As reported earlier, the Ukrainian Parliament is now scrutinzing a draft law, which will replace the current general financial services framework (Draft Law). Back in March 2021, we assessed the key features of the revised regulatory regime. For this article, we will focus on one of the key topics specifically relevant for any financial institution (FI) – whether its activity may be viewed as a provision of services in a foreign jurisdiction (in our case in Ukraine) and thus, subject to local regulatory approval.
This topic is a rather complex one in view of the ongoing digitalization of financial services (i.e., offering services through various digital means, including apps and online). It is increasingly difficult for both FIs and regulators to determine whether activities carried out through digital means are taking place across borders.
Typically, it is not unusual for a jurisdiction to have an authorization regime applicable to third country financial services firms making their services available to local residents. Thus, for instance, in the European Union MIFID II and MiFIR provide for a third-country firm regime and allow such entities to provide their services through a branch, or even without a physical presence. In Singapore, under the Securities and Futures Act (which generally regulates capital markets activities), activities carried out wholly outside Singapore will be subject to regulation if they have a substantial and foreseeable effect in Singapore. In the US, a foreign financial services firm that engages in a securities or investment business may be caught, even if it only uses US jurisdictional means (e.g., mail, email or telephone lines), which means that it may need to register with the Securities Exchange Commission as a broker-dealer.
From the above examples, a country typically extends its jurisdiction vis-à-vis a foreign FI, if there is a link between the activity and local customers. On this basis, it was not surprising that the initial text of the Draft Law permitted a foreign FI authorized to provide relevant services in its home jurisdiction to also do so in Ukraine, in accordance with Ukranian applicable law. On 27 April 2021, the Draft Law was adopted on first reading and this provision was modified. Instead, it now provides for a general regime for a foreign FI to conduct its activity in Ukraine through a licensed branch.
In addition, Ukraine is now going through perhaps its largest financial services law reform to date, with a whole range of new laws being adopted to replace the previous legislative frameworks. Thus, under the new Capital Markets Law, which came into force in July 2021, the National Securities and Stock Market Commission is authorized to adopt licensing rules for foreign intermediaries looking to conduct their activities in Ukraine. Likewise, the new Payment Services Law provides for a general regime for a foreign FI payment service provider to conduct its activity in Ukraine through a licensed branch. Moreover, on 4 February 2021, the new law On Financial Leasing was adopted. Finally, on 17 June 2021, Ukrainian Parliament adopted on first reading the revised version of a new law on insurance (available here in Ukrainian).
The way in which some of these new laws are drafted makes it unclear whether, and to what extent, foreign FIs could provide their services on a cross-border basis (i.e., without a physical presence in Ukraine). Moreover, in view of the growing digitalization of the financial services, it is not at all clear what constitutesa cross-border activity in the first place (e.g., where a consumer in Ukraine downloads and installs on a personal device an app of a foreign FI).
In this context, it may be useful to refer to the relevant sovereign obligations of Ukraine. In particular, when Ukraine joined the World Trade Organization, it made specific commitments under the General Agreement on Trade in Services. In the financial services chapter it committed not to create obstacles for foreign FIs to render their services in Ukraine in a “cross-border” mode, with the exception of the insurance sector.
It may also be useful to bear in mind that under the EU-Ukraine Association Agreement, EU-domiciled FIs may access the Ukrainian financial services market on terms similar to the internal market in the EU as soon as Ukraine implements a number of EU financial services legislative instruments. This innovative market access regime is, however, subject to a positive assessment to be carried out by the European Commission on completion of the above-referred implementation process.
The forthcoming legislative framework for financial services in Ukraine is still a work in progress. At this stage, there is a lack of guidance from regulators on its potential impact on foreign FIs operating in a cross-border mode. Given this, we recommend monitoring the evolving framework, including a review of the regulations of the relevant authorities implementing the new law. It would also make sense (if necessary and applicable) to consider practical steps on how to comply with those legislative instruments, which have already came into force (i.e., the Capital Markets Law) or which implementation is subject to a grace period (i.e, the Payment Services Law).
 Such a branch will only be able to conduct the activity of (i) a “financial company,” namely, provision of funds on credit; providing guarantees; factoring; financial leasing; trading in currency values; financial payment services for the transfer of funds without opening an account and/or acquiring payment instruments; or (ii) a pawnshop.
 It will become effective on 1 August 2022.
 Although it clarified a few legacy issues, it did not provide any special rules concerning foreign market players.
 It is particularly interesting from the foreign insurers’ perspective: the draft seems to loosen up the limitations on access to market imposed under the GATS. In particular, it appears to introduce a cross-border license for those services, which would not benefit from Ukraine’s WTO commitments. That said, the licensing regime is not entirely clear and it remains to be seen whether it will be improved in the course of further readings.
 It is noteworthy that European Banking Authority has recently looked into this question in a similar context of the cross-border provision of banking and payment services suggesting that there was no clear definition of a cross-border service and respective criteria for identifying when such service would be rendered: Draft report — Obstacles to cross-border provision of services (for BoS) 021019.docx (europa.eu).