Qualified Investor: Is It Worth Upgrading Your Level?

0 170 12 minutes read

How to become a more qualified investor, why it is imperative to be tested under the categorization law, and why you should definitely not be afraid of it.

Author: 1top.company

We explain exactly what changes private investors can expect next year in connection with the law on categorization and new restrictions from the Central Bank , why private investors will have to upgrade their level and pass testing by category in order to maintain access to a wide list of investment instruments , and whether it is worthwhile already now attend to obtaining the status of a qualified investor .

READ IN THE ARTICLE:

✔ Law on categorization: what will change in 2021?
✔ What does all this mean for an investor?
✔ How can an investor improve his level?

Table of Contents

The categorization law: what will change next year?

In the summer of this year, the State Duma adopted in the third and final reading amendments to the law “On the Securities Market” regulating the categories of private investors (we talked about the new law in detail here ). According to the law, there are two categories of investors in Russia – qualified and unskilled. BUT! The list of instruments that will still be available to investors without qualifications is changing significantly.

For example, if you are a typical unqualified investor , you can easily gain access to such instruments as shares of Russian issuers included in the quotation lists of exchanges, government bonds ( OFZ ), bonds of Russian corporate issuers with a certain level of credit rating (which is the Central Bank so far did not specify) and investment shares of exchange-traded, open-ended and interval mutual funds , as well as foreign securities included in the calculation base of indices recognized by the Bank of Russia (for example, S&P 500, NASDAQ-100, Dow Jones, British FTSE 100, Hong Kong Hang Seng, German DAX , French CAC 40, Korean KOSPI 200, Japanese Nikkei 225 and others).

It is also important that ordinary individuals will be able to make transactions with these instruments only with their own money, that is, without using the “leverage” from the broker.

To gain access to an expanded arsenal of tools, individuals will be required to undergo special testing.

It was assumed that the new rules will come into force in April 2022, at the same time testing for categories will begin . But by the end of the year, the regulator, not in words, but in actions, explained that it intends to seriously speed up the process of categorizing investors : in mid-December, the Central Bank had already sent letters to professional market participants demanding to stop the sale of complex financial products to “physicists”, in particular, structured products before testing began , investment bonds that Russian banks are so fond of offering to their clients looking for higher yields.

In addition, the timing of the start of testing was clearly shifted at the suggestion of the Central Bank, now instead of April 2022 it is planned to launch it already from October 2021.

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What does all this mean for the investor?

The Central Bank clearly makes it clear to the market that it will ruthlessly fight misseling (unfair sale) by banks and investment companies, protecting inexperienced private investors from too risky investments and disappointments in the financial market.

So it is quite possible that the list of “unwanted” instruments for the regulator will be expanded in the near future.

For example, so far the Bank of Russia has not specified exactly what the minimum rating level will need to be for bond issuers so that unqualified investors can buy their securities. Taking into account the fact that in the SME bond market a significant part of issuers still have no ratings, access to this category of securities for private investors (namely, they are today the main buyers of HDI) will also be cut off.

“The key goal of the law on categorization is to increase the level of understanding of complex financial instruments by private investors,” explains NAUFOR President Alexei Timofeev . – It is very important that investors in the financial market act, realizing the consequences of their actions, and clearly understand the risks that are associated with certain assets.

There is nothing unusual in this law, it is completely in line with the global regulation in the field of investments in the securities market. If you look, for example, at Art. 25 of the MiFID directive (The Markets in Financial Instruments Directive – the European Union Directive governing investments in financial instruments – Ed.), You will see there a direct indication of the need for appropriateness testing : “the investment firm should request information about knowledge from the client (potential client) and investment experience regarding the particular type of product or service offered or requested in a manner that is appropriate to assess whether it is appropriate for him. ”

True, the Russian law is still a little stricter than the MiFID approaches, Timofeev admits: in particular, it requires testing of Russian securities traded on an organized market , but not included in quotation lists , bonds that do not have a rating established by the Bank of Russia and foreign securities . traded on an organized market. In addition, the law on categorization prohibits brokers and investment companies in principle to provide services without testing and limits the transaction of a client who “failed” the test to the amount of 100 thousand rubles.

“Testing is not a ban at all, it is very important to understand this, and this is our principled position,” emphasized Mikhail Mamuta, Head of the Bank of Russia’s Consumer Rights Protection and Financial Services Accessibility Service . – Because, according to the law, the client always has the right to the “last word” , that is, to be able to complete the deal that he wants, even though the test was not successfully passed. In addition, you can be tested an unlimited number of times and for free. We hope that if an investor makes, say, 10 attempts to pass the test for some instrument and they all fail, this will be a reason to think about whether he should, in principle, invest in such assets.

The Central Bank introduces additional restrictions for non-quotals from next year (!)

At the end of December it became known that the Central Bank decided not to limit itself to simple recommendations for brokers, investment companies and banks and promptly prepared new amendments to the laws, which next year will temporarily limit the list of instruments available to unqualified investors.

Despite the fact that testing starts from October 2021, until December 31, 2022 brokers will be able to execute orders of “physicists” only for the purchase of the following instruments:

securities included in the quotation lists of exchanges (except for bonds);
bonds of Russian issuers, if their credit rating is not lower than that established by the Central Bank, and they are issued under Russian law or under the legislation of the UK or countries – members of the EU or EAEU, and at the same time between this country and Russia there is an agreement on the avoidance of double taxation. The exception is structural or investment bonds;
government securities;
shares of open-ended, interval and exchange-traded mutual funds, as well as closed-end funds, not limited in circulation;
foreign securities already traded on the Russian stock exchange;
Eurobonds of Russian companies with a credit rating that meets the requirements of the Central Bank;
foreign shares that are not included in the quotation lists of exchanges, if they are included in the calculation of one of the stock indices (their list will be determined by the Central Bank) or ETF, if they follow such an index, and the client is provided with information about the tax rate and the procedure for paying tax on such instruments …

An unqualified investor will be able to buy instruments not included in this list until December 31, 2022, only if they are not deliberately intended for qualified investors and, at the same time, he has already bought them at least once within two years prior to the filing of the application.

What happens? On the one hand, for an ordinary private investor who is just beginning to master the basics of investing, this process of tightening the screws with the help of the new law seems to have quite positive consequences: in the end, the “physicist” has less and less chances to get his own money into something. An “ugly story” with options, structure notes and other exotics promising ultra-high returns.

On the other hand, the new alignment with the categorization and increased supervision of the Bank of Russia greatly narrows the choice for investment. And as you know, it is precisely the possibility of choice that is the main condition in investment. Those with the choice get the higher return .

But the reality is that after the entry into force of the categorization law, unqualified investors who want to buy bonds , in fact, are left with only OFZ and high-quality corporate bonds . And given the ongoing downward trend in rates in these instruments, it is unlikely that it will be possible to earn any interesting profitability that does not just cover inflation .

So, whether you like it or not, as early as 2021, private investors will have to improve their level in order to continue to normally engage in independent investments.

How can an investor improve his level?

In order to retain access to a wide range of investment instruments , an investor without qualifications has two ways – to pass testing for a category approximately starting in October 2021 ( although, taking into account the new initiative of the Central Bank, even in this case, access to instruments outside the basic list will be possible get only from 2023 ) or, without waiting for the law, if possible, get the status of a qualified investor now.

Get tested

How exactly the tests will look like, even the brokers themselves still definitely cannot say. Now tests are being developed by specialized associations – NAUFOR and NFA . By March, they will have to be finally approved by the Central Bank, and in October, as expected, brokers will be able to start testing their clients. So far, they have time to prepare technically for the tests.

What is already known now? In the standard test, two blocks of questions are planned, there will be a total of 7–8; the first block is devoted to assessing the investor’s experience, the second – to assessing the knowledge of a particular instrument.

NAUFOR and NFA have repeatedly stressed that testing should not artificially delay an investor’s entry into the market after he has decided that he is ready to conduct transactions with the selected instrument. Therefore, the number of questions should be limited (no more than three for the “Client self-assessment” block and no more than four for the “Client’s knowledge about the instrument” block). In addition, questions and answers should be clearly and concisely formulated and contain unambiguous statements.

The client does not need to be required to know the wording of legislative norms, the accuracy of their reproduction, as well as knowledge of certain terms and concepts, NAUFOR believes. It is important that the investor exclusively understands the essence of the financial instrument, its main mechanism and the level of risk, that is, his possible losses on the instrument.

For example, what a block of questions on knowledge of the basics of margin transactions might look like in the test , Mikhail Mamuta said earlier:

Margin trading is … (correct answer: leveraged trading of brokers).
Can I be charged for using funds provided by a broker? (Maybe, if it is provided by the agreement with the broker).
If you use margin trades when investing, the amount of possible losses, as a rule, … (more than when trading only with your own funds).
Can a broker forcefully close a client’s position in the presence of previously concluded margin unsecured transactions? (Yes, if there is not enough collateral for the margin position).

The good news is that it will be possible to get tested by a broker for free and an unlimited number of times: for example, if you decided to try your luck with futures, but did not answer all the questions correctly the first time, you can take a timeout, tighten up the materiel on the topic and return with a new try.

By the way, there is one nice caveat: if, before the entry into force of the law on categories, you have already made transactions with some instruments for which you need to pass the test, then you can continue to make them further without testing. So if you suddenly planned to start investing, for example, in individual stocks on the Moscow Exchange outside the quotation lists or in bonds of unrated SME issuers, it’s time to start.

However, the idea of self-education in the field of investment and increase your level of financial literacy, if not to advanced, then at least intermediate seems reasonable anyway! If you are looking for more understandable information about instruments, risks, investment pitfalls, how financial markets work, visit the 1top.company-Safe Investments YouTube channel , there is a lot of useful and interesting information.

Become a qualified investor

If testing still has to be postponed at least until October next year, theoretically, nothing prevents you from obtaining the status of a qualified investor now.

True, in order for a broker to recognize you as a qualified investor, one ardent desire is not enough: you must meet at least one of the requirements to obtain qualifications.

Here is a simple check list by which you can easily check if you can become a qualifier literally from tomorrow.

Property size
The volume of your assets must be at least 6 million rubles. It does not have to be securities in the account with the broker: funds in accounts or on deposits in banks are also taken into account .
Experience with securities
If you have worked for at least three years in an organization that entered into transactions with securities or derivatives , then consider that the status of qualification is already in your pocket. If your employer himself had the status of a qualified investor , then the required experience is even less – two years.
Investing experience
If you are an active investor and have entered into transactions with financial assets at least once a month, as well as made at least 10 transactions for a total amount of RUB 6 million or more on a quarterly basis, you also have a green light on your way to qualification.
Specialized education
It is easy to get a qualification even if you have a higher economic education received at a university that can certify in the field of professional activity in the securities market. In addition, any of the following documents will work:- qualification certificate of a financial market specialist;- qualification certificate of the auditor;- qualification certificate of an insurance actuary;- Financial Risk Manager (FRM) certificate;- Chartered Financial Analyst (CFA) certificate;- Certified International Investment Analyst (CHA) certificate.

Can I get a qualification certificate now?

By the way, if you still do not have a specialized education, but you want to become a qualified investor, another option is to sit at your desk, pass qualifying exams and get a certificate that gives you the right to legally qualify for the status of qualification.

From September 1, 2020, NAUFOR resumed conducting qualification exams for obtaining a qualification certificate of a financial market specialist for individuals applying for the status of a qualified investor.

Earlier, NAUFOR announced the termination of the certification of financial market specialists due to the abolition of the obligation to have a certificate and the introduction of a qualification system in the financial market. However, after the adoption of the law on the categorization of investors, it was decided to resume the certification.

Therefore, if it is possible to obtain a 1.0 series certificate before April 1, 2022, it will allow you to go through the qualification procedure. In the future, instead of a qualified certificate, a private investor will need to provide a certificate of qualification or an international certificate in order to be recognized as a qualifier.

So far, to get a qualification, you need to pass as many as two exams: first, the basic qualification exam (in case you have never taken it) for financial market specialists, and then the first series exam (series 1.0) – a specialized qualification exam for specialists financial market for brokerage, dealer activities, securities management activities and forex dealer activities.

You can prepare for the exams by yourself sitting down at the textbooks, but the easiest way seems to be to go through distance learning at NAUFOR. The pleasure is not cheap: the basic course will cost 15 thousand rubles, the distance training course for the 1.0 series will cost 13 thousand rubles. Based on the results of training, students are entitled to one free test attempt. If you fail the test the first time, you will have to pay about 2 thousand rubles for the second exam.

You can take exams only in person in Moscow, or at the NAUFOR branch in Kazan, but NAUFOR offers to sign up for the test online .

How to formalize the status of a qualified investor?

If you are convinced that at least one criterion is suitable for the status of a qualified investor, then you should go straight to the broker to confirm this officially.

Here is the sequence of actions.

Prepare your documents.
If you own money and securities in the amount of 6 million rubles or more, then you will need bank statements, statements of depo accounts and originals of brokers’ reports, which prove what assets you have.If you plan to confirm your qualifications based on your experience in finance or specialized education, then you will need to present certified copies of a qualification certificate, certificate or work book and diploma.If in the last 4 quarters you have traded in the amount of RUB 6 million or more, you will have to submit a brokerage report confirming the amount and frequency of transactions – at least 10 per quarter.
Fill out the application “On recognizing a client as a qualified investor” .
Send the broker the original application for recognition as a qualifying investor, attaching supporting documents.
By the way, if you have opened an online brokerage account and have never communicated with a broker offline, most likely you will be asked to first pass offline identification – provide the original of the application in person or send a notarized application together with a copy of your passport by mail.

conclusions

Brokers will begin testing investors under the categorization law from October 2021. The test will be free, fast and online.
If you do not pass the test, you can lose access to almost all the tools that allow you to earn more or less adequate profitability in the face of lower rates.
It is a good idea to start tightening up materiel and financial literacy right now, this will allow you to adequately prepare for testing and preserve the opportunity for yourself to invest in bonds and stocks that will not be included in the list of assets available to unqualified investors .
You can find tons of useful educational content for investors that will definitely come in handy for preparing for tests in 1top.company magazine and on the 1top.company-Safe Investments YouTube channel .
If, according to one of the criteria, you are eligible for the status of a qualified investor , it may be worth getting it now, without waiting for the entry into force of the categorization law.