LeBoeuf, Lamb, Greene & MacRae LLP
Russia has adopted a sweeping new law On the Defence of Competition in the Financial Services Market (Federal Law No. 117-FZ). The Law will become effective on December 29 1999. Seeking to fill a gap in prior legislation, the law creates broad authority for the Ministry of Anti-Monopoly Policy and Support of Entrepreneurship (the Ministry) to regulate competition in the banking, insurance, leasing, securities and other financial services sectors. Accordingly, the law will require close attention from companies active in these markets (all of which are referred to as financial organizations, for definitional purposes). Main points include:
Dominant position. Article 4 empowers the Ministry to determine which financial organizations occupy a dominant position on their respective markets, together with other government bodies (for example, the Central Bank for banking services). The Russian Government is to approve the methodology for defining markets and market share. Article 5 of the law prohibits a financial organization from abusing a dominant position to limit market access or negatively affect market conditions (citing such examples as discriminatory clauses in contracts and prices which are unjustifiably high or low).
Restrictive agreements. Article 6 prohibits agreements which restrict competition on the financial services market, including agreements between financial organizations and government bodies. As examples, the law refers to agreements which establish prices or discounts, divide markets into geographical territories, or limit access to payment systems or other systems essential for the provision of financial services. Article 7 provides a safe harbour for certain types of agreements not prohibited by Article 6, including those that establish unified technical standards and joint research and development efforts.
In extremely broad language, Article 8 requires financial organizations to notify the Ministry of agreements or decisions to act jointly with other organizations that could restrict competition, unless the financial organizations involved have aggregate market shares below a defined threshold (to be set by the government). Notice is supposed to be given within 15 days, and the Ministry then has up to 60 days to determine whether the noticed agreements or decisions would restrict competition. If so, the Ministry may require the parties to terminate the offending agreements or decisions, cease performing them, or amend their terms. Under Article 10 of the law, the Ministry may also apply to a court to invalidate such agreements or decisions, and may seek payment of compensation to parties damaged by the restrictive actions.
Controls on capital concentration. The new law also imposes controls on certain investments and other transactions, similar to existing competition rules that apply to non-financial organizations. Under Article 16, prior approval of the Ministry is required for designated transactions involving a financial organization, including mergers, acquisitions of more than 20% equity by one person or group, acquisitions of assets above a certain threshold, obtaining rights of control, and changes in charter capital.
Controls on government bodies. The new law also prohibits federal and regional government authorities from taking action which restricts competition on the financial services market (Article 12), and requires such authorities to organize open tenders for the selection of financial organizations that will provide certain services using state funds (Article 13). These provisions seek to correct abuses and corruption that, according to many observers, have characterized past relations between state bodies and some Russian banks.
Remedies and enforcement. The new law also addresses the Ministry's powers to issue orders to offending organizations, and to impose fines on organizations and officials. In the absence of compliance, the Ministry may apply to the courts to enforce its orders, including the invalidation of agreements and seizure of funds.
In summary, the new law provides the Ministry with extremely broad jurisdiction over activities in the banking, insurance, securities and other affected markets. It remains to be seen how the Ministry will use these new powers — for good, by focusing on real threats to competition, or for ill, by imposing new bureaucratic obstacles to legitimate business activities. A related issue is whether the Ministry will manage to cooperate with other state bodies that have overlapping jurisdiction over the same markets (such as the Central Bank and the Federal Securities Market Commission), or whether a destructive turf war will emerge. In any case, the new law leaves many important details to be clarified, presumably by a combination of future government action and Ministry regulations.
Brian Zimbler and Sergei Stepanov