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Prudential regulation

i Relationship with the prudential regulator

Pursuant to the provisions of Ordinance No. 3.021, Monegasque credit institutions are under the direct supervision of the ACPR.

It should be noted that Monegasque credit institutions are not within the scope of the EU Single Supervisory Mechanism under the authority of the European Central Bank. Consequently, the ACPR remains exclusively competent concerning the licensing and supervision of Monegasque credit institutions.

The ACPR carries out three supervisory missions in Monaco (granting of licences, prudential control and resolution) out of the five carried out in France. Indeed, the ACPR is not competent concerning the supervision of the fight against money laundering, which is supervised by a Monegasque-specific authority, the SICCFIN, or the protection of customers.

For the purposes of prudential supervision, the ACPR carries out ongoing control and on-site inspections of Monegasque credit institutions.

In the context of ongoing control, Monegasque credit institutions, as French credit institutions, are required to send their prudential and financial statements quarterly to the ACPR. In addition, regular exchanges and meetings are held between the ACPR and the key representatives of Monegasque credit institutions.

The ACPR may also proceed to on-site inspections in the premises of Monegasque credit institutions, under the same conditions as on-site inspections in the premises of French credit institutions. For such purposes, the agents of the French Central Bank, who are responsible for carrying out this type of control, may be assisted by the Monegasque authorities, if needed. Once an audit is finalised, the results are communicated to the Monegasque authorities by the ACPR.

The ACPR has the same powers of sanction over Monegasque credit institutions as over French credit institutions. Decisions taken by the ACPR in this respect are communicated to the Monegasque government, which will enforce them.

Monegasque credit institutions carrying out non-banking financial services regulated by Law No. 1.338 are also under the supervision of the CCAF, and are subject to on-site and off-site monitoring by the CCAF. In this context, Monegasque credit institutions are required, within six months after the closing of the accounting year, to communicate to the CCAF their annual report and their financial accounts, as certified by their Monaco statutory auditors. The annual report contains, in particular, a description of the measures that were put in place to comply with ethical rules of good conduct and prudential rules. The CCAF may pronounce administrative sanctions consisting of warnings, reprimands, a possible temporary suspension of an authorisation of up to six months, or the definitive withdrawal of the authorisation in certain limited cases.

ii Management of banks

Further to the provisions of Ordinance No. 3.021 and Ordinance No. 3.559, the mandatory rules concerning management of credit institutions established in Monaco are also provided by French legislation.

As in France, credit institutions established in Monaco must comply with the provisions of the CRD IV, as transposed into French legislation on 20 February 2014, and the CRR, which have been included under Annex A of the Monetary Agreement.

As mentioned in Section II, Monegasque credit institutions take the form of either a local SAM or a branch of a foreign credit institution.

The executive body of Monegasque credit institutions incorporated under the legal form of a SAM is the board of directors, which must be composed of between two and eight members. Effective management must be ensured by at least two managing directors of the board of directors. The main missions of the directors are the management of the activities, risks and resources of Monegasque credit institutions.

Registered branches of foreign credit institutions must also have a local effective management composed of at least two managers. Those two managers must be empowered by a delegation of power from the board of directors (or equivalent executive body) of the foreign credit institution in order to have sufficient autonomy.

The board of directors, and other managers and compliance officers designated by the board of directors of the SAM (or, as regards branches of foreign credit institutions, the executive body of such credit institution) shall be composed of members whose knowledge, experience and expertise in the banking area are evidenced, both individually and collectively.

Monegasque credit institutions have the obligation to notify to the ACPR any change of the persons in charge of their effective management, and more broadly of their board of directors. The ACPR can use in this respect a right of opposition.

In addition, for credit institutions with a balance sheet of at least €5 billion, it is compulsory to constitute the three following committees: a risk committee, a nomination committee and a compensation committee.

Significant branches of credit institutions are exempted from constituting a nomination committee, but they must be able to prove that they constituted the two other committees or another body that achieves equivalent results.

iii Regulatory capital and liquidity

Since the CRD IV and the CRR are applicable in Monaco, credit institutions and branches established in Monaco must comply with the European standards in order to maintain their liquidity and solvency. In this context, credit institutions and branches are required to be permanently solvent.

In accordance with the provisions of the CMF, credit institutions in the form of a SAM must have a fully released initial capital of at least €5 million. The financial components included in the initial capital are the following:

  1. capital instruments;
  2. share premium accounts related to the instruments referred to in point (a) above;
  3. retained earnings;
  4. accumulated other comprehensive income; and
  5. other reserves.

Solvency ratios, capital buffers and liquidity ratios apply in the same manner as for French credit institutions.

Non-French foreign credit institutions are required to constitute in respect of their Monegasque branch a capital endowment of the same amount, and are subject to the same solvency ratio requirements.

Branches of non-French foreign credit institutions may benefit from a total or partial exemption from solvency and liquidity requirements. The exemption is granted by the ACPR, subject to the following conditions:

  1. the regulation and supervision of the country of the credit institution from which the branch is dependent take into account the risks assumed outside the branch in an equivalent manner to the provisions in force in Monaco;
  2. the credit institution from which the branch is dependent commits to ensure the supervision of operations of the branch in Monaco in accordance with the regulations in force in its country of incorporation and under the supervision of the competent authority in that country;
  3. the credit institution from which the branch is dependent confirms that it will ensure that the branch has sufficient funds in Monaco to cover its commitments, in particular to meet its short-term liquidity needs;
  4. the credit institution from which the branch depends undertakes to inform the ACPR of any relevant developments to verify that the conditions above are met on a permanent basis; and
  5. the competent authority of the country of the credit institution from which the branch is dependent:
    • agrees to the requested exemption;
    • confirms the regularity of the situation of the credit institution from which the branch depends; and
    • undertakes to inform the ACPR of any significant change in the above conditions and to provide the ACPR, upon its request, with any information relating to the credit institution in question.

The ACPR will assess and supervise mechanisms, strategies and procedures implemented by foreign credit institutions.

iv Recovery and resolution

The Bank Recovery and Resolution Directive (BRRD), which is listed under Annex A of the Monetary Agreement, applies to the Monegasque banking sector following its transposition into French legislation on 20 August 2015. Consequently, the ACPR has an exclusive power to launch and supervise the resolution procedure against a credit institution established in Monaco, and Regulation (EU) No. 806/2014 of 15 July 2014 establishing the Single Resolution Mechanism applies to credit institutions located in Monaco, as being also included under Annex A of the Monetary Agreement.

In this context, the ACPR has the following main missions:

  1. draft resolution plans;
  2. assess the capacity of credit institutions to be subject to resolution measures;
  3. make decisions that could reduce or suppress barriers to the implementation of resolution measures;
  4. assess the default of a credit institution; and
  5. implement resolution measures.

In this context, and in accordance with the provisions of the CMF, directors and effective managers must draft a preventive recovery plan providing measures to face the significant deterioration in the financial position of a credit institution. Such plan shall contain proceedings enabling the implementation of the planned recovery measures and for future actions to be taken by a credit institution in the event of a crisis.

The preventive recovery plan must be updated at least each year and after every substantial change within a credit institution. In addition, the ACPR can also suggest to any credit institution under its supervision a preventive recovery programme that must be implemented by the directors and effective managers if the credit institution presents a specific risk with regard to its financial stability. In cases of failure to meet this obligation, the ACPR can decide to replace them in order to ensure the recovery plan.

A credit institution is considered to be in default in the event the following situations arise:

  1. it no longer complies with the relevant equity capital requirements;
  2. it is not able to secure its payments;
  3. the value of its assets is less than the value of its liabilities; or
  4. it requires exceptional financial support from the public authorities.

If the resolution college of the ACPR considers that a credit institution is, or is likely to become, insolvent and that there is no alternative solution, the credit institution is subject to a resolution procedure. In this scenario, the resolution college of the ACPR would take control of the credit institution, and has the four following tools that could be used separately or in combination:

  1. a business divestiture through a transfer of shares, other title deeds, rights and obligations in the credit institution to a private purchaser;
  2. the separation of assets through the creation of an asset management structure, to which the poor-quality assets, rights and obligations of the credit institution that are intended to be sold or liquidated would be transferred;
  3. a bridging institution through which the shares and other deeds of property as well as the assets, rights and obligations of the credit institution are transferred to a bridging institution, which will continue their operation; and
  4. an internal bail-in instrument that allows for the absorption of losses through the recapitalisation of the credit institution thanks to the contributions of shareholders and creditors. First there is a phase of reduction of eligible commitments to such a measure to absorb the losses and reduce the net worth of the institution to zero. Then there is a conversion phase of eligible commitments to recapitalise the institution.

In a case of the insolvency of a Monegasque credit institution, Article L 613-24 et seq of the CMF apply, however taking into account the specificities of the insolvency proceedings provided by Monegasque bankruptcy legislation, in particular as regards the exercise of the mandates of directors, liquidators and statutory auditors.

There is currently no precedent on the application of the resolution procedure as transposed in the CMF to a Monegasque credit institution. It appears that such an application would under the current state of the legislation raise numerous questions, since the Monegasque insolvency regime differs strongly from the French insolvency regime. A new exchange of letters to be entered into between France and Monaco is currently under negotiation to address those questions.

Finally, effective managers and directors of a Monegasque credit institution may be held responsible for the bankruptcy of the credit institution in the event of mismanagement or an improper continuation of operations leading to the insolvency, which will lead to civil liabilities (in which case the state of personal bankruptcy is pronounced by the Monegasque court) or criminal liabilities (in which case the state of crime of bankruptcy is pronounced by the Monegasque court).

Such effective managers and directors are subject to the ACPR's disciplinary powers, and severe penalties can be imposed on managers and directors of banks.