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Ukraine: Banking and Financial Services Industry Developments

Ukraine: Banking and Financial Services Industry Developments

Issue 10.4
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Notwithstanding the ongoing war, the Ukrainian banking and financial services industry continues to operate without interruptions and shows great resilience and stability. Ukrainian legislation continues to develop at the same time, bringing the standards of banking and financial services closer to the EU requirements.

Thus, the new Payment Services Law became effective on December 1, 2022, (the original effective date of August 1, 2022, being pushed back due to the Russian intervention). This law marks a major development in the payment services industry and purports to harmonize Ukrainian legislation with the EU standards, particularly with the EU’s Payment Services Directive (PSD2) and E-money Directive (EMD). The law sets out the principal rules for the provision of payment services and for carrying out payment transactions. The law provides a general framework for the functioning of payment systems in Ukraine, sets out an exhaustive list of payment services, defines categories of service providers and conditions for the authorization of their activities, determines the rights, duties, and responsibilities of market participants, and regulates oversight procedures for the payment infrastructure. Also, the law regulates the issuance and use of electronic money in Ukraine. As of today, the National Bank of Ukraine (NBU) has either updated or adopted new regulations implementing the provisions of the Payment Services Law, thus establishing a solid new base for the functioning of the payment services market in Ukraine.

These legislative changes were accompanied by significant developments in Ukraine’s national payment infrastructure. On April 1, 2023, the NBU launched a new generation of the national electronic payment system, called SEP 4.0, which operates around the clock and is based on the international ISO 20022 standard. According to the NBU’s SEP roadmap, all non-banking financial institutions are expected to connect to SEP 4.0 during 2023. In 2024-25, the NBU plans to expand the system’s functionality and align it with the EU rules. This will include the implementation of an instant payment service for client settlements within Ukraine and the possibility of making cross-border transfers with the EU countries based on the SEPA Instant Credit Transfer.

As warfare caused by the Russian invasion continues, restrictive measures with respect to cross-border settlements (including loan repayments and dividend repatriation) remain in effect. However, certain relaxations were introduced in 2022 as more territories of Ukraine were gradually liberated from Russian occupation. Thus, in August 2022, Ukraine’s Securities Commission lifted most of its restrictions on the functioning of the local capital markets. Prior to these relaxations, the local securities market was effectively shut down, and only transactions with government bonds were allowed. Further, in September 2022, Ukrainian borrowers were permitted to make interest payments to foreign lenders, subject to certain conditions set out by the NBU. Although the repatriation of dividends and most investment proceeds from Ukraine abroad remains restricted, the repatriation of interest payments under domestic sovereign bonds received after April 1, 2023, has recently been allowed.

In March 2023, the NBU introduced new rules requiring banks to identify and document information about their clients’ and counterparties’ ties with the Russian Federation. This move purports to increase transparency among bank customers with ties to the Russian aggressors and reveal the hidden presence of the aggressor state in the Ukrainian market.

As regards the law firms that service the banking and financial institutions industry in Ukraine, most of them have resumed their normal operation. Among them, Baker McKenzie’s Kyiv office is fully operational and provides services to clients on all matters related to their business in Ukraine.

The war has brought a sharp decrease in transactional work and an increase in regulatory consulting services, especially those related to sanctions and restrictions on cross-border settlements during martial law. However, major law firms are reasonably busy with a number of debt-restructuring transactions as well as with servicing certain significant credit deals concluded before the war. We’re working for a leading Ukrainian grain exporter on restructuring its loan arrangements with a large group of international and domestic creditors, and assisting an international financial institution on project funding for the reconstruction of residential housing in a number of Ukrainian cities. There is also a relatively constant flow of regulatory work for Ukrainian commercial banks, international payment systems, and securities custodians. On balance, the Ukrainian legal market is quite active and ready for the commencement of the full-scale reconstruction of the Ukrainian economy after the war. 

By Serhiy Chorny, Co-Managing Partner, Baker McKenzie Kyiv 

This article was originally published in Issue 10.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here