Prudential regulationi Financial Market Authority
There is only one supervisory authority for Liechtenstein banks: the Financial Market Authority Liechtenstein (FMA).
The FMA has been a regular member of the International Organization of Securities Commissions since April 2011, has had observer status in the EBA and the European Securities and Markets Authority since May 2011, and also has observer status in the European Insurance and Occupational Pensions Authority.ii Relationship with the prudential regulator
The Banking Division is responsible for supervising banks and investment firms in Liechtenstein, and it monitors compliance with the applicable legal norms. As part of the licensing procedure, submitted documents are reviewed for content and completeness. Ongoing monitoring is ensured with reports banks and investment firms are legally required to submit, as well as through direct and periodic contact with the boards of directors and management of institutions.
Similar to Switzerland, Liechtenstein has implemented the dual supervision model. This means that independent, qualified auditors supervise the fulfilment of a bank's legal duties. Additionally, internal audits are mandatory. Smaller banks often use other independent, qualified auditors for this part of the auditing process as well. The FMA may also carry out its own audits or accompany external audits. Where violations of legal norms or grievances come to the attention of the Banking Supervision Section of the FMA, it undertakes necessary measures to restore a lawful state of affairs.
To ensure transparency as well as to improve the working of the internal banking market, the Capital Requirement Directive (CRD IV) obliges the competent authorities to disclose specific information. The published information should permit a meaningful comparison of the approaches adopted by the competent authorities of the different Member States.
The FMA keeps regular contact with members of boards of directors and management to discuss and address financial market observations and any potential conflicts. The FMA is a proactive financial market player: it not only takes on the role of supervisory authority but also that of researching partner for new developments within the field. For example, it has its own laboratory to research, inter alia, new technologies and new developments. This sandbox allows financial market players to learn about new developments and approaches within the market, and thereby to not be surprised by them. Additionally, the size of Liechtenstein's financial market system, the accessibility of the authorities and the rapid processing of any potential issues are big advantages for the local market, which gives enterprises a competitive advantage when filing for licences across the EEA.
There are several reports that banks must deliver to the FMA during the course of the year concerning financial stability, liquidity, fulfilment of different tasks and – as previously mentioned – auditors' reports. These reports must fulfil the general legal requirements according to the Basel III agreements (CRD IV and CRR), and are part of the Single Supervisory Mechanism across the EU.iii Management of banks
Banks are organised as public companies (companies limited by shares or joint-stock companies). Shares normally are registered shares in order to comply with the duty to identify shareholders for fit and proper evaluation (see below).
Pursuant to Article 22 BA, banks and investment firms must be organised in accordance with their business profile and business cases, and require:
- a board of directors responsible for overall direction, supervision and control;
- general management responsible for operations that consists of at least two members who perform their activities with joint responsibility and who may not simultaneously be members of the board of directors;
- an internal audit department that reports directly to the board of directors (see Article 33 of the Banking Ordinance on delegation of the responsibilities of the internal audit department);
- risk management that is independent of management responsible for the operational business;
- an audit committee of the board of directors; and
- appropriate procedures by which employees can report violations of the Banking Act and Regulation (EU) No. 575/2013.
The distribution of functions between the board of directors and the general management must guarantee proper monitoring of business conduct (Article 22 Paragraph 4 BA). The board of directors is responsible for the overall direction, supervision and control of the bank or investment firm (for details, see Article 23 Paragraph 2 BA).
In addition to the Banking Act, the Law on Persons and Companies (PGR) also applies. Article 261 et seq. of the PGR regulates the basic rules for joint-stock companies, such as rules on the structure of shares, organisation and capital increases.Remuneration and bonus system
According to Article 7a Paragraph 6 BA, banks and investment firms shall introduce and permanently maintain remuneration policies and practices that are consistent with sound and effective risk management. The FMA will share this information with the European supervision bodies.
This rule on remuneration was implemented in the wake of the financial crisis, and the bonus discussion with regard to Article 1 (3) of CRD III. A risk-oriented and appropriate remuneration policy for banks and investment firms is stipulated to ensure that their remuneration policies are in line with the long-term interests of banks and investment firms. The details of these remuneration policies and practices, which must subsequently be introduced and maintained by institutions, can be found in Article 92 of Directive 2013/36/EU and in Annex 4.4 to the Banking Ordinance.
Liechtenstein follows the requirements of CRD IV, which gives clear rules concerning the relation between fixed salary and variable components. Most banks in Liechtenstein pay bonuses. Their systems vary: some banks pay bonuses connected to specific goals, while others pay bonuses as a fully discretionary add-on to the salary.
Within the framework of the principle of proportionality, the FMA has determined that certain rules do not apply to small institutions and to employees who receive relatively low variable remuneration compared with other international institutions. These are the provisions concerning:
- the composition of variable remuneration (Annex 4.4 No. 1 Paragraph 2 Subparagraph k Banking Ordinance;
- retention (Annex 4.4 No. 1 Paragraph 2 Subparagraph l Banking Ordinance; and
- the treatment of voluntary retirement benefits in the event of an employee leaving a company (Annex 4.4 No. 1 Paragraph 2 Subparagraph n Sentence 2 Banking Ordinance.
A bank qualifies as a small institution if its assets do not exceed 5 billion Swiss francs.iv Regulatory capital and liquidityCRD and CRR
Liechtenstein banks are distinguished by their financial strength and stability. They have solid and high-quality equity capital resources. With an average core capital (Tier 1 ratio) of more than 20 per cent, Liechtenstein banks hold, on average, more than what is required under BASEL III or the EU capital requirements of CRD IV. They are thus among the best-capitalised banks across Europe and worldwide. Since the beginning of the financial crisis, no bank in Liechtenstein has required state aid. Liechtenstein's AAA rating by Standard & Poor's underscores the country's reliability and stability.
In its Guidance 2017/10, the FMA defines the obligations with regard to own funds and capital adequacy requirements. In doing so, it relies on CRD, and especially CRR, which is implemented in the Banking Act and the Banking Ordinance. The guidelines ensure that banks have sound, effective and comprehensive strategies and procedures in place with which they can maintain the level, types and distribution of internal capital required under the Internal Capital Adequacy Assessment Process (ICAAP). The required capital is related to current and possible future risks (Article 7a Paragraph 3 Banking Act). The FMA has issued a special directive on ICAAP.Capital buffers
Pursuant to Article 7e and 7f Banking Ordinance, the FMA is obliged to conduct an annual analysis to identify other systemically relevant institutions in Liechtenstein, report results to the relevant institutions (A-SRIs) and publish those results. Pursuant to Article 4a Banking Act, such A-SRIs may be assigned an additional capital buffer of up to a maximum of 2 per cent of the total risk amount pursuant to Article 92 of CRR.v Recovery and Resolution
The Recovery and Resolution Act (RRA), transposing the European Recovery and Resolution Directive (BRRD), provides a framework for solving the too-big-to-fail issue, and hence contributes to strengthening the stability of the Liechtenstein financial system. The BRRD requires EEA Member States to establish a national resolution authority vested with specifically designed resolution powers. The RRA appointed the FMA as Liechtenstein's Resolution Authority. For this function, the FMA is obliged to create a separate organisational unit within its organisational structure. The FMA has to ensure that the Resolution Authority is able to exercise its functions operationally independent from the FMA's other organisational units and to prevent conflicts of interest between the resolution functions and the FMA's other functions. The Resolution Authority assumed its function on 1 January 2017. The Resolution Authority, among other things, is tasked with drawing up resolution plans. With regard to the resolution objectives, it is authorised to apply the resolution tools and to exercise its resolution powers (RAA Article 82).
The resolution objectives are:
- to ensure the continuity of critical functions;
- to avoid a significant adverse effect on the financial system;
- to protect public funds by minimising reliance on extraordinary public financial support;
- to protect covered deposits and investments; and
- to protect client funds and client assets.
The tools for resolution are as follows:
- sale of business tool;
- bridge institution tool;
- asset separation tool;
- bail-in tool.