Self-regulation in Ukraine: how the crisis can help restore what is lost

Quarantine restrictions related to preventing the spread of coronavirus disease will eventually be eased. One of the main challenges for businesses will be to maximize the safety of both their employees returning to their jobs and the consumers of their goods (works, services).

Self-regulatory organizations can contribute to establishing high standards of service safety, as well as providing additional guarantees to clients. However, nowadays, their formation and effective activity is hampered by a significant legislative gap.

Imagine that with the weakening of quarantine, a dozen entrepreneurs working in the beauty industry will decide to come together to agree on standards of their work: a multi-step algorithm for disinfection and sterilization of tools, mandatory use of hot air sterilizers, frequent and regular airing, installation of air purifiers and sanitary treatment of premises, specialists and clients should be only in masks, goggles and gloves, no more than one technician on 2 m², prohibition of providing services outside beauty salons, etc. This association will become an open platform that can be joined by all entrepreneurs who agree to comply with the rules.

By raising standards of work of member companies, such an association, in turn, receives levers of influencing those of them who will break their obligations and thus harm consumers. In addition, it will be committed to guarantee compensation of losses suffered by consumers. Considering this, the consumers of services provided by companies that joined this association are more secure and can count on higher quality and security guarantees. As for industry representatives, they receive a much greater level of trust from clients, and one satisfied client means 2-3 new ones (we prefer the word of mouth marketing).

In the tradition laid down by Ukrainian law, the above-mentioned business association should obtain a self-regulatory organization (SRO) status from the state. This alone wouldn’t be a problem, but the existing laws do not provide for the establishment of self-regulatory organizations in the beauty industry. There is no specific law regulating the beauty industry (actually, it is not needed), and therefore there is no document to enshrine the relevant rules. That’s how many Ukrainian sectors are deprived of the right to self-regulation. By the way, this is a historical right.

Guilds as the first SROs

Guilds known since the XII century and established by artisans and merchants to protect common interests such as protecting from robbers, receiving preferential duties and helping each other in the event of disasters, can be considered the predecessors of modern business associations. In addition to mutual assistance, the guilds also took care of meeting the quality standards by their members, so that buyers would return for their goods again and again, increasing the profits of artisans.

It is interesting that such prototypes of self-regulatory associations existed not only in Western European countries, which are now far ahead of us in terms of development, but also in the territory of Ukraine: merchant “hundreds” and trade fraternities were active back in the days of Kyivan Rus. Trade guilds set a certain level of prices for their products as well as stimulated competition and international trade. In one format or another, business associations remained until the Soviet era, and, of course, they were liquidated in Soviet days. In such a way, the practice of joining business efforts for self-regulation is time-proved and absolutely traditional in our world view. But why are modern “guilds” a privilege rather than a right in Ukraine?

Why is there a breach of justice in modern Ukraine?

Ukrainian laws that have been developed chaotically and occasionally laid down inequality for different sectors in their right to self-regulation. Some entrepreneurs or professionals have the opportunity to create self-regulatory associations and set rules of the game in the market, while others have no such right.

The current legal framework allows for the registration of a self-regulatory organization (hereinafter – SRO) only for 16 types of activity (although 4 of them lack the necessary by-laws). These include land management, architectural and auditing activities, appraisal practice, administration of non-state pension funds and several others. The possibility of establishing a SRO resulted from the adoption of new laws in these areas or the necessary amendments to existing sectoral laws. The most recent step is the adoption of the Bankruptcy Code of Ukraine, in which a separate section regulates the formation and activity of a profile SRO (although it should be noted that there was the possibility of self-regulation before, but it was regulated by the Law “On Restoration of Debtor’s Solvency or Declaration of Bankruptcy” that is no longer valid).

If you are unlucky and your activity is not included in the list of these 16 activities, unfortunately, the state has not given you the right to officially call your association a self-regulatory organization. That is, it is much more difficult for you to fully regulate and control the activities of representatives in your business sector, set higher standards of quality of work than the state ones and increase responsibility to consumers, thus increasing the level of their trust and, as a consequence, your profits and competitiveness in the market.

In addition, the status of a self-regulatory organization is an important prerequisite for delegating market regulation functions to associations by the state or granting the authority to perform such regulation. Today, these practices are already applied in several sectors (for example, architectural activities and arbitration managers, respectively). Their spread would allow to reduce administrative pressure on business, reduce corruption risks from interaction with government agencies and develop civilized market mechanisms for regulating business activities.

Restoring the right for everyone

Only a framework law that will allow establishing SROs in all areas where possible (and where this will not threaten national security interests) can solving the problem of selective provision (as we have seen) of the historic right to create self-regulatory organizations in different sectors. Realtors, construction components producers, hotel and restaurant business owners, scrap material producers, beekeepers, banks, shoe manufacturers, mushroom foragers, beauty salons, pharmaceutical business, doctors and many others – all they will be able to promote new standards in the sector and guarantee responsibility for their compliance through their associations. Therefore, they will be able to stimulate consumer demand for a higher level of quality and safety of goods (works, services). By the way, consumer awareness and “pickiness” are especially important in pandemic situations.

For this purpose, experts of the Better Regulation Delivery Office (BRDO) together with the Ministry of Economy and representatives of stakeholders have developed a draft law on self-regulation of economic and professional activity in Ukraine, which lays down the necessary basis for the voluntary use of the right to self-regulation in any sector. To gain the self-regulatory status, the association should meet a clear set of criteria that are the same for all associations, regardless of their activity. These are certain requirements for the organization’s charter and rules approved by the organization.