to once again make investors think about the balance of risk and return. And about the lack of state guarantees for investment.

It will be impossible to work with repo transactions, unsecured transactions, derivatives, structured bonds, closed-end mutual funds and other risky instruments without testing. But if the investor has traded such instruments before, he can continue without a test. If the test fails, the investor will be able to buy a risky asset in the amount of no more than 100,000 rubles or in the amount of one lot.

Without testing, an unqualified investor can continue to purchase less risky instruments: for example, shares included in quotation lists, OFZ, bonds of Russian issuers with a certain level of credit rating and investment units of exchange-traded, open-ended and interval mutual funds. Foreign securities that meet the criteria of the regulator will remain available, for example, inclusion in the quotation lists of Russian stock exchanges and a number of others.

How in other countries?

The Russian model is close to the approach of the EU countries , but the requirements for qualified investors in Europe are even stricter. In accordance with the MiFID 2 directive , investors can be recognized as professional (qualified) if they meet two of the three criteria:

In  the US, the concept of an accredited investor is based on a quantitative assessment of his wealth. An individual investor’s income must be at least $200,000 for one person, and if there is a family, at least $300,000 plus the spouse’s income. An alternative valuation method is based on disposable assets. Assets in the amount of $1 million or more, excluding the value of the property – the main place of residence, also make it possible to obtain the status of an accredited investor. About 13% of families in the US fall under these requirements.

Recently, the American financial regulator – SEC (Securities and Exchange Commission) went for the first slight relaxation and reduced financial requirements for a narrow category of financial professionals: employees of private funds and holders of licenses to work with securities.

Unaccredited investors in the US have the opportunity to invest in stocks and bonds traded on stock exchanges. The requirements for listing securities on stock exchanges are quite strict, which is a certain guarantee of stability and reliability of companies. Investments in hedge funds or startups are only available to accredited investors. Restrictions prevent private investors from taking part in the explosive growth of technology companies – the bulk of their growth in capitalization occurs before entering the public market. The main investors at these stages are venture funds, business angels, private equity funds. They take on increased risk, offsetting it with potential high returns.

The direction of movement of regulators in different countries is the same – towards increasing the importance of financial education in the list of criteria for determining a qualified investor and protecting the right to receive complete information about instruments, markets and services. The approaches differ, as the movement proceeds at different speeds, and the agenda is determined by individual requests. If in Russia last year the protection of retail investors when they purchase structured products and precautionary measures against the backdrop of a sharp influx of new investors into the market became topical, in the United States the object of controversy is the liberalization of investors’ access to startups.

Leave a Reply

Your email address will not be published.