The Legal Nature of Behavioral Supervision of the Central Bank of the Russian Federation.

Litovko Andrei Sergeevich Postgraduate student, Department of International and Public Law, Financial University under the Government of the Russian Federation 55 Leningradsky Ave., Moscow, 125167, Russia andreilitovko@yandex.ru Other publications by this author

In conditions when the economic situation makes high demands on the stability and security of the financial market (approx. Decree of the Government of the Russian Federation No. 4355-r of December 29, 2022 on the approval of the Strategy for the development of the financial market of the Russian Federation until 2030 // SPS Concultantplus) the most urgent issues are achieving its high stability, means of ensuring the rights and freedoms of financial market entities and their guarantees. Among the authorities that traditionally ensure rights and freedoms in the financial market, which include law enforcement agencies, judicial authorities, prosecutor's offices ^[1], a special place is occupied by the Central Bank of the Russian Federation (hereinafter – the Bank of Russia), which ensures financial stability and sustainability by exercising its supervisory powers. In accordance with the provisions of Chapters X, X.1, X.1-1 of Federal Law No. 86-FZ of July 10, 2002 "On the Central Bank of the Russian Federation (Bank of Russia)" (hereinafter – the Law on the Bank of Russia) The Bank of Russia exercises control and supervision in the financial market, its activities are aimed at managing and countering modern types of threats to the banking and financial systems. In the exercise of its powers, the Bank of Russia pursues the achievement of public interest (in the understanding of I.O. Antroptseva) in ensuring economic security and legality ^[2].

Considering the supervisory powers of the Bank of Russia, it can be concluded that behavioral supervision is the least studied tool for achieving stability of the financial system and strengthening confidence in the financial market. Analysis of the official materials of the Bank of Russia has shown that the understanding of behavioral supervision is transformed over time. At the same time, the scientific community recognizes the weak scientific and legal development of this institute.

Thus, I.V. Mikheeva and E.A. Dolkova note that: "all the difficulties and prospects of behavioral supervision should be placed in the legislative perimeter" ^[3].

E.B. Lautz ^[4], A.V. Turbanov ^[5] recognizes the need to consolidate the norms on the protection of the rights of consumers of financial services by a separate act, including one that would regulate behavioral supervision.

At the same time, at present, this institution has not been consolidated, in this regard, its doctrinal perception is of particular importance. However, even in the scientific community, this institute has been studied only in a limited way - the main categories have not been developed, and active discussions are underway about its legal content. Weak scientific development currently does not allow us to form a holistic view of the phenomenon under study. In this regard, we consider it appropriate to consider in more detail the legal nature of ^[6] behavioral supervision in comparison with the most similar institution in terms of application – the Institute of banking supervision.

Considering the supervisory powers of the Bank of Russia, we pay attention to the legal nature of supervisory activities.

In its essence, the supervisory activity of the Bank of Russia is an organizational and governmental activity, which consists in creating a system for verifying compliance with mandatory requirements and legislation in the process of carrying out various types of activities, as well as in suppressing or preventing offenses, and subsequently bringing perpetrators to justice ^[7].

Thus, the legal nature of the supervisory activity of the Bank of Russia is expressed in establishing the compliance of legal relations with standards or norms that fix their lawful form, in order to prevent or prevent offenses.

Banking supervision is the main institution for ensuring financial stability, as well as a type of public law activity carried out by the central bank and (or) a special public law body (bodies) and whose objectives are: maintaining the stability and development of the country's banking system; maintaining the stability of the financial system and the national monetary unit; protecting interests and rights depositors and creditors; prevention of crisis phenomena in the banking sector ^[8].

Banking supervision is expressed in monitoring compliance with mandatory banking regulations and the application of liability measures in case of their violation, as well as the use of a risk-based approach, which allows for a targeted, effective and timely response to emerging threats to economic security, to determine the necessary set of control and supervisory measures ^[9].

The object of banking supervision is the risk system and financial stability of a credit institution.

The subject of supervision is the direct activities of credit institutions and banking groups, in particular, the reporting of commercial banks, which is checked for compliance with its mandatory banking standards established by the Bank of Russia, which reflect the financial and economic condition of the Bank. Within the framework of banking supervision, the Bank of Russia establishes compliance between the indicators of banking activity of banks and generally accepted standards enshrined in the regulations and instructions of the Bank of Russia, and after detecting violations, applies liability measures, sending warnings, instructions, requirements for the elimination of violations to credit institutions, and if multiple violations or non-compliance with the recommendations of the Bank of Russia - applies coercive measures in the form of restrictions on banking operations, revocation of a license to carry out financial activities.

Thus, the Bank of Russia's banking supervision is supervision with strictly formalized limits of implementation. However, it is worth noting that the Bank of Russia's banking supervision is also being reformed, due to the dynamic development of new forms of economic relations.

As T.E. Rozhdestvenskaya notes, "due to the complexity of the banking business, the emergence of new financial instruments, the development of electronic commerce and a number of other reasons, the Bank of Russia cannot rely solely on compliance with regulatory requirements, although this area of supervisory activity does not lose its relevance" ^[9]. According to the researcher, this approach can be called formal (quantitative), the disadvantage of which is, among other things, the probability of an untimely reaction to the risks of the financial system and recognizes the need for the introduction of a supervisory approach that will be based on qualitatively new criteria.

L.V. Sannikova also confirms the existence of problems in the implementation of prudential supervision, within which it is not always possible to identify violations that are not reflected in the "paper" reporting ^[10].

The current situation has led to the formation of a new approach aimed at analyzing the behavior of financial market entities, taking into account its features for the purposes of ensuring the stability of the financial market, which has received the name "behavioral supervision" in the scientific literature and official sources of the Bank of Russia.

E.V. Lutz notes that the emergence of behavioral supervision is primarily due to the provision of incomplete, unreliable and probably false information about financial market instruments – unfair behavior. At the same time, from the point of view of formal observance of the rights and interests of their clients, professional subjects of the financial market comply with the requirements of the legislation ^[11].

V.V. Chistyukhin draws attention to the fact that within the framework of behavioral supervision of the Bank of Russia, first of all, control is exercised over the process of direct sale of financial products and services, that is, over the behavior of financial market entities. And unlike banking supervision, behavioral supervision is not focused on the problems of ensuring the stability of the financial market, but aims to ensure the protection and restoration of violated rights and legitimate interests of consumers of financial services, eliminating the causes of unfair practices ^[12].

Thus, despite the fact that we say that behavioral supervision is a logical response to the need for in-depth supervision of the stability of the financial market and follows from banking supervision, it is impossible to draw a conclusion about the identification of behavioral supervision and banking supervision of the Bank of Russia.

Scientists Greshnova T.M., Besko O.V., also note that behavioral supervision is not banking supervision, and its most important difference is that it does not consist in the supervision of compliance with regulations, but in the study of the behavior of financial market entities, in particular banks, in their interaction with consumers of financial services ^[13].

At the same time, as we noted earlier, "behavioral supervision" has not found a legislative reflection, however, it can be assumed that this institution is currently being formed through the practice of the Bank of Russia (approx. electronic resource: behavioral supervision URL: [https://cbr.ru/protection_rights/behavioral_surveillance ] (accessed 06.01.2023).

We have not identified any scientific papers devoted to the topic of studying the legal nature of supervision over the behavior of financial market participants, in this regard, we have attempted to independently determine the content of the legal nature of behavioral supervision.

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 ^[14].

Behavioral supervision is designed to localize that "gray space" unsettled by mandatory norms of law, where the discretion of professional financial market actors is widespread, whose behavior is associated with improper exercise of their rights and abuse of their dominant position in the market. Such behavior reduces the overall economic development, prevents the emergence of confidence of non-professional financial market participants in financial institutions, and again forms pockets of a "gray" economy.

In addition, based on the results of the analysis, it can be concluded that the object of behavioral supervision is the broad activity of financial market entities for the sale of financial products to consumers of financial services (products), countering unfair, illegal practices, as well as complaints and improving legal regulation.

The subject of behavioral supervision is a set of norms regulating the procedure for the activities of financial market entities, requirements for the financial product itself, as well as norms of acts regulating the rights of consumers of financial services, norms on the activities of a financial commissioner, on the activities of self-regulatory organizations in the financial market, as well as that sphere of relations that does not directly fall within the scope of regulation of mandatory financial regulations, but is closely related to the behavior of financial market participants and can be assessed by the integrity of its implementation.

The new type of supervision is aimed at strengthening the confidence of individuals in financial market institutions, as well as improving the quality of financial services; countering financial crimes and unfair practices; creating an investment climate that will allow developing the economy; supporting the development of regional banks.

This type of supervision can be further characterized by the fact that it pays special attention to the consumer of financial services, which stands out among a wide range of supervised entities, among which, in addition to banks, brokers, insurance organizations, pension backgrounds, microfinance organizations, investment companies, brokerage companies, dealer companies and others are distinguished (approx. electronic resource: Behavioral Supervision URL: [https://cbr.ru/protection_rights/behavioral_surveillance ] (accessed 06.01.2023).

Behavioral supervision is a broader institution, which is due to its purpose and the forms of relations that develop between supervised subjects. A similar point of view is held by E.B. Lauts ^[4].

Behavioral supervision in comparison with banking supervision cannot be called formalized due to the fact that a significant feature is introduced by supervised relationships, which are characterized by permanent change and the complexity of their fixation, objectification into universal norms of law. The implementation of the main substantive aspect of behavioral supervision is expressed in the establishment of compliance with the standards of behavior in the market, the identification of unfair behavior and its qualification in accordance with the signs of dishonesty.

A.G. Guznov notes that "the main directions of supervision in the securities market are related to the behavioral nature of subjects, and above all, to the protection of the rights of consumers of services – citizens and legal entities. However, there are aspects of regulation and supervision related to maintaining financial stability" ^[15].

We also agree with this opinion, since the single constitutional purpose of the Bank of Russia is to ensure financial stability, and its specific powers are only an instrument for achieving a common goal.

It is also worth noting that in addition to the separate use of behavioral supervision to identify unscrupulous behaviors of financial market participants with the participation of consumers of financial services, behavioral supervision can also be used in a combined format. Thus, if behavioral supervision is implemented simultaneously with banking supervision or supervision of insurance organizations, it is implemented within the framework of ongoing banking, insurance or financial market supervision and is aimed at ensuring financial stability.

         Separately, we consider it necessary to note the exceptional provisions of the behavioral supervision of the Bank of Russia (including other supervisory powers of the Bank of Russia) from the point of view of national regulation of control and supervision.

As we have noted, on the one hand, most doctrinal definitions of behavioral supervision disclose it as primarily supervisory activities for financial market entities, at the same time, supervision is not regulated by "sectoral" laws on state control (supervision). In accordance with paragraphs 8 and 9 of Part 4 of Article 2 of Federal Law No. 248-FZ of July 31, 2020 "On State Control (Supervision) and Municipal Control in the Russian Federation" (hereinafter referred to as Law No. 248–FZ), the provisions of Law No. 248-FZ do not apply to the organization and implementation of state financial control and municipal financial control, control over the use of funds by state corporations and control (supervision) over the activities of credit organizations and banking groups, non-credit financial organizations, persons providing professional services in the financial market, supervision in the national payment system.

In addition, we believe that the Bank of Russia, when implementing behavioral supervision, may pay attention to the developments of "traditional" state control (supervision), which currently provide, among other things, for the mass digitalization of state control (supervision) through the development and implementation of special state automated systems.

Summing up the above, we can conclude that behavioral supervision is a type of supervisory activity of the Bank of Russia with certain features due to the objective permanent dynamic variability of supervised relations. The legal nature of behavioral supervision is to complement the "traditional" types of supervision of the Bank of Russia and is implemented in the direction of consumer supervision of the rights of consumers of financial services and the prevention of unfair practices and is aimed at establishing violations of the rights of consumers of financial services within the prudential supervision of the Bank of Russia.