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Regulatory framework

Key policies

What are the principal governmental and regulatory policies that govern the banking sector?

The main focus of the Andorran banking regulations is centred on the stability and efficiency of banks and other Andorran financial entities that operate in the financial system, to enhance the confidence of international financial markets in the Andorran banking sector and to protect the interests of its clients and investors.

Andorran banking regulations are based on the cornerstone principle of reserve of activity. According to this principle, only the banks that have been duly authorised by the local regulator, the Andorran Financial Authority Autoritat Financera Andorrana (AFA) may carry out typical banking activities, such as receiving deposits and other funds from clients and granting any kind of credits by its own account. Andorran banks can also render investment and ancillary services.

Andorran banking regulation is being increasingly influenced by international standards in financial regulation (ie, European and international financial standards), which are taken as a reference by the Andorran legislature in order to adapt its internal banking regulation. Andorra signed the Monetary Agreement with the European Union in 2011 (the Monetary Agreement), which, on occasion, obliged the Andorran government to implement several financial, banking and anti-money laundering European Directives and Regulation.

The latest Annex to the Monetary Agreement foresees the forthcoming implementation of the following key pieces of legislation into the Andorran legal framework between 2019 and 31 December 2020:

  • Regulation (EU) No. 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR);
  • Directive 2014/65/EU on markets in financial instruments (MiFID II);
  • Regulation (EU) No. 600/2014 on markets in financial instruments (MiFIR); and
  • Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (CRD IV) along with Regulation (EU) No. 575/2013 on prudential requirements for credit institutions and investment firms (CRR) regime.

The CRD IV/CRR regime is on the verge of being implemented into the Andorran legal framework through a draft bill on solvency, liquidity and prudential supervision for banking entities and investment firms, which currently is through the later stages of parliamentary procedure. Its entry into force is expected early 2019.

EMIR implementation is planned for 30 September 2019.

Primary and secondary legislation

Summarise the primary statutes and regulations that govern the banking industry.

Overall, the primary statutes governing the banking sector are Act No. 7/2013, dated 9 May 2013, on the regime for the operating entities in the Andorran financial system and other provisions that govern financial services in the Principality of Andorra and Act No. 8/2013, dated 9 May 2013, which covers the organisational requirements and operating conditions of entities operating in the Andorran financial system, investor protection, market abuse and financial securities agreements. The first of these Acts establishes the substantive regime for banking and financial activity within Andorra, while the second determines the formal aspects (ie, organisational requirements and operating conditions) for Andorran financial entities, jointly with the market abuse regulation and the regime of financial securities agreements in line with the corresponding EU regulations. With regard to the aforementioned provisions, it is worth noting that the draft bill implementing CRD IV/CRR provisions on prudential, solvency and liquidity requirements will encompass corporate governance requirements as well as CRD IV.

Specifically, the following rules govern specific areas of the banking sector, including:

  • Act on capital adequacy and liquidity criteria of financial institutions, dated 29 February 1996;
  • Act of the financial system disciplinary, dated 27 November 1997;
  • Act No. 10/2008, dated 12 June 2008, regulating Andorra collective investment schemes undertakings;
  • Act No. 35/2010, dated 3 June 2010, on the legal regime for authorising the creation of new operating entities within the Andorran financial system;
  • Act No. 10/2013, dated 23 May 2013, of the Andorran National Finance Institute, as amended by Act No. 12/2018 dated 31 May 2018;
  • Act No. 8/2015, dated 2 April 2015, on urgent measures to introduce mechanisms for the recovery and resolution of banking entities;
  • Act No. 12/2017, dated 22 June 2017, on insurance companies and organisation, and supervision of insurance and reinsurance;
  • Act No. 14/2017, dated 22 June 2017, on prevention and the fight against the money or securities laundering and terrorism financing;
  • Act No. 20/2018, dated 13 September 2018, regulating the Andorran Deposit Guarantee Fund and Andorran investment compensation schemes; and
  • Act No. 8/2018, dated 17 May 2018, on payment Services and electronic money.

Additionally, the AFA is empowered to issue technical communications and recommendations to develop the Andorran banking regulations apply international standards on the banking industry.

Note that the Accounting Plan of the Andorran Financial System was abolished with legal force from 1 January 2017 by means of the Decree dated 22 December 2016, which transposed the International Financial Reporting Standards (IFRS) rules adopted by the European Union into the Andorran legal framework. Andorran financial institutions shall apply the IFRS rules to their 2017 financial statements.

Regulatory authorities

Which regulatory authorities are primarily responsible for overseeing banks?

The AFA is the sole supervisor of the Andorran financial system, acting as a macro-surveillance entity responsible over the Andorran banking and insurance sector (there are no stock exchange markets in Andorra). The AFA has been a member of the International Organization of Securities Commissions (IOSCO) since 2013. Owing to the enactment of Act No. 12/2017, the AFA also assumed supervision over the insurance and reinsurance Andorran entities (see question 9).

Government deposit insurance

Describe the extent to which deposits are insured by the government. Describe the extent to which the government has taken an ownership interest in the banking sector and intends to maintain, increase or decrease that interest.

By means of Act No. 1/2011, dated 2 February 2011, related to the creation of a banking entities deposit guarantee system, the Andorran government created a banking deposits guarantee system without legal personality managed by a management committee, which is in turn directed by the AFA. All banks authorised to operate within Andorra participate in the banking deposits guarantee system, funding it through periodical contributions.

Additionally, Andorra has taken clear legislative steps for improving the reliability and robustness of this system. Namely, Act No. 20/2018 continues to establish the maximum amount of coverage at €100,000 per depositor and €100,000 per investor. Furthermore, additional coverage is incorporated in exceptional cases that guarantee a limit of €300,000. The overall limit is €200 million (as absolute value), which shall be increased as the system of annual contributions to the fund assets reaches 1.5 per cent of the calculation basis of contributions. The scope of the protection provided by the banking deposits guarantee system encompasses all cash and securities deposits of natural and legal persons, irrespective of their nationality or domicile, held in local banks.

The banking deposits guarantee system is excluded from contribution to bail-in in the event of bank resolution (see question 13). Generally, this deposit guarantee system is configured as an ex-post mechanism by paying the corresponding amounts secured in case of intervention or resolution of an Andorran bank.

To date, the deposits guarantee system has never been applied to the financial assistance of Andorran banks. Moreover, the Andorran State Agency for the Resolution of Banking Institutions (AREB) and the Andorran Fund for the Resolution of Banking Institutions, as the financing mechanism for the banking resolution processes, were incorporated in 2015.

Transactions between affiliates

Which legal and regulatory limitations apply to transactions between a bank and its affiliates? What constitutes an ‘affiliate’ for this purpose? Briefly describe the range of permissible and prohibited activities for financial institutions and whether there have been any changes to how those activities are classified.

The legal regime on transactions that banks may carry out with their affiliates is basically made up of the capital adequacy and liquidity criteria of financial institutions Act, dated 29 February 1996, since the Andorran banks acting as a group have to comply with solvency and liquidity ratios and risk concentration limits stated in the above-mentioned Act under a consolidated basis.

Under Andorran law, an ‘affiliate’ relationship applies when there are one dominant and dependent entities and the dominant entity directly or indirectly:

  • holds the majority of the voting rights of the dependent entity;
  • has the power to appoint or to remove the majority of the board of directors of the dependent entity;
  • has appointed exclusively with its votes, at least the majority of the board of directors of the dependent entity; or
  • exercises control of the board of directors of the dependent entity where at least the majority of its members are directly or indirectly directors of the dominant entity.

The type of entity and its specific regulatory status are the criteria that determine the activities that Andorran financial entities may carry out. Banks may perform the widest spectrum of activities, since these are the only entities authorised to take deposits or other repayable funds from the public. Additionally, banks are also authorised to render investment services and investment ancillary services, yet they can neither directly manage collective investment schemes nor perform the activities reserved to life insurance companies, unless they acquire either a majority or a minority stake in these companies.

In relation to the other Andorran financial entities that act in the Andorran financial system, the essential note is that they have a limited range of activities and services:

  • investment financial entities may render both investment and ancillary services as well as complementary activities as long as their principal activity continues to be performed efficiently. On the other hand, they cannot carry out typical banking activities;
  • non-banking financial entities of specialised credit (specialised credit institutions) may only grant financing under any form (eg mortgage loans); and
  • management entities of collective investment schemes.

All the aforementioned financial institutions have an exclusive corporate purpose; therefore, they may only render the relevant financial services established by law with express exclusion of other activities, except for complementary activities that are reasonably linked to their financial business.

Regulatory challenges

What are the principal regulatory challenges facing the banking industry?

The Andorran legislator has made significant efforts in recent years to adapt and modernise the Andorran banking industry to meet international standards.

In this regard, areas such as investor protection, market abuse regulation, the general regulatory regime for Andorran financial entities and regulation of financial guarantees have been set up and strengthened, as well as the regulation for banking resolution and restructuring.

Nevertheless, there are several upcoming challenges that must be carefully monitored for their impact.

Insurance and reinsurance regulation

Act No. 12/2017 on regulation and supervision of insurances and reinsurances in the Principality of Andorra serves as a cornerstone for the Andorran insurance market. In particular, the main challenges in this respect are the adaptation of Andorran insurance entities to the capital requirements imposed by that Act, which are aligned with the provisions of Directive 2009/138/EC (Solvency II), as well as the exercise of effective and efficient supervision by the AFA. Act No. 12/2018 provides the AFA with all the necessary authority, powers and instruments to exercise as a sole supervisor for financial and insurance industries in Andorra.

Banking industry framework

One of the main challenges for the banking industry is to continue to open up to foreign investment and, at the same time, to maintain its independence and remain a competitive financial hub by implementing the commitments agreed upon in the Monetary Agreement. Furthermore, the Andorran government signed an agreement with the European Union in February 2016 that involved the incorporation of the Andorran legal framework to the Common Reporting Standard of the Organisation for Economic Co-operation and Development (OECD). This commitment came into force by the enactment of Act No. 19/2016 of 30 November 2016 on the automatic exchange of tax information.

Bank resolution and restructuring regulation

The main challenges in this matter refer both to the modernisation of the Insolvency Decree, dated 4 October 1969, which governs the general bankruptcy regime, and its alignment with Act No. 8/2015, which provides for the specific banking insolvency regime, and the level of effectiveness and certainty that their combination has to provide.

Association agreement

Currently, the Andorran government is working on the future framework of relations between Andorra and the European Union in order to allow progressive and structured access to the EU internal market, taking into account the particularities of Andorra by means of a specific association agreement.

Consumer protection

Are banks subject to consumer protection rules?

Andorran banks are subject to general and specific consumer protection rules.

The general consumer protection rules are established by Act No. 13/2013, dated 13 June, on effective competition and consumer protection. Its key points may be summarised as follows:

General principles on consumer protection

  • the good faith principle, the fair equilibrium between consumer protection and competitiveness of companies as well as the irrevocable status character of consumer protection regulation are the keystones of this regulation.

Basic rights of consumers

  • in addition to any applicable provisions established by sectoral rules and civil regulation, the basic rights of consumers protected are health and safety;
  • economic and social interests; and
  • the right to information.

Requirements common to all consumer relations

  • in the framework of any consumer relation the following requirements must be met at all times:
    • consumer relations may not cause a risk to health, insurance or environment, unless expressly permitted by law;
    • publicity, information and offers made by any means may be subject to the principles of veracity and objectivity, and must not lead to confusion or error;
    • availability of information to consumers by businesses;
    • information regarding beneficial conditions for consumers;
    • requirements and configuration of the right of withdrawal;
    • requirements and configuration of the guarantee over products and post-sale service;
    • customer satisfaction and product suitability;
    • seller’s responsibility;
    • civil liability for damage caused to consumers;
    • abusive clauses;
    • special modalities for sale; and
    • information and diffusion on consumption through mass media.

Unfair terms

This Act provides a general definition of unfair terms and a catalogue of possible contractual clauses with consumers that may be considered unfair, and therefore, void. Unfair terms are defined as all those that derive from an agreement that have not been individually negotiated, and all those practices not expressly permitted that, against the good faith principle obligation, cause prejudice to a consumer and a material imbalance between the rights and obligations of each party to a contract.

Specific protection rules apply to Andorran banks in respect of investment services by means of Act No. 8/2013, which is in line with the provisions of Directive 2004/39/EC on Markets in Financial Instruments (MiFID I). This regulation aims to maintain and enhance certain ethical and behavioural principles as well as regulate specific practices that are actively combatted internationally.

According to Act No. 8/2013, a retail investor or client is any individual or legal person other than a professional investor or client. In turn, a professional investor is a client that possesses the experience, knowledge and expertise to make its own investment decisions and to properly assess the risk that it incurs.

The Commerce and Consumer Unit is the administrative body responsible for the development, promotion and implementation of policies with the aim of improving the Andorran commercial sector, as well as for protecting consumers’ rights.

In addition, the implementation of MiFID II and MiFIR is planned for 31 December 2020 according to the latest Annex to the Monetary Agreement.

Future changes

In what ways do you anticipate the legal and regulatory policy changing over the next few years?

The main trends regarding legal and regulatory policy will be in accordance with the commitments contained in the Monetary Agreement (eg, capital requirements, payment services, electronic money and financial instruments market regulations). The Andorran government is working to enact a gradual and comprehensive framework of securities law. Moreover, Andorra is currently negotiating jointly with Monaco and San Marino an association agreement with the European Union whose main objective is the participation of Andorra, Monaco and San Marino and their citizens in the European Single Market and to give the possibility to European investors and banking entities to accede these jurisdictions. However, the Andorran economical and financial needs would accelerate by themselves the implementation of international standards in order to operate on a level playing field.

Supervision

Extent of oversight

How are banks supervised by their regulatory authorities? How often do these examinations occur and how extensive are they?

The AFA is the regulatory authority for Andorran banking entities, which performs a supervisory role over Andorran financial entities, in accordance with Act No. 10/2013. Since Andorra is not a member of the European Union, the AFA is not integrated within the framework of the Single Supervisory Mechanism.

The main objectives of the AFA are:

  • to promote and ensure the proper functioning of the Andorran financial system;
  • to ensure the stability and reputation of the Andorran financial system and contribute to reducing systemic risk deriving from credit events affecting the Andorran financial entities or their counterparties;
  • to provide adequate protection to clients and investors;
  • to enhance the competitiveness of Andorra as an international financial hub;
  • to reduce the systemic risk deriving from the financial markets;
  • to perform all activities that may be deemed necessary for the exercise of its functions; and
  • to regulate the Andorran insurance and reinsurance sector.

Supervision performed by the AFA has as an essential aim to protect the public interest rather than to guarantee the individual interests of the supervised entities or the interest of their clients and third parties. It performs supervision on a consolidated basis over entities operating in the Andorran financial system, Andorran undertakings of collective investment schemes, financial markets located or operating in Andorra or requiring authorisation by the AFA to operate and those natural or legal persons over whom the AFA may exercise supervisory powers.

The most relevant functions and competences of the AFA that Act No. 10/2013 does not expressly foresee, among others, are:

  • to issue technical communications, communications and recommendations in order to develop the regulation and instrumental technical regulations in accordance with Andorran law and also with international standards;
  • to supervise on a consolidated basis groups of entities operating in the financial system;
  • to exercise disciplinary and sanctioning power;
  • to examine and manage the claims brought against Andorran banks before it and, possibly, carrying out specific controls if the problem advertised through the claim regards prudential supervision;
  • to undertake services of treasury for the state and manage the issuance of public debt; and
  • to assess the Andorran government on economic and financial policy.

The AFA has discretionary powers to conduct investigations and on-site inspections over Andorran banks and request information from supervised entities, as well as imposing administrative penalties for the case of breach of the obligations imposed by the Andorran financial legislation. These on-site inspections carried out by the AFA are frequent and conducted in a thorough manner.

In spite of not being a EU member state, article 20 of Act No. 10/2013 foresees the international cooperation with other regulators, in addition to the AFA condition as a member of IOSCO. In this regard, there is a memorandum of understanding (MoU) in force between Andorra and Spain, signed on 4 April 2011, which does the following:

  • constitutes an agreement for consolidated cooperation in the supervisory framework between the AFA and the Bank of Spain;
  • establishes the terms of the protocol for the relationship and collaboration between both authorities; and
  • enables the supervisory authority of the country of origin to request information of consolidated risks of banking groups from the relevant authority of the country where the entity has subsidiaries.

In addition to the MoU, the AFA signed the Multilateral Memorandum of Understanding on cooperation and exchange of information on 17 September 2013, becoming a member of the IOSCO framework.

Enforcement

How do the regulatory authorities enforce banking laws and regulations?

Banking regulation is enforced by the AFA, which is entitled to exercise the widest enforcement powers (see question 9).

The AFA’s enforcement powers include, among others:

  • restricting or limiting the bank’s business and operations;
  • requesting divestment of activities posing excessive risks;
  • requiring institutions to limit variable remuneration;
  • requesting the use of net profits to strengthen own funds;
  • imposing specific liquidity requirements; and
  • requesting judicial assistance to undertake its powers.

What are the most common enforcement issues and how have they been addressed by the regulators and the banks?

In recent years, the principal enforcement issues with relevant implications for the banking sector have been:

  • the increase in the default ratio (NPL ratio) of the Andorran banks;
  • compliance with the anti-money laundering Act; and
  • the judicial proceedings issued against unfair terms incorporated in consumer contracts.

Nevertheless, the volume and intensity of the three aforementioned enforcement issues in comparison with other jurisdictions has been significantly lower (eg, promotion of preferred shares to retail investors).

Resolution

Government takeovers

In what circumstances may banks be taken over by the government or regulatory authorities? How frequent is this in practice? How are the interests of the various stakeholders treated?

Act No. 8/2015 comprises a set of rules specifically applicable to the restructuring and resolution of banks, in line with the provisions stated in Directive 2014/59/EU on establishing a framework for the recovery and resolution of credit institutions and investment firms (BRRD).

Under such a law, banks may be taken over by the regulatory authorities (AFA or AREB) when they infringe or it is expected that they will infringe in the near future insolvency, organisational or disciplinary regulations.

Once a bank is in one of such situations, the AFA can adopt several measures to rectify them. If the situation cannot be rectified, the AFA will have to determine whether the bank is unviable.

If the AFA determines the unviability of the bank, it must communicate that situation to the AREB, which will decide what resolution measures to implement.

Bank intervention and processes of resolution and restructuring are governed by the following principles:

  • shareholders will necessarily bear losses in the first place;
  • after the shareholders, creditors will bear losses pursuant to the seniority of their credits;
  • there will be an equivalent treatment for creditors with same seniority;
  • shareholders and creditors will not bear higher losses than those that would have arisen under an insolvency proceeding;
  • the directors may be replaced and shall be responsible for any damage caused to the bank; and
  • full protection to guaranteed deposits is provided (see question 4).

The AREB may intervene in a credit institution’s business, in order to start its restructuring and, possibly, its resolution process if:

  • there is evidence that the bank’s situation may damage its stability, liquidity and solvency;
  • in a restructuring, the AREB may order the removal or replacement of one or several members of the bank board of directors, as well as senior management members, if it determines that such members are not eligible to fulfil their obligations in accordance with the mandatory aptitude requirements; or
  • right after the opening of a resolution process, the AREB shall dictate the substitution of the whole board of directors. This measure has a limited temporal extent of one year, although it may be extended by the AREB to the extent necessary for the smooth development of the resolution process.

Bank failures

What is the role of the bank’s management and directors in the case of a bank failure? Must banks have a resolution plan or similar document?

The role of the bank’s management and directors in the framework of a bank failure can be explained by distinguishing the following plans: the action plan (living will), the debt restructuring plan and the reorganisation of activities plan.

Under Act No. 8/2015 the bank’s management must draft an action plan in the case where the bank is already or is foreseeably going to enter an insolvency situation. The objective of the plan is to provide measures to restore the bank position and must be accompanied by a specific implementation schedule.

In addition, the board of directors must draft a plan in order to negotiate the debt restructuring with a part or the totality of creditors.

Furthermore, in the event of internal recapitalisation being used as resolution instrument, the AREB will ask the board of directors to draft a plan for the reorganisation of activities. This plan shall contain measures that, in accordance with the economic situation of the bank and the markets in which it operates, are geared towards re-establishing the long-term economic viability of the entity, either of the totality of its activity or a part of it, within a reasonable period of time. This plan must be approved by the AREB, prior to a non-binding consultation with the AFA. The AREB shall also adopt all necessary measures to ensure the fulfilment of the reorganisation plan.

Are managers or directors personally liable in the case of a bank failure?

Managers or directors may incur personal liability in the event of a bank failure. Such liability may be civil, criminal or administrative or a combination thereof.

Civil liability implies that the directors may be liable for any damages caused if a causal link between the bank failure and their acting with gross negligence or wilful misconduct is verified.

Criminal liability exists in several cases (eg, false accounting, negligent management of the business and fraudulent transactions prior to commencement of the restructuring process).

From an administrative perspective, infringements are classified in different grades: very serious, serious and minor. The sanctions that may be imposed on the managers or directors in the case of a bank failure and depending on the gravity of the sanction are:

  • pecuniary sanctions (from €36,000 to €200,000), which may be imposed on directors in the event of, among other things, obstructing the functions of the AREB and the AFA with respect to analysis of the bank’s situation;
  • removal from the position of director and disqualification from exercising management or direction activities in the failed entity for five years;
  • disqualification from exercising management or direction activities in any financial or banking entity, and removal, as the case may be, from his or her position as director, for a period less than 10 years;
  • an order for the directors to cease and desist from the prejudicial activity performed against the entity; and
  • public reprimand in the Andorran official journal or the website of the sanctioning organisation or private reprimand.

Planning exercises

Describe any resolution planning or similar exercises that banks are required to conduct.

Under Act No. 8/2015, the bank’s management must draft an action plan in the case where the bank is already or is foreseeably going to enter an insolvency situation. The objective of the plan is to provide measures to restore the bank position and must be accompanied by a specific implementation schedule. This plan would include the different actions foreseen under the plan with the necessary information to conduct them, for example:

  • detailed information on the strategy considered to address the circumstances;
  • a description of the arrangements to ensure operational continuity of the business; and
  • a description of the financing requirements and financing sources necessary for the implementation of the strategy foreseen in the plan.

Capital requirements

Capital adequacy

Describe the legal and regulatory capital adequacy requirements for banks. Must banks make contingent capital arrangements?

Andorran banks are subject to the Act regulating the minimum capital adequacy and liquidity ratios, which establishes the general framework for prudential requirements. The minimum percentage of own resources that banking entities have to maintain at all times is the level of own funds necessary to reach a solvency ratio of 10 per cent.

Additionally, without prejudice to the obligations derived from the solvency and liquidity ratio, Andorran banks shall have solid, effective and exhaustive strategies and procedures to evaluate and maintain, permanently, the amount, type and distribution of share capital that is adequate to cover the nature and the level of risk to which the bank may be exposed. These strategies and procedures must be periodically subject to evaluation. Moreover, Andorran banks must have a minimum share capital of €30 million.

Own resources of banking entities cannot be below 10 per cent, except for the two first exercises of operation, in which only in the case of accumulated losses, can own resources be under 20 per cent, as long as the reduction in capital resources is guaranteed by the shareholders of the entity. The AFA has competence to adopt all measures necessary if a bank has insufficient own funds.

Furthermore, the Monetary Agreement established the implementation of CRD IV/CRR by 30 September 2017. Accordingly, these regulations will formally be implemented into the Andorran legal framework by means of the approval of the draft bill regarding the implementation of capital requirements (see question 2). In addition, the AFA is empowered to require compliance with CRD IV/CRR to the Andorran banking entities if such pieces of legislation are considered as international standards.

How are the capital adequacy guidelines enforced?

Banks are required to report information quarterly to the AFA in relation to solvency and liquidity ratios. The communication will be made during the first 15 days following the date of submission of the correspondent quarterly balances. Additionally, the AFA is entitled to demand banks declare their ratio situation at any moment it deems it necessary.

On the basis of such information, the AFA will be able to determine whether a bank is undercapitalised, in which case it will proceed (see question 16).

Undercapitalisation

What happens in the event that a bank becomes undercapitalised?

Banks that do not comply with the solvency and liquidity ratios are normally required by the AFA to draft a restructuring plan. This plan has to be drafted by the board of directors, determining all the measures that must be taken in order to overcome the problems detected in the framework of an implementation schedule. In addition to this, the drafting of a debt restructuring plan may also be ordered at the AFA’s initiative.

If the bank is financially struggling, yet is still in a position to reverse this situation and avoid entering into a resolution process, the AFA may adopt certain preventive measures, among others:

  • to require the board of directors to call a general meeting or call to its constitution directly, in order to adopt the corporate resolutions that may be considered necessary;
  • to order the cessation or dismiss members of the board of directors or senior managers; or
  • to appoint a representative in the bank to monitor the process and assess its effectiveness.

Insolvency

What are the legal and regulatory processes in the event that a bank becomes insolvent?

The AREB may initiate the resolution process if (in spite of the measures mentioned in question 18):

  • a bank is not able to fulfil solvency and liquidity ratios, and falls into insolvency or will foreseeably do so;
  • there is no likelihood that private sector measures will be able to prevent the insolvency within a reasonable period of time; and
  • for reasons of public interest, it is necessary or convenient to wind up the entity, hence the dissolution or liquidation of the bank by means of bankruptcy proceedings will not reasonably allow the resolution objectives to be fulfilled.

There are several instruments for the resolution of a bank under Act No. 8/2015, which can be individually or jointly applied by the AREB:

  • sale of the bank’s business;
  • transfer of the assets and liabilities to a bridge entity;
  • transfer of the assets and liabilities to a management company; or
  • the internal recapitalisation of the bank.

However, it is also possible that banks will be subject to ordinary, court-driven insolvency proceedings (ie, under the general framework of the Insolvency Decree dated 4 October 1969), if after the valuation process the AREB reaches the conclusion that the objectives (see question 12) will not be fulfilled by the banking resolution process.

Recent and future changes

Have capital adequacy guidelines changed, or are they expected to change in the near future?

Capital adequacy guidelines are expected to be amended in the near future (see question 2), in order to align their provisions with bank capital and liquidity provisions stated by CRD IV/CRR, by its implementation into the Andorran legislation. However, although the AFA has been anticipating provisions of Basel III framework by means of personalised direct recommendations and communications (note that the regulator has the ability to set as applicable what he deems to be an international standard) the provisions of Basel III and its correspondent EU capital requirements regulations have not been homogeneously imposed by the AFA when performing its supervisory activity.

As Basel III provisions have been already phased in by the regulator and the IFRS rules were also applicable to the 2017 financial statement, the impact on the Andorran regulatory framework should not be particularly relevant.

Recently, the AFA issued the Technical Communication 245/17 bis, addressed to local banking entities and focused on the forthcoming implementation of corporate governance requirements. This technical communication warned about the implementation of CRD IV corporate governance requirements and the obligation it imposes on banking entities’ boards of directors to comply with such requirements.

Ownership restrictions and implications

Controlling interest

Describe the legal and regulatory limitations regarding the types of entities and individuals that may own a controlling interest in a bank. What constitutes ‘control’ for this purpose?

The creation or acquisition of entities, with a long-term project and acquiring a ‘qualified stake’, is subject to the AFA’s prior consent and subsequent registration.

A participation is considered as ‘qualified’ when it reaches, either directly or indirectly, a percentage of 10 per cent of the capital or voting rights in the participated entity; or, regardless of its amount, it enables the holder to exercise ‘significant influence’. In turn, ‘significant influence’ is defined as the power to intervene in the financial and business activity decisions of the entity, without having an absolute or joint control over it (eg, the capacity to appoint or dismiss a director is normally deemed as ‘significant influence’).

The AFA will deny the consent to the authorisation or the registration if, from the analysis of the documentation, reaches the conclusion that the act does not adjust to legislation in force or may negatively affect in a significant way the elements that are technical, economical or professional guarantees of the entity or its group. Additionally, prior to granting authorisation for the transaction, the AFA will request a report from the anti-money laundering (AML) authority - the Andorra Financial Intelligence Unit (UIFAND) - which will also examine the transaction and the acquirer.

Foreign ownership

Are there any restrictions on foreign ownership of banks?

There are no general restrictions on foreign ownership of banks. Thus, foreign natural or legal persons may own banks without having to fulfil additional requirements, except for the prior obtainment of a foreign investment authorisation granted by the Andorran government.

The request form to the foreign investment authorisation has to identify the investor and explain the details of the business plan to undertake as well as the investment amount.

The Andorran government has up to 45 days to decide whether to grant the authorisation. However, if the authorisation is not resolved in that period, it is deemed as granted.

However, the Andorran government has a safeguard clause to deny such authorisation to protect the sovereignty, public and economic order, national security, public health or general interest of the Principality of Andorra.

Implications and responsibilities

What are the legal and regulatory implications for entities that control banks?

Entities that control banks fall under the supervision of the AFA for prudential purposes; in particular, these entities must comply with the requirements set down in question 24.

Controlling entities and holders of significant stakes are liable to administrative sanctions if they exercise a negative influence over, or otherwise destabilise, the bank in question.

What are the legal and regulatory duties and responsibilities of an entity or individual that controls a bank?

The entity or individual controlling a bank as a parent company is subject to the suitability requirements that apply to directors of banking entities (ie, business reputation, suitable knowledge and professional experience). Hence, the parent company’s proposal for appointing directors must be submitted to and analysed by the AFA prior to the appointment of these directors.

Additionally, according to Act No. 12/2018, if the home state regulator of the entity or individual controlling a bank incorporated in Andorra has signed a cooperation agreement for supervision on a consolidated basis with the AFA, the entity or individual shall comply with the following provisions in accordance with the terms of the specific co-operation agreement:

  • transmitting all the information required by its home state regulator and, as the case may be, all the information regarding risk management to its parent company; and
  • demanding the home state regulator to perform on-site inspections in relation to entities supervised by the AFA and vice versa.

What are the implications for a controlling entity or individual in the event that a bank becomes insolvent?

Act No. 8/2015 expressly establishes that shareholders will be the first to bear the entity’s losses, although they will not bear any losses to a higher extent than those accumulated if the entity had been subject to a general insolvency proceeding. Consequently, the loss that may be suffered by a shareholder is limited to its stake in the share capital.

Furthermore, the AREB is granted with extraordinary powers which enable it to adopt wide-ranging actions, which in practice could affect a controlling entity (eg, bail-in sequence or ordering structural modifications, such as a SPV-controlling entity merger).

Changes in control

Required approvals

Describe the regulatory approvals needed to acquire control of a bank. How is ‘control’ defined for this purpose?

The acquisition of a ‘qualified stake’ in the capital of an Andorran bank is subject to prior AFA approval and registration. Furthermore, the considerations of the UIFAND in respect of AML control will have to be taken into consideration.

‘Qualified stake’ is defined as the reaching, either directly or indirectly, of 10 per cent of the capital or voting rights in the participated entity or regardless of its amount, a percentage of the share capital that enables the holder to exercise ‘significant influence’. In turn, ‘significant influence’ is defined as the power to intervene in the financial and business activity decisions of the entity, without having an absolute or jointly control over it (eg, the capacity to appoint or dismiss a director is always deemed ‘significant influence’).

In turn, definition of ‘control’ includes the following situations:

  • a person or entity has the majority of the voting rights;
  • a person or entity has the right to appoint or revoke the majority of members of the board of directors, direction or control and at the same time, while being a shareholder or partner of that company;
  • a natural or legal person is a shareholder or associated party and has exclusive control, by means of an agreement concluded with other shareholders or associated parties of this bank, over the majority of voting rights of the shareholders or associated parties thereof; or
  • a natural or legal person may exercise or actually exercises a dominant influence or an influence of control.

Foreign acquirers

Are the regulatory authorities receptive to foreign acquirers? How is the regulatory process different for a foreign acquirer?

The AFA is receptive to foreign acquirers. The regulatory process does not differ substantially for a foreign acquirer, except for the requirement for a foreign investment authorisation.

The AFA has accepted the purchase of stakes in Andorran banks by foreign banks, as well as the incorporation of subsidiaries of foreign banks in Andorra. Therefore, the jurisdiction of a foreign acquirer is not an obstacle in itself, as long as the AFA can continuously perform its supervisory and regulatory activity.

Factors considered by authorities

What factors are considered by the relevant regulatory authorities in an acquisition of control of a bank?

The key factors analysed by the AFA in the context of an acquisition of control of an Andorran bank are principally:

  • the business reputation of the acquirer and the persons controlling it;
  • the capacity of the bank to comply with the applicable regulatory and disciplinary rules stated in Andorran legislation;
  • the directors and senior officers of the bank who may be appointed as consequence of taking control, who will have to comply with the suitability requirements of business reputation, experience, knowledge and independence;
  • the absence of a significant negative effect on the elements that form the technical, economic and professional guarantees of the entity of which the control is acquired;
  • absence of breach of the Andorran laws by the acquisition of control of an Andorran bank; and
  • the existence of signs that may reasonably lead to suspicion that the transaction is related to money laundering or terrorism financing.

Filing requirements

Describe the required filings for an acquisition of control of a bank.

The AFA will demand the following information to authorise the acquisition of control of a bank:

  • information about the transaction:
    • purpose, price and payment terms;
    • identification of the entity;
    • impact on the distribution of voting rights;
    • financing of the transaction and existence of agreements with third parties or other shareholders in relation to the transaction;
    • documentation stating that there is no affection to the technical;
    • economic and professional guarantees of the Andorran bank;
    • in the case of qualified stakes, that there is no breach of Andorran legislation; and
  • information about the acquirer and its controlling persons:
    • a certificate of the general meeting of the foreign entity according the acquisition;
    • the identity of the acquirer and its controlling persons, group structure, structure and members of the management bodies as well as their reputation and experience;
    • their economic and financial situation;
    • verification or previous links with the acquired bank;
    • evaluations performed by AML bodies; and
  • impact on the bank’s economic activity and impact on the Andorran economy:
    • business and strategic plans;
    • changes and structure of the corporate governance structure;
    • internal controls; and
    • AML compliance procedures.

Timeframe for approval

What is the typical time frame for regulatory approval for both a domestic and a foreign acquirer?

For both domestic and foreign acquirers, the framework for regulatory approval is the same. Therefore, the AFA should hand down a decision on the acquisition, accepting or opposing the transaction within 30 business days of submission of the application or, if applicable, from the date of submission of additional information.

The AFA may always choose to oppose an application. The foreign entity may file an administrative appeal against this decision before the competent Andorran courts.