The Concept and Essence of Behavioral Supervision of the Central Bank of the Russian Federation.

The Central Bank of the Russian Federation (hereinafter referred to as the Bank of Russia) performs supervision functions in certain areas of the financial market. With the development of public relations, it becomes obvious that the effective achievement of the objectives of the Bank of Russia, enshrined in Article 75 of the Constitution of the Russian Federation and disclosed in Article 3 of Federal Law No. 86-FZ of July 10, 2002 "On the Central Bank of the Russian Federation (Bank of Russia)", requires the expansion of its functional powers. One of the ways that was chosen for this was the introduction into the activities of the Bank of Russia of approaches and methods used by foreign financial regulators and called "behavioral supervision".

Analysis of the official materials of the Bank of Russia shows that the understanding of behavioral supervision is transformed over time.In 2016, the Bank of Russia defined behavioral supervision as "control over the behavior patterns of market participants, including assessment of the facts of interaction between suppliers and consumers of financial services, assessment of the quality of services offered, compliance with the requirements for the parameters of products and services, and subsequent comprehensive interaction of the Bank of Russia with supervised organizations aimed at improving the quality of services provided and increase customer satisfaction."

(approx. Electronic resource: State Duma Committee on Financial Market, Annual Report of the Bank of Russia for 2016 URL: http://komitet2-12.km.duma.gov.ru/Analitika/item/348577 / (accessed 12/28/2022)).

In the Main directions of the development of the financial market of the Russian Federation for the period 2019-2021, behavioral supervision was understood as a procedure for monitoring the behavioral models of financial market participants, focused on the process of interaction between suppliers and consumers of financial services (approx. "The main directions of development of the financial market of the Russian Federation for the period 2019 - 2021" (developed by the Bank of Russia) // SPS ConsultantPlus).

Currently, behavioral supervision is defined as the supervision of how financial institutions interact with the consumer. The Bank of Russia analyzes the practices of selling financial products and services, the completeness and correctness of the information that the consumer receives before concluding the contract, the compliance of the contract itself with the legislation, as well as compliance and fulfillment of all its terms by a financial institution. It is actively used to combat misseling (the sale of some financial products under the guise of others), the imposition of insurance and additional services when making loans, violations in collecting overdue debts, insufficient information or misleading the consumer before entering into a contract and other unfair practices.

Since the term "behavioral supervision" has not been legally fixed yet, scientific approaches to the concept and legal nature of this phenomenon are of particular importance.

Pirogova T. V. and Selivanova M. A. understand behavioral supervision as a procedure of the Bank of Russia's control over the behavioral models of market participants with a focus on the process of interaction between suppliers and consumers of financial services. ^[1]

Knyazeva E. Y. under behavioral supervision understands the analysis of sales of financial products and services, the completeness and transparency of information received by the consumer before concluding a particular financial transaction (contract), as well as the compliance of the concluded transaction (contract) with the current legislation, compliance by a financial institution with all the terms of such a transaction. ^[2]

Veis E. V., Starikova P. G. define behavioral supervision as the activity of the Bank of Russia, which is aimed at preventing, detecting and preventing violations of the rights of consumers of financial services. ^[3]

Greshnova T.M., Besko O.V. Admit that the concept of behavioral supervision has not been formed in the domestic literature, the only idea of the category is given by the Regulator itself. ^[4]

The application of behavioral supervision approaches in the activities of financial regulators was initially implemented in foreign countries.

According to the position of Yu.A. Kuznetsova, the emergence of behavioral supervision became possible in connection with the conclusion of the Basel Agreements. The reason for such changes, according to the author, was the introduction of capital adequacy requirements for financial organizations. ^[5]

In our opinion, there is no direct causal relationship between the conclusion of the Basel Agreements and the beginning of the application of behavioral supervision approaches in the activities of financial regulators.

Other researchers (for example, A.L. Savatyugin, E.O. Mehdiyev) also do not make a direct connection between the mandatory standards that are established by the Basel Agreements (approx. The Consolidated Basel Framework (CRE20 "Standardized approach: individual exposures", p. 20.12, footnote 7) and the behavior of financial market entities, which is checked within the framework of behavioral supervision.

However, the importance of the Basel Agreements as one of the general prerequisites for the design of the institute of behavioral supervision cannot be excluded. This is largely due to the fact that the Basel Committee recognized the need for compliance with ethical standards, the introduction of codes of ethics that would fix the unacceptability of forgery and falsification of reports, unfair financial transactions, participation in questionable activities, fraud, money laundering and corruption. ^[6]

The actual formation of behavioral supervision occurred long before the design of the term itself.

In foreign countries, the discussion of financial crises and behavioral economics took place in parallel with the development of legal ideas in this area.

Within the framework of behavioral economics, various deviations in the models of behavior in the economy are traditionally studied. Within the framework of these studies, scientists have come to the conclusion that the financial sphere of public relations is one of the most difficult areas for a person, since it is not natural and familiar to him. The sphere of financial relations is an area of making frequent behavioral mistakes. Although it was previously thought that due to the strong development of financial institutions, any disruptions in their functioning and damage from them would be incomparable with the overall scale of benefits and would be insignificant, but these estimates were premature.

At the beginning of the XXI century, global economic crises began, which, among other things, were associated with unfair behavior of financial market participants (and primarily financial service providers).

It is worth noting that behavioral economics is not so much connected with the activities of organizations as with the behavior of an ordinary person, in this regard, there has been a sharp increase in attention to the protection of the rights of consumers of financial services.

To this end, in 1973, at the 25th session of the Consultative Assembly, the European Union adopted the Consumer Protection Charter ^[7], and later UN General Assembly Resolution 39/248 on April 9, 1985, which proclaimed the principles of protecting the interests of consumers of financial services. The next step in 2012 was the United Nations Conference on Trade and Development (UNCTAD), where, in order to pay special attention to the rights of consumers of financial services, work began on updating the UN Guidelines on Consumer Protection. ^[8]

One of the ways of normative consolidation of provisions on the protection of the rights of consumers of financial services in such states as Italy, Belgium, France and other states of the European Union has become the implementation of general international principles in the normative legal acts of national legislations in the field of consumer protection. ^[9]

Subsequent steps to expand the use of behavioral supervision were already taken by European states after the crisis of the two thousandth years, when crises and mini-crises occurred, after which financial regulators began to tighten requirements for financial organizations. At the same time, the circle of supervised entities expanded, which made the financial market stricter in terms of regulatory policy and increased its transparency for a single regulator, which concentrated on itself a large volume of complaints about the behavior of various financial market entities.

On the one hand, entities were identified that, provided they fully comply with prudential requirements for financial stability, nevertheless, in comparison with others, became the object of complaints from consumers of financial services much more often.

On the other hand, after it became clear that the protection of rights in the financial market is possible only after their violation, and their restoration is carried out in relation to specific private entities, which did not change the overall negative systemic picture of violations in the financial market, there was an understanding that for the long-term development of the financial market it is necessary to create a system of comprehensive monitoring of the behavior of subjects financial market. It was assumed that this monitoring would make it possible to form "correct behavioral models for financial market entities."^[8]

 The results of such conclusions were the appearance in European states of bodies with special powers to protect the financial market. Thus, in the countries of Anglo-Saxon law, it was decided to create two different state structures - the Financial Conduct Service in the Financial Supervision Authority and the Bureau for the Protection of the Rights of Consumers of Financial Services. These bodies have embodied the tasks of strengthening trust and legality in the financial market by protecting consumers by informing them, protecting them from illegal actions, by using methods of checking financial market entities, requesting documents from them for verification, etc.

The Bank of Russia also attaches great importance to the protection of the rights of consumers of financial services: it monitors compliance by financial organizations with the mandatory terms of the contract, prevents the imposition of services, concealment of material information from customers, misleading them and other unfair practices.

Within the framework of this activity, consumer protection includes two areas — reactive, that is, work with complaints and appeals, and preventive, when the Bank of Russia itself identifies practices in the market that may harm the interests of consumers of financial services, and works to eliminate them.

As Knyazeva E.Y. notes, the coordinated work of all financial institutions is a key condition for the successful financial and political development of the Russian Federation. ^[10] With this in mind, the issues of regulation of the financial and economic sector, regulation of the behavior of financial market entities are of high relevance and importance. This is especially significant in relation to the activities of the financial sector, which directly interacts with citizens – consumers of financial services. Such interaction, taking into account the specifics of financial and economic risks of individuals, requires consistency and trust.

The lack of trust in the financial system on the part of individuals - consumers of financial services can stimulate high risks for all participants in the financial system, since consumer fears are reflected, among other things, in their financially active investment behavior.

Reducing risks and increasing overall confidence in the financial services system through compliance with current legislation and high-quality operational regulation of new public relations and phenomena is one of the new, but important goals of the Bank of Russia.

The Bank of Russia partially discloses the content of behavioral supervision on its public resources and understands it to control how financial organizations interact with consumers (approx. Electronic resource: Official website of the Bank of Russia. Behavioral supervision. URL: http://www.cbr.ru/protection_rights/behavioral_surveillance / (accessed 05.01.2023)).

The subjects of behavioral supervision are financial organizations and consumers of financial services. The Bank of Russia analyzes the sales practices of financial products and services, the completeness and correctness of the information that the consumer receives before concluding the contract, the contract itself for its compliance with the law, as well as compliance with all its conditions by a financial organization.

The Bank of Russia notes that with the help of behavioral supervision, it is possible not only to restore the violated rights of specific people, but also to eliminate the causes of such violations.

The elimination of the causes of violations of the rights of consumers of financial services is carried out on the basis of analytical information obtained through consumer complaints about the services provided, the study of the websites of financial service providers, the terms of financial services offers. After analyzing this information, the Bank of Russia issues general recommendations that give financial service providers (financial organizations) a clear signal about the inadmissibility of certain practices in relation to consumers of financial services.

Analysis of available public sources on behavioral supervision and scientific research on this topic allows us to formulate the following definition of behavioral supervision.

Behavioral supervision is a type of supervisory activity of the Bank of Russia carried out in relation to financial market participants in order to prevent them from implementing unfair behavioral practices.

Thus, in the definition of behavioral supervision, three signs can be distinguished:

1) behavioral supervision is a type of supervisory activity of the Bank of Russia;

2) behavioral supervision is carried out in relation to financial market participants;

3) the purpose of this supervisory activity of the Bank of Russia is to prevent the implementation of unfair behavioral practices by financial market participants.

Let's look at them in more detail.

1. Banking supervision is defined by the current legislation as supervision of the activities of credit institutions and banking groups (Clause 9, Part 1, Article 4 of the Federal Law "On the Central Bank of the Russian Federation (Bank of Russia)" (hereinafter – the Law on the Bank of Russia").

According to Article 56 of the Law on the Bank of Russia, the Central Bank of the Russian Federation is the body of banking regulation and banking supervision, carries out constant supervision of compliance by credit organizations and banking groups with the legislation of the Russian Federation, regulations of the Bank of Russia, mandatory standards established by them and (or) individual limit values of mandatory standards established by the Bank of Russia. The Bank of Russia analyzes the activities of bank holdings and uses the information obtained for the purposes of banking supervision of credit institutions and banking groups that are part of bank holdings.

According to A.S. Pastushenko, banking supervision as a function of the Bank of Russia is characterized by the following features:

1) represents the control and supervisory function of a public legal entity authorized by law (the Bank of Russia);

2) is an integral part of the state financial control carried out by the Bank of Russia over the activities of credit organizations that form non-centralized funds of funds on an ongoing basis for the prevention, suppression of offenses of credit organizations, bringing them to the responsibility established by law for the offenses committed;

3) has a socially significant character, aims to ensure financial stability and financial security, taking into account the risk-based approach in banking supervision and banking regulation, as well as the lawful behavior of credit institutions in the financial market, effective protection of the rights of depositors and creditors of credit institutions. ^[11]

Determining the place of behavioral supervision, it is impossible not to pay attention to the opinion of S.S. Tropskaya, according to which "it is difficult to imagine the public law of the financial market without interaction with financial control law. Institutions such as banking supervision ... can simultaneously be considered as institutions of a special part of financial control law and as sub-institutions of public banking law, respectively ...". ^[12]

Since behavioral supervision, in addition to a special feature, is also characterized by signs of banking supervision, it can be concluded that banking supervision and behavioral supervision are united by common tasks of financial control and supervisory activities.

In connection with the above, it seems that the behavioral supervision of the Bank of Russia is a kind of its control and supervisory activities.

Direct control over compliance with the obligations of economic entities operating in the financial market as part of the consumer market is entrusted to the Bank of Russia as a mega-regulator in the financial market.

2. The second significant feature of the category of behavioral supervision is the object of such supervision.

Currently, persons subject to behavioral supervision are not fixed in regulatory legal acts.

At the same time, the very essence of behavioral supervision presupposes the widest possible application of its methods in relation to financial market participants.

Behavioral supervision is carried out in relation to financial organizations listed in Article 76.1 of the Law on the Bank of Russia in order to protect consumers of financial services.

A consumer of financial services in accordance with Article 2 of Federal Law No. 123-FZ of June 4, 2018 "On the Commissioner for the Rights of Consumers of Financial Services" means an individual who is a party to the contract, or a person in whose favor the contract is concluded, or a person to whom a financial service is provided for purposes unrelated to the implementation of entrepreneurial activity. However, we do not limit the range of financial market participants fixed in the above-mentioned article.

Within the framework of behavioral supervision, the Bank of Russia implements measures aimed at monitoring the interaction of various financial market participants with consumers of financial services. The main objects of behavioral supervision of the Bank of Russia are financial service providers, since their activities are most associated with interaction with consumers of financial services and, accordingly, have risks of implementing unfair behavioral practices.

3. The third feature of the definition of behavioral supervision is the purpose of its implementation.

The formation of the goal of behavioral supervision is due to historical trends that we have considered earlier.

In the context of widespread economic crises and the imperfection of financial institutions, it became clear that financial market participants and, first of all, financial suppliers, in order to achieve their benefits, resort to such tools for selling and maintaining their financial products that contradict the civil law principles of good faith.

According to the definition of L.V. Sannikova, behavioral supervision, in contrast to supervision of compliance with legislation, involves verification by the authority not only of compliance by a financial organization with mandatory requirements established by law, but also of the behavior of the organization in relation to the consumer of financial services. This approach makes it possible to identify, in addition to formally illegal actions of organizations providing financial services, also actions that violate the principle of good faith behavior of participants in legal relations. ^[13]

At the same time, the absence in the current legislation of a clear concept of behavioral supervision and its place in the system of supervisory practices carried out by the Bank of Russia leads to discrepancies and nervousness in the financial market. In order to eliminate legal uncertainty in this matter, it is proposed to supplement the provisions of Chapter X.I of the Law on the Bank of Russia with a new Article 76.9-5 as follows:

"76.9-5. The Bank of Russia, within the framework of its supervisory functions, protects the interests of consumers in the financial market, including by monitoring the compliance of financial organizations with the mandatory terms of the contract, preventing the imposition of services, hiding material information from customers, misleading them and other unfair practices, and conducting behavioral supervision.

Behavioral supervision is the supervision of how financial institutions interact with the consumer.

The Bank of Russia analyzes the practices of selling financial products and services, the completeness and correctness of the information that the consumer receives before concluding the contract, the compliance of the contract itself with the law, as well as compliance and fulfillment of all its conditions by a financial institution; determines the behavioral risk profile of financial market participants, setting signal indicators for them by the ratio of the number of complaints to the customer base.

For the purposes of behavioral supervision, the Bank of Russia has the right to receive information from the official websites of credit institutions, complaints and appeals against unfair actions of their employees, specialized consumer forums and other sources; to conduct control purchases of financial products and services in order to identify violations of legislation by financial market participants at the stage before the conclusion of the contract and the application of supervisory response measures.

Behavioral supervision is carried out in accordance with the procedure established by the Bank of Russia."