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Self-regulatory organizations – a step towards “smart regulation”



The state regulation system of Ukraine is overloaded with powers of government authorities. A huge number of government agencies, which have been granted regulatory powers under the guise of protection of consumer rights and state interests, mostly failed to perform these functions, but just produce a huge number of papers and often become corruption centres due to complexity, unsystematic character, and a large number of conflicting rules in various regulatory acts.

Government agencies granted regulatory powers are mostly engaged in punitive inspections instead of regulating the markets to ensure their development. According to the International Finance Corporation, Ukraine and Tajikistan became two countries with a total amount of inspections at the year-end 2013. 95% of economic entities have been inspected every year. There were 594,974 inspections conducted in Ukraine only in 2014 (even despite the moratorium on business inspections introduced in the second half of the year).

The centralized system of establishing rules / standards of professional activities and product requirements is not only a factor hindering the business development, but also a legacy of an outdated regulation system of Soviet times. The constantly growing number of regulatory bodies and their total control over entrepreneurs haven’t contribute in changing quality and efficiency indicators showing significant improvements for consumers over the past 20 year.

The lack of effective activities, low competence, extremely passive response to market demands (both consumers’ and entrepreneurs’ needs), no real objective feedback mechanism between the business community and government bodies and high supervision and control costs of the state are real barriers to modernize both the economy and product standards. In addition, it leads to continuously increasing costs of the state and enterprises to support the inefficient control system.

The world regulatory practice provides for transferring some rights on establishing rules and their control from the state to entrepreneurs or with the community involvement. In such a way, a self-regulatory principle will come into effect – when market participants regulate market activities themselves.

This principle is one of the most effective methods of reducing the state regulation and costs related to control and supervision.

The term ‘self-regulatory organization’ has been used in the US legislation, in the Securities Exchange Act of 1934, under which some associations and organizations of the stock market were given the SRO status, in the days of the Theodore Roosevelt’s New Deal policy for the first time ever. Since then, the legal use of the ‘self-regulatory organization’ term is mostly applied for financial services and securities regulation in Western countries. However, organizations formed by this principle may also exist on other business areas, but this term is not used for them in the law.

There is another situation in emerging democracies of Easter Europe and the former Soviet Union. The SRO concept was formed in different business areas due to the fact that the ‘self-regulatory organization’ term came into practice in many sectors. There is even a clearly observed trend: organizations are considered as self-regulatory organizations, if the sector specific legislation provides for the possibility to create SROs along with certain requirements to them. In turn, organizations having common features with the SRO but established in other sectors don’t have this status.

Today, there is no unified concept of legal regulation of these organizations in Ukraine and, as a result, there is no unified self-regulation model as well. However, certain self-regulation principles are reflected in the sector specific legislation of Ukraine. For example, there is the provision on self-regulatory organizations of professional stock market participants (in current version of 2009) that have been being in effect for a long time (at least since 1996).

As already noted above, Ukraine hasn’t adopted a unified legal act that would regulate specific features of organizations and activities of self-regulatory organizations yet.

A large step towards solving this issue was made in June 2016. The Concept of the basic draft law on self-regulatory organizations (SROs) was presented at a meeting at the EBRD office in Kyiv. The Concept was developed by joint efforts of the Ministry of Economic Development and Trade of Ukraine, the European Bank for Reconstruction and Development, the UN Food and Agriculture Organization, experts and public representatives.

The concept of basic law on SROs in Ukraine provides for the evolution from the law on non-governmental organizations to the legal regulation of representative self-regulatory organizations (i.e. those that can really represent the sector in the interests of all (or the vast majority) market participants). This concept also provides the further transformation of representative SROs and professional associations into the regulatory element with transferring more regulatory powers from the state to these structures in accordance with special laws.

The concept also defines main principles of the ordinary and representative SROs registration and clarifies some principles of their activities. For example, it is proposed to introduce two principles of the representative SROs registration: the procedural and share one. The procedural principle implies that there is a certain time being allocated for other organizations to challenge the registration of a representative self-regulatory organization. The share registration principle requires from the organization to confirm that it is composed of more than 50% sector market participants.

It is proposed to entrust controlling and coordinating SROs activities to the Ministry of Economic Development and Trade, Ministry of Justice and the State Regulatory Service of Ukraine. In addition, functions can be assigned to sector ministries by special laws.

According to the concept developers, the basic law should be composed of four basic sections and must: define general provisions of the law; clarify issues regarding establishing and registering SROs; determine SRO rights, duties and activities; describe requirements to the SRO organizational structure. In addition, the law should specify necessary amendments to existing regulatory legal acts of Ukraine to implement reforms this area.

With the successful implementation, the self-regulation will allow to reduce government costs, control quality of services in a more professional way, move the focus from the state control over performance to the supervision over activity results. The direct involvement of business and public representatives in establishing rules and standards in the sector will help create better regulation in relevant areas. This will ensure the development of business and economy. In addition, increasing the responsibility of market participants for their actions via direct communication with consumers and without the state mediation will be an important factor.

The adoption of the law on self-regulatory organizations is a large step towards ‘smart regulation’ of the market. It is clear that the above-mentioned concept of basic law requires a lot of expert work, but the result of this work of government bodies, experts, business and public representatives can become a real foundation to form a modern regulatory policy. Everyone will benefit – from consumers and manufacturers to the state.