Contents
The Banking
Regulation
Review
Third Edition
Editor
Jan Putnis
Law Business Research
i
The Banking Regulation Review
Reproduced with permission from Law Business Research Ltd.
This article was first published in The Banking Regulation Review,
3rd edition (published in May 2012 – editor Jan Putnis).
For further information please email [email protected]
ii
THE Banking
Regulation
REVIEW
Third Edition
Editor
Jan Putnis
Law Business Research Ltd
Publisher
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Acknowledgements
The publisher acknowledges and thanks the following law firms for their learned assistance
throughout the preparation of this book:
Abdulaziz Algasim Law Firm
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AFRIDI & ANGELL
Ali Budiardjo, Nugroho, Reksodiputro
Anderson Mōri & Tomotsune
Arthur Cox
Bonelli Erede Pappalardo
Bredin Prat
Bugge, Arentz-Hansen & Rasmussen
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Chancery Chambers
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Davies Ward Phillips & Vineberg LLP
v
Acknowledgements
Davis Polk & Wardwell LLP
De Brauw Blackstone Westbroek
DLA Piper Weiss-Tessbach Rechtsanwälte GmbH
Elvinger, Hoss & Prussen
F.O. Akinrele & Co
Formosa Transnational Attorneys at Law
Gernandt & Danielsson
Gide Loyrette Nouel AARPI
Gorrissen Federspiel
Hengeler Mueller
Kadir Andri & Partners
Kim & Chang
Lenz & Staehelin
LS Horizon Limited
Marval, O’Farrell & Mairal
Mattos Filho Advogados
Mayora & Mayora, SC
Moratis Passas Law Firm
Mourant Ozannes
vi
Acknowledgements
Mulla & Mulla & Craigie Blunt & Caroe
Muñoz Tamayo & Asociados Abogados SA
Nagy és Trócsányi Ügyvédi Iroda
NautaDutilh
Paksoy
Russell MCVeagh
Ružička Csekes sro
Schoenherr şi Asociaţii SCA
Skudra & Udris
Slaughter and May
SyCip Salazar Hernandez & Gatmaitan
T Studnicki, K Płeszka, Z Ćwiąkalski, J Górski Spk
Uría Menéndez
Vieira de Almeida & Associados
Waselius & Wist
Webber Wentzel
WongPartnership LLP
Zhong Lun Law Firm
vii
Contents
contents
Editor’s Preface
������������������������������������������������������������������������������������������xvii
Jan Putnis
Chapter 1
International Initiatives�������������������������������������������������������� 1
Jan Putnis and Tolek Petch
Chapter 2
Argentina�����������������������������������������������������������������������������29
Santiago Carregal, Martín G Vázquez Acuña and Josefina Tobias
Chapter 3
Australia������������������������������������������������������������������������������41
Louise McCoach and David Landy
Chapter 4
Austria���������������������������������������������������������������������������������76
Wolfgang Freund
Chapter 5
Barbados������������������������������������������������������������������������������86
Trevor A Carmichael QC
Chapter 6
Belgium�������������������������������������������������������������������������������95
Anne Fontaine
Chapter 7
Brazil���������������������������������������������������������������������������������107
José Eduardo Carneiro Queiroz
Chapter 8
Cambodia��������������������������������������������������������������������������113
Bun Youdy
viii
Contents
Chapter 9
Canada������������������������������������������������������������������������������127
Scott Hyman, Carol Pennycook, Derek Vesey and Nicholas Williams
Chapter 10
Cayman Islands�����������������������������������������������������������������143
Richard de Basto
Chapter 11
China���������������������������������������������������������������������������������154
Wantao Yang, Emily Xiaoqian Wang and Carol Dongping Cao
Chapter 12
Colombia���������������������������������������������������������������������������175
Diego Muñoz-Tamayo
Chapter 13
Denmark���������������������������������������������������������������������������191
Tomas Haagen Jensen and Tobias Linde
Chapter 14
El Salvador������������������������������������������������������������������������203
Aquiles A Delgado and Oscar Samour
Chapter 15
European Union����������������������������������������������������������������214
Jan Putnis and Benjamin Hammond
Chapter 16
Finland������������������������������������������������������������������������������236
Tarja Wist and Jussi Salo
Chapter 17
France��������������������������������������������������������������������������������247
Olivier Saba, Samuel Pariente, Jennifer Downing, Jessica Chartier
and Hubert Yu Zhang
Chapter 18
Germany����������������������������������������������������������������������������278
Thomas Paul and Sven H Schneider
Chapter 19
Greece��������������������������������������������������������������������������������292
Dimitris Passas and Vassilis Saliaris
ix
Contents
Chapter 20
Guatemala�������������������������������������������������������������������������312
María Fernanda Morales Pellecer
Chapter 21
Guernsey����������������������������������������������������������������������������325
John Lewis and Jeremy Berchem
Chapter 22
Hong Kong������������������������������������������������������������������������337
Laurence Rudge and Peter Lake
Chapter 23
Hungary����������������������������������������������������������������������������353
Zoltán Varga and Tamás Pásztor
Chapter 24
India����������������������������������������������������������������������������������366
Shardul Thacker
Chapter 25
Indonesia���������������������������������������������������������������������������379
Ferry P Madian and Yanny Meuthia S
Chapter 26
Ireland�������������������������������������������������������������������������������398
Carl O’Sullivan, William Johnston, Robert Cain and Eoin
O’Connor
Chapter 27
Italy�����������������������������������������������������������������������������������410
Giuseppe Rumi and Andrea Savigliano
Chapter 28
Japan���������������������������������������������������������������������������������421
Hirohito Akagami, Toshinori Yagi and Wataru Ishii
Chapter 29
Jersey���������������������������������������������������������������������������������432
Simon Gould and Sarah Huelin
Chapter 30
Korea���������������������������������������������������������������������������������444
Sang Hwan Lee, Chan Moon Park and Hoin Lee
x
Contents
Chapter 31
Latvia���������������������������������������������������������������������������������457
Armands Skudra
Chapter 32
Luxembourg����������������������������������������������������������������������468
Franz Fayot
Chapter 33
Malaysia����������������������������������������������������������������������������485
Andri Aidham bin Dato’ Ahmad Badri, Julian Mahmud Hashim
and Tan Kong Yam
Chapter 34
Malta���������������������������������������������������������������������������������495
David Griscti and Clint Bennetti
Chapter 35
Netherlands�����������������������������������������������������������������������506
Joost Schutte, Annick Houben and Mariken van Loopik
Chapter 36
New Zealand����������������������������������������������������������������������519
Debbie Booth and Guy Lethbridge
Chapter 37
Nicaragua��������������������������������������������������������������������������533
Rodrigo Taboada R
Chapter 38
Nigeria�������������������������������������������������������������������������������545
Adamu M Usman and Jumoke Onigbogi
Chapter 39
Norway������������������������������������������������������������������������������560
Terje Sommer, Markus Nilssen and Mats Nygaard Johnsen
Chapter 40
Philippines������������������������������������������������������������������������571
Rafael A Morales
Chapter 41
Poland�������������������������������������������������������������������������������586
Tomasz Gizbert-Studnicki, Tomasz Spyra and Michał Bobrzyński
xi
Contents
Chapter 42
Portugal�����������������������������������������������������������������������������600
Pedro Cassiano Santos
Chapter 43
Romania����������������������������������������������������������������������������615
Adela-Ioana Florescu and Diana-Maria Moroianu
Chapter 44
Saudi Arabia����������������������������������������������������������������������626
Johannes Bruski and Julian Johansen
Chapter 45
Singapore���������������������������������������������������������������������������635
Elaine Chan
Chapter 46
Slovakia�����������������������������������������������������������������������������649
Sylvia Szabó
Chapter 47
South Africa�����������������������������������������������������������������������663
Johan de Lange and Matthew Gibson
Chapter 48
Spain���������������������������������������������������������������������������������677
Juan Carlos Machuca
Chapter 49
Sweden������������������������������������������������������������������������������699
Niclas Rockborn and Nils Unckel
Chapter 50
Switzerland������������������������������������������������������������������������715
Shelby R du Pasquier, Patrick Hünerwadel, Marcel Tranchet and
Valérie Menoud
Chapter 51
Taiwan�������������������������������������������������������������������������������736
Chun-yih Cheng
Chapter 52
Thailand����������������������������������������������������������������������������749
Montien Bunjarnondha and Rahat Alikhan
xii
Contents
Chapter 53
Turkey�������������������������������������������������������������������������������763
Serdar Paksoy and Nazlı Bezirci
Chapter 54
United Arab Emirates��������������������������������������������������������775
Amjad Ali Khan and Stuart Walker
Chapter 55
United Kingdom����������������������������������������������������������������783
Jan Putnis, Michael Sholem and Nick Bonsall
Chapter 56
United States���������������������������������������������������������������������821
Luigi L De Ghenghi and Reena Agrawal Sahni
Chapter 57
Vietnam�����������������������������������������������������������������������������887
Samantha Campbell, Pham Bach Duong and Nguyen Thi Tinh
Tam
Appendix 1
About the Authors�������������������������������������������������������������907
Appendix 2
Contributing Law Firms’ Contact Details��������������������������942
xiii
Editor’s Preface
Jan Putnis
When the first edition of this book was published in mid-2010, banking regulation seemed
to be undergoing a transformation driven by a reasonably coherent international agenda.
There were questions about how long it would be before nationalist and protectionist
tendencies fractured the broad consensus that seemed to have built up on such issues as
the need for more and better quality capital resources, liquidity requirements and the
strengthening and reform of vital market infrastructure. However, there appeared to be
a reasonable degree of certainty about the direction and speed of reform, at least among
the G20 countries.
Events, as they always do, have since conspired to make the position considerably
more complicated, in two separate ways. First, achieving many of the regulatory
reforms agreed in principle at the meeting of G20 leaders in London in 2009 has
proved to be a far more complex and difficult task than even those expert in the field
of banking regulation had expected. Secondly, as concerns about solvency have spread
to governments, sovereign debt has assumed centre stage. The eurozone crisis, as it has
come to be known, rumbles on with no obvious short-term solution that would avoid
significant economic and social upheaval in parts of the European Union. There is also
the potential existential threat that sovereign defaults of eurozone countries would pose
to banks that are either established in those countries or have significant exposure to
banks or assets in those countries. Events in the eurozone have given the frenetic activity
in the area of financial regulatory reform in the European Union a slightly surreal quality
against the backdrop of the consequences of potential economic and financial upheaval
in one or more eurozone countries. Meanwhile, in the United States, the rule-making
process under the Dodd-Frank Act has continued, behind its original schedule, and
banks continue to digest the consequences of the Volcker rule.
On both sides of the Atlantic the volume and complexity of new and proposed
rules has continued to be a cause of criticism and frustration. A banking sector that
was roundly blamed for creating the complexity in products, markets and business
structures that exacerbated aspects of the financial crisis is facing the irony of a wall of
xvii
Editor’s Preface
new regulation of such complexity that the complexity itself might end up being the
main reason that the new regulation fails to achieve its objectives.
Separately, in many Asian financial centres reforms are underway but are, in
general, far behind those proposed and enacted in the United States and the European
Union. Many governments, regulators and bankers in Asia saw (and continue to see) the
western financial crisis of 2007–2009 as exactly that, a western financial crisis, and view
the gradual liberalisation of the Chinese banking system and greater convertibility of the
renminbi as the greater challenge and opportunity.
If we set ourselves the task of summarising the positive things that have emerged
for banking regulation from that western financial crisis, what would we say now,
three years on? There is little doubt that there is now much greater awareness among
policymakers and regulators in all major jurisdictions of two important factors that will
probably dominate any future international banking crisis:
aBanks, however well capitalised, risk collapse in sufficiently extreme circumstances
and the crisis demonstrated that those circumstances should never be regarded as
too extreme to contemplate. Assumptions about the credit quality and liquidity
of assets, and about withdrawal of sources of funding (including deposits), may
cease to apply in stressed market conditions. That means that the maturity
transformation role of banks (‘borrowing short term and lending long term’, as it
is often simplistically described) makes them subject to existential threats that are,
by their very nature, difficult to anticipate and address accurately.
bContagion can spread through financial systems in unexpected ways, or at least in
ways that are unexpected by governments and regulators. Studying the potential
routes of contagion and considering whether there are ways of closing down those
routes without adverse unintended consequences for economies that are recovering
from recession is therefore an important aspect of regulatory endeavour.
It might seem incredible now that these points were not appreciated sufficiently by
governments and regulators before the financial crisis first erupted in the United States
in 2007 and then spread to Europe in the following year. But that was undoubtedly the
case.
The past year has seen international banking groups grappling with the practical
realities of regulatory reform. Doubts about the ability of some banks to raise the additional
capital (particularly Tier I capital) that they will require in order to meet the gradually
increasing capital requirements set out in the Basel III agreement are feeding concerns
about the long-term viability of some banks’ business models and, more generally, about
previously long-held expectations as to returns on equity of banking groups. Banks have
begun to respond to actual and prospective higher capital requirements, in some cases
by raising equity with varying degrees of success (which has been difficult in the market
conditions prevailing in most of the world in the past year) and in other cases by selling
or preparing to sell assets and business units, or simply by closing down business lines.
Politics have intervened in banking in the past year in ways that have made the
debate about the direction of regulatory reform in the banking sector more complicated.
In some countries, concern about the remuneration of senior management of banking
groups has reached fever pitch in the media while, at the same time, a less emotive and
xviii
Editor’s Preface
generally more thoughtful debate has continued on the need for more financing for
businesses, particularly small and medium-sized enterprises.
The apparent shortage of finance for businesses in many economies, coupled with
expected further pressure on the ability of banks to provide that finance as their capital
requirements continue to increase, has led to concerns about the development of other
sources of finance. Is credit risk, and the contagion to which it can give rise if borrowers
default, shifting in dangerous ways out of the banking sector into the so-called ‘shadow
banking sector’? The European Commission looks set to start investigating this topic in
earnest in 2012. The consequences of regulatory intervention in this area are currently
very difficult to predict, not least because any attempt to regulate non-bank sources of
finance more heavily is bound to attract criticism from those who claim that it will only
reduce further the sources of finance available to the ‘real’ economy.
Another area of regulatory reform that banking groups continue to grapple
with in 2012 is transparency with regulators. There are various examples of the ways
in which this is starting to affect the sector. The most immediate and relevant example
concerns the work that many of the largest banking groups in the United States and
Europe are currently involved in to draw up ‘recovery plans’ and to draw up, or to assist
their regulators in drawing up, ‘resolution plans’, those plans being collectively (and
somewhat misleadingly) referred to as ‘living wills’. The phrase of the moment is ‘barriers
to resolution’, describing factors that would prevent or inhibit the orderly resolution
of a bank at or close to its collapse. Plenty of barriers to resolution are being identified
as recovery and resolution plans are prepared. The second half of 2012 and 2013 will
likely be an interesting period in which regulators ponder these barriers and deepen their
discussions with banking groups as to what might be done about them.
Fears of enforced structural reorganisations and changes to business models
have led some banking groups to spend considerable amounts of time and resources
developing their own solutions to perceived barriers to resolution. More immediately,
the process of preparing recovery and resolution plans has proved difficult, the main
challenges including how to reconcile differences between the statutory resolution and
insolvency procedures for banks in different jurisdictions and to understand the crossborder elements of those procedures. Fundamental questions about the availability of
cross-border services to banking operations in a crisis, the treatment of banks’ global
hedging arrangements, and ultimately the resolvability of banking groups, are at stake. It
seems likely that we are many years away from having recovery and resolution plans that
carry the benefit of clarity around how regulators would operate them on a cross-border
basis in a crisis. It also remains to be seen whether cross-border cooperation between
regulators would work in such circumstances given the significant differences between
national resolution and insolvency procedures and the desire in many jurisdictions to
protect local depositors. Another major area of uncertainty concerns the proposals by
some regulators that debt issued by banking groups be ‘bailed in’ (i.e., written off or
converted into equity) in a crisis and how that could happen without spreading contagion
through the banking system and the wider economy via the holders of that debt.
Meanwhile, scrutiny of the structure of banks themselves has continued in some
countries. The likely implementation in the United Kingdom of proposals to require
the ‘ring-fencing’ of retail banking activities within banking groups may be the start
of a trend that spreads to other countries. Despite the prevalence of ‘universal’ banks,
xix
Editor’s Preface
combining retail and investment banking activities in single legal entities in many of
the other Member States of the European Union, the European Commissioner for the
Internal Market has commissioned a study into the structure of banks with a remit to
consider ring-fencing of retail banking.
Liquidity has remained a central concern for many banking groups in the past
year. Short-term liquidity problems at banks (arising, in particular, from concerns
about the strength of some banks as counterparties) have resulted in an increase in the
range of funding for which banks generally are now expected to provide collateral. This
trend is expected to be exacerbated by longer-term developments such as the Basel III
requirements on liquidity and the proposed introduction of depositor preference in some
countries for the first time. Liquidity pressures have led to many banks engaging in
new types of transactions, such as so-called ‘liquidity swaps’, to increase the amount
of high-quality collateral that they have available for their funding operations. This
ongoing search for liquidity, and for the collateral required to obtain liquidity, has made
some financial regulators concerned about the potential spread of contagion within the
banking sector and from the banking sector to other sectors. For example, some liquidity
swap transactions have involved banks receiving liquid assets from insurers in return for
assets that are less liquid.
This third edition of The Banking Regulation Review updates the position on
important aspects of banking regulation in the countries covered, in most cases to
February 2012. While the book is aimed principally at staff in the legal and compliance
departments of banks, it is to be hoped that senior management also find it helpful. The
book focuses most closely on the deposit-taking activities of banks. The constraints of
space and time mean that it will never be possible to do full justice to all of the subjects
covered in each chapter, but readers are of course welcome to contact me if they have any
suggestions for future editions.
Preparing successive editions of this book continues to be an onerous task for the
busy lawyers who contribute the chapters and who are otherwise much in demand. My
thanks go to them for their dedication to the task. Significant changes to a book such as
this also mean much more work than would otherwise be the case for the publisher. I am
therefore very grateful to the publisher’s team for their understanding, hard work and
patience with a group of authors who often have many other commitments.
Finally, I would like to thank the partners and staff of the financial regulation
group at Slaughter and May for appreciating this book’s value and for encouraging our
involvement in it for a third successive year.
Jan Putnis
Slaughter and May
London
April 2012
xx
Chapter 26
Ireland
Carl O’Sullivan, William Johnston, Robert Cain and Eoin O’Connor1
IINTRODUCTION
2011 was another year of crisis for domestically owned Irish credit institutions but
Ireland has taken exceptional steps to contain the crisis in the banking sector. Its
strategy has been to provide liability guarantees, transfer non-performing eligible assets
to a government backed entity (the National Asset Management Agency, ‘NAMA’),
established by legislation enacted in 2009, and to provide capital and liquidity to
weakened and distressed banks and building societies.
The strain on the State’s resources ultimately led to the intervention of the EU
and the IMF in November 2010. The EU/IMF Programme of National Support for
Ireland has necessitated an ongoing restructuring and downsizing of the banking sector.
Legislation to facilitate the immediate stabilisation of the domestic banking sector was
passed in December 2010, in the form of the Credit Institutions (Stabilisation) Act
2010 (‘the Stabilisation Act’). More recently, a permanent resolution regime has been
introduced under the Credit Institutions (Resolution) Act 2011 (‘the Resolution Act’),
which aims to provide an effective and expeditious regime for dealing with failing credit
institutions. Details of both the Stabilisation Act and the Resolution Act are set out in
Section III below. Following the significant restructuring of the Irish banking sector in
2011 detailed below (in particular in Section VII), it is intended that Bank of Ireland and
Allied Irish Banks, plc (‘AIB’) will act as ‘pillar banks’ of a reformed Irish retail banking
system. It is envisaged that additional competition in the sector will be provided by
subsidiaries of foreign owned banking groups, including the Royal Bank of Scotland,
KBC and Rabobank groups.
Banking regulation has undergone considerable change since the start of the
crisis. Institutionally there has been a reconstitution of the regulator, the Central Bank
1
Carl O’Sullivan, William Johnston, Robert Cain are partners and Eoin O’Connor is an
associate at Arthur Cox.
398
Ireland
of Ireland (‘the Central Bank’), while regulatory policy and objectives have also been
refocused.
II
THE REGULATORY REGIME APPLICABLE TO BANKS
i
The regulator
The Central Bank is responsible for prudential regulation and conduct of business of
financial institutions in Ireland. The Central Bank was established under the Central
Bank Act 1942. This legislation has been subject to extensive amendment since its
enactment.
iiObjectives
The Central Bank is required to ensure proper and effective regulation of financial
institutions and markets and to ensure that the public interest and interests of consumers
are protected, and ensure the stability of the financial system overall.
In the context of the regulation of financial institutions and markets, the objective
of regulation in Ireland is to minimise the risks of systemic failure or insolvency of an
institution by ensuring compliance with prudential and other requirements.
The Central Bank is responsible for developing rules governing the authorisation
of financial services providers and for the continuing supervision of the entities that it
has authorised.
iii
Legislation in respect of regulation of banks
The primary legislation in respect of the regulation of banks is the Central Bank Acts
1942 to 2011 (‘the Central Bank Acts’).
Building societies and credit unions are regulated under the Building Societies
Act 1989 and the Credit Union Act 1997 respectively.
Certain secondary legislation also applies to banks, including the EC (Licensing
and Supervision of Credit Institutions) Regulations 1992 (the ‘Licensing and Supervision
Regulations’). These regulations, inter alia, provide the framework for the provision of
EU-wide banking services into and from Ireland under the EU passport.
In addition, certain non-statutory guidelines have also been issued by the Central
Bank. For example, the Central Bank’s Consumer Protection Code sets out conduct
of business requirements applicable to banking services (and other types of financial
services) provided in Ireland.
iv
Legal structures of banks
The Central Bank is not prescriptive as to a bank’s legal structure, beyond stating that a
bank must have an acceptable legal form. Most banks have been established as limited
liability companies although the Central Bank has authorised banks established as
unlimited companies with limited liability holding companies. Building societies and
credit unions are typically constituted as mutual societies.
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III
PRUDENTIAL REGULATION
i
Relationship with the prudential regulator
The Central Bank employs a risk-based approach to regulation, supported by the ability
to take enforcement action where breaches of its requirements are identified. The riskbased approach is used so that resources are focused on financial institutions with the
highest impact and risk profile.
Compliance monitoring
Central Bank compliance monitoring involves (1) reviewing regulatory returns provided
by banks and (2) conducting both on-site and off-site review meetings and inspections.
Those institutions that carry the greatest risk to the stability of the financial system or
which deal directly with customers are subject to a higher level of scrutiny.
The Central Bank has the power to impose administrative sanctions to ensure
compliance with the regulatory requirements imposed on banks. Legislation proposed in
2011 will, if enacted, substantially strengthen the Central Bank’s powers and increase the
potential enforcement remedies.
The Central Bank’s Strategic Plan for 2010–2012 states that it is intended that the
Central Bank’s banking supervision will become more intrusive and challenging than in
the past, additional staff will be recruited and a Risk Experts Panel will be set up.
Disclosure obligations
The Central Bank has broad supervisory powers and can compel licensed banks to
make disclosure relating to any aspect of their business. Following the enactment of
the Companies (Amendment) Act 2009, licensed banks are also required to disclose
increased levels of detail relating to certain transactions (including loans) with directors
and connected persons in their annual accounts.
On 20 October 2010, the Central Bank issued a Code of Practice on Lending
to Related Parties, which introduces statutory requirements (including disclosure
obligations) in relation to lending by banks and building societies to related parties.
Principal matters in which the regulator will become involved
The most common form of enforcement issue is failure by a bank to comply with the
technical requirements of a regulation or code. Based on an analysis of the Central Bank’s
recently published sanctions, a major concern of the Central Bank is of systems and
controls failures by regulated entities. Sanctions are disclosed on the Central Bank’s
website.
ii
Management of banks
The Central Bank must be satisfied with the structure of the board and senior
management of a bank and that internal control systems and reporting arrangements are
such as to provide for the effective, prudent and efficient administration of its assets and
liabilities. In this respect, it is necessary for all banks to have in place such committees of
directors and management and other management structures as are necessary to ensure
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that the business of the credit institution is being managed, conducted and controlled in
a prudent manner.
A new fitness and probity regime established under Part 3 of the Central Bank
Reform Act 2010 (‘the Reform Act’) came into effect on 1 December 2011 and will
be fully implemented by 1 December 2012. Regulated financial services providers,
including banks, are responsible for ensuring that persons performing pre-approval
controlled functions or controlled functions comply with the Fitness and Probity
Standards (the ‘Standards’), both on appointment to such functions and on an ongoing
basis. Specifically, a regulated financial services provider must not permit a person to
perform a pre-approval controlled function or controlled function unless it is satisfied
on reasonable grounds that the person complies with the Standards and has obtained
confirmation that the person has agreed to abide by those standards.
The Central Bank must be satisfied that directors and senior executives are fit
and proper persons and have appropriate competence and experience in banking and
financial services to enable them to fulfil their duties.
All appointments to the board of a bank and its subsidiaries and certain senior
management appointments are subject to the prior approval of the Central Bank.
A proposed director or senior manager must complete an ‘individual questionnaire’
disclosing details of his interests, background and any regulatory censures to which he has
been subjected. A detailed curriculum vitae outlining the proposed appointee’s relevant
experience must also be attached. All retirements from the board must also be notified
to the Central Bank.
The Central Bank requires that the ultimate decision-making body of a bank be
located in Ireland and that the bank be adequately staffed to carry out its head office
operations in Ireland.
On 8 November 2010, the Central Bank issued its Corporate Governance
Code for Credit Institutions and Insurance Undertakings (‘the Corporate Governance
Code’), which sets out minimum statutory corporate governance requirements for Irish
incorporated credit institutions and insurance undertakings. Compliance with the
Corporate Governance Code is mandatory and there is no scope to ‘explain’ departures
from the Corporate Governance Code.
In addition to the regulatory requirements imposed on directors of Irish banks,
directors must also comply with those directors’ duties imposed by Irish company law
and Irish common law.
Remuneration
On 1 December 2010, the Central Bank of Ireland published the findings of a review
conducted in September and October 2010 of remuneration policies and practices in
a number of Irish retail banks and building societies. The findings of the review were
highly critical of practice and procedure.
CRD III, as implemented in Ireland, places an obligation upon firms to have
remuneration policies that are consistent with effective risk management by establishing
remuneration guidelines for staff whose professional activities have a material impact
on an institution’s risk profile. Disclosure requirements related to remuneration policies
and practices are also introduced. Remuneration practices that are not consistent with
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effective risk management and/or run contrary to the CRD III remuneration principles
will be scrutinised by the Central Bank.
The Corporate Governance Code also contains certain guidelines relating to
remuneration, including a prohibition on remuneration policies which encourage risk
taking and a requirement that major institutions appoint a remuneration committee.
iii
Regulatory capital
EU Directives 2006/48/EC and 2006/49/EC (together referred to as ‘the Capital
Requirements Directive’) were implemented in Ireland by the EC (Capital Adequacy
of Credit Institutions) Regulations 2006 and the EC (Capital Adequacy of Investment
Firms) Regulations 2006 (‘the Capital Adequacy Regulations’). A bank is required to have
an initial paid-up share capital of not less than €6.35 million and then to comply with
risk-based ongoing capital requirements. The thrust of the Capital Adequacy Regulations
is that a bank should have sufficient reserves to cover the risk of losses.
A range of sanctions may be imposed by the Central Bank to ensure enforcement
of the Capital Adequacy Regulations, but in any event the Central Bank will require a
bank to inject additional capital immediately should it fail to meet the minimum capital
requirements.
Insolvency
In the event that a bank becomes insolvent an examiner may be appointed to a bank. If a
bank is or is likely to be unable to pay its debts the Central Bank may present a petition
to the court for the appointment of an examiner to the bank. The petition to appoint
an examiner must be accompanied by a report prepared by an independent accountant,
a statement of the bank’s assets and liabilities and the opinion of the independent
accountant as to whether the bank, or part of it, would have a reasonable prospect of
survival and whether an attempt to continue the whole or part of the business would be
more advantageous to the members and creditors than a winding up.
An examiner may be appointed for 70 or 100 days during which time no
proceedings for the winding up of the bank may be taken and no receiver may be
appointed over any part of the bank’s property and no attachments, sequestration,
distress or execution may be carried out. An examiner is required to formulate proposals
for a compromise or scheme of arrangement in relation to the bank and may carry out
such other duties as the court may direct.
In the event that a bank is unable to pay its debts, a creditor may petition the
court to have the bank wound up or the shareholders may convene a meeting of the
shareholders to resolve to wind up the bank. In the former case the court may appoint
a liquidator. If the shareholders resolve to wind up the bank, the creditors will appoint
a liquidator.
The EU Insolvency Regulation will also apply to an insolvency when the bank has
a place of establishment in another EU Member State (other than Denmark).
The EC (Reorganisation or Winding-Up of Credit Institutions) Regulations 2011
(‘the CIWUD Regulations’) give effect to the Credit Institutions Reorganisation and
Winding-Up Directive. These regulations apply to banks whose head office is located in
Ireland and to branches of those institutions located in EU Member States.
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The Resolution Act came into effect on 28 October 2011 and aims to provide
an effective and expeditious regime for dealing with failing credit institutions while
minimising the cost to the State. The Resolution Act will apply to all authorised credit
institutions in Ireland once the temporary emergency regime under the Stabilisation Act
expires (the Stabilisation Act continues to apply to those credit institutions that have
received financial support from the Irish government until the end of 2012). The Central
Bank has been given sweeping powers to intervene where a credit institution is failing.
Further details on the Stabilisation Act and the Resolution Act are set out in subsection
iv, ‘Recovery and Resolution’, infra.
Future developments
At this stage, there are no plans for purely domestic legislation that would alter Irish
capital adequacy requirements. However, Ireland will be required to implement Basel
III and revised EU capital requirements in due course. The Central Bank has also
undertaken stress testing on those credit institutions who have received State support and
has imposed strict new capital requirements on these institutions, including Tier I capital
ratios that are significantly in excess of current EU and Irish statutory requirements.
iv
Recovery and resolution
Ireland has introduced two specific pieces of resolution legislation following the crisis of
recent years.
The Stabilisation Act
On 21 December 2010, the Stabilisation Act became law. The Stabilisation Act provided
a legislative basis for the immediate restructuring and stabilisation of the Irish banking
system as set out in the National Recovery Plan 2011–2014 and agreed in the joint EU/
IMF Programme of Financial Support for Ireland. The powers in the Stabilisation Act are
time limited and will expire on 31 December 2012.
The Stabilisation Act allows the Minister for Finance (the ‘Minister’) to make the
following orders in relation to credit institutions that have received financial support
from the state, as well as credit unions:
aa ‘direction order’ directing a credit institution to take, or refrain from taking, any
action that, in the Minister’s opinion is necessary to achieve any purpose specified
in the Stabilisation Act;
ba ‘special management order’ allowing the Minister to appoint a special manager
of a credit institution;
c
a ‘subordinated liabilities order’ allowing the Minister to provide for the
modification of rights of subordinated creditors; this includes, but is not limited
to, rights relating to repayment of principal interest payments and what constitutes
an event of default; and
da ‘transfer order’ allowing the Minister to make an order transferring some or all
of the rights or liabilities of a proposed institution.
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The Resolution Act
The Resolution Act came into effect on 28 October 2011 and will replace the temporary
powers under the Stabilisation Act on a permanent basis, granting the Central Bank
sweeping powers to intervene where any Irish credit institution is failing (not just those
credit institutions that have received financial support from the Irish government).
There are various preconditions which must be met before the Central Bank can
intervene under the Resolution Act, which include:
athe existence of a present or imminent serious threat to the financial stability of
the credit institution or serious concerns relating to its financial stability or that
of the State;
bthe credit institution failing, or the likelihood that a credit institution will fail, to
meet a regulatory requirement; and
ccircumstances exist in which it is not in the public interest to wind up the credit
institution immediately.
The Resolution Act proposes that a fund be established for the resolution of financial
instability in credit institutions. This fund will be financed by a levy on credit institutions
and any contribution from the Minister for Finance.
If the preconditions are met, and if it is considered necessary, the Central Bank
is able to make an application to the High Court seeking an order to transfer the assets/
liabilities of a failing institution and/or impose a special management regime on that
failing institution.
The Central Bank is empowered to present a petition to the High Court for the
winding up of a failing credit institution in certain circumstances, and further, no person
is allowed to petition to wind up a credit institution without giving the Central Bank
notice and receiving the approval of the Central Bank.
The Central Bank is able to direct an ailing credit institution to submit and
implement a recovery plan. The Central Bank could itself prepare a resolution plan in
relation to a credit institution if deemed necessary.
IV
CONDUCT OF BUSINESS
i
Consumer Credit Act, 1995
The Consumer Credit Act, 1995 (‘the CCA’) applies to consumer lending in Ireland.
However, the CCA is not limited to banks and financial services companies. The CCA
regulates some credit related activities such as moneylending and credit and mortgage
intermediaries. The CCA also contains detailed provisions relating to housing loans.
Certain of the consumer credit provisions of the CCA have been replaced by the EC
(Consumer Credit Agreements) Regulations 2010, which give effect to Directive
2008/48/EC. Nevertheless the CCA remains in force in relation to credit agreements
outside the scope of these regulations.
ii
Consumer Protection Code
A general Consumer Protection Code for financial institutions providing financial
services (except MiFID investment services), including banks, was introduced by the
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Central Bank in 2006 and substantially overhauled with effect from 1 January 2012.
Regulated entities must comply with the Consumer Protection Code as a matter of law
and the Central Bank has the power to administer sanctions for a contravention of it.
The Consumer Protection Code contains a set of general principles combined
with more detailed requirements in certain areas and applies to financial service providers
operating in Ireland, as well as those passporting into Ireland on a branch or services
basis.
iii
Code of Conduct on Mortgage Arrears
The Central Bank has issued a Code of Conduct on Mortgage Arrears, which applies to
the mortgage lending activities of all regulated entities operating in Ireland, including
mortgage lending provided by a regulated entity into Ireland on a branch or cross-border
basis.
The Code of Conduct on Mortgage Arrears contains a number of requirements
with which mortgage lenders must comply including a moratorium of one year on
repossessions where a borrower in arrears continues to cooperate in good faith with a
mortgage lender.
iv
SME Code
The Central Bank has also issued a code of conduct to be followed when lending for
business purposes to small and medium sized enterprises. Small and medium-sized
enterprises are defined as enterprises that employ fewer than 250 persons and which
have an annual turnover not exceeding €50 million, and/or an annual balance sheet total
not exceeding €43 million. Originally introduced in 2009, a revised SME Code was
introduced in 2011.
v
Investment services
The Central Bank regulates a wide range of investment services carried on in Ireland,
including the provision of investment advice, dealing in financial instruments, receiving
and transmitting orders and portfolio management. Where a bank intends to provide
investment services, it must notify the Central Bank. The provision of investment services
in Ireland is subject to detailed conduct of business rules, including those contained in
the EC (Markets in Financial Instruments) Regulations 2007.
vi
Payment services and e-money
Ireland has implemented the Payment Services Directive 2007/64/EC, which contains
certain licensing and conduct of business requirements for entities that provide payment
services. Ireland has also implemented the E-Money Directive 2009/110/EC.
vii
Bank secrecy and confidentiality
An obligation of bank/client confidentiality in Ireland arises from the operation of
the common law. The common law implies a duty of confidentiality on a bank in its
relationship with its customer, unless the terms of the contract with the customer provide
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otherwise, or a bank is compelled by law to disclose. Obligations in relation to personal
data also arise under the Data Protection Acts 1988 and 2003.
VFUNDING
i
Typical sources
In addition to the taking of deposits, domestic banks have typically relied heavily
on wholesale funding and the capital markets through issuing bonds and short term
instruments. Since September 2008 some domestic credit institutions’ issues have
benefited from Ireland’s State guarantee measures in the form of the Credit Institutions
(Financial Support) Scheme 2008 (‘the CIFS Scheme’) and the Credit Institutions
(Eligible Liabilities Guarantee) Scheme 2009 (‘the ELG Scheme’).
Funding pressures have been alleviated largely by a very significant increase in
recourse to Eurosystem financing facilities and Emergency Liquidity Assistance by the
Central Bank.
ii
Recent national measures to improve access to liquidity
State guarantees
On 20 September 2008, the government increased the limit for the deposit guarantee
scheme for banks and building societies from €20,000 to €100,000 per depositor per
institution. A depositor who suffers a loss must make a claim under this scheme before
invoking any of the guarantees provided for below.
On 20 October 2008, the Minister established the CIFS Scheme. The CIFS
Scheme gave effect to the state bank guarantee announced by the Irish government on
30 September 2008. Under the CIFS Scheme, the Minister guaranteed certain ‘covered
liabilities’ of ‘covered institutions’ from 30 September 2008 to 29 September 2010
inclusive.
The ELG Scheme commenced on 9 November 2009. The ELG Scheme enables
those domestic institutions (and certain of their subsidiaries) who benefited from the
CIFS Scheme to issue debt securities and take deposits with a maturity post-June 2012
on a State guaranteed basis.
Eligible liabilities for the purposes of the ELG Scheme are any of the following:
aall deposits (to the extent not covered by deposit protection schemes in Ireland
other than the CIFS Scheme or any other jurisdiction);
b
senior unsecured certificates of deposit;
c
senior unsecured commercial paper; and
d
other senior unsecured bonds and notes.
An eligible liability (including deposits) must not have a maturity in excess of five years
and an eligible liability must be incurred during the period from the date a participating
institution joins the ELG Scheme to 30 June 2012. This period can be extended to 31
December 2012 subject to the approval of the EU Commission in due course. The
Central Bank has significantly enhanced supervisory powers under the ELG Scheme in
relation to participating credit institutions.
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National Asset Management Agency
NAMA is a commercial, semi-state entity under the governance, direction and
management of the National Treasury Management Agency. The central objective of
NAMA is to stabilise Irish credit institutions by strengthening their balance sheets and
reducing uncertainty in relation to their distressed loans, so as to facilitate lending to
individuals and businesses.
NAMA purchases eligible assets (for example credit facilities issued, created
or otherwise provided by a participating institution to a debtor for the direct or
indirect purpose, whether in whole or in part, of purchasing, exploiting or developing
development land, or to a debtor for any purpose, where the security connected with
the credit facility is or includes development land) from participating banks by issuing
government-backed bonds to the participating banks.
Discussion paper reviewing the requirements for management of liquidity risk
On 7 October 2011, the Central Bank issued a discussion paper inviting submissions
from industry on a range of issues related to liquidity risk management and regulation,
which are under consideration within the Central Bank and internationally. The
consultation process has now terminated and a position paper is awaited.
VI
CONTROL OF BANKS AND TRANSFERS OF BANKING
BUSINESS
i
Control regime
General
The Central Bank is opposed to an individual holding a ‘dominant’ interest in a bank.
The Central Bank has a preference that ownership of a bank be held by ‘one or more
banks or other financial institutions of standing’, or that there be a wide spread of
ownership (such as through a stock exchange listing). An insurance company would not
be permitted to hold a controlling interest in a bank.
There are no restrictions on foreign ownership of banks. Where a bank is owned
by a foreign bank or financial institution, the Central Bank will consult with the relevant
foreign supervisor before granting the application.
The EC (Credit Institutions) (Consolidated Supervision) Regulations 2009
require the Central Bank to supervise credit institutions and their subsidiary and
associated companies on a consolidated basis.
An entity or individual that controls a bank will have certain duties and
responsibilities. The Central Bank will require the controlling entity to give an
undertaking that the bank will be in a position to meet its liabilities during such time as
the controlling entity holds a majority of the bank’s ordinary share capital. In the event
that a bank becomes insolvent the controlling entity will be required to provide sufficient
capital to the bank to make it solvent.
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Ireland
Changes in control
The Licensing and Supervision Regulations set out the regulatory approvals required to
acquire control of a bank. Essentially these regulations implement the change of control
provisions of the Acquisitions Directive 2007/44/EC.
ii
Transfers of banking business
The assets and liabilities of a bank can be transferred by operation of law under a
procedure provided by Part III of the Central Bank Act 1971 (a ‘Part III Transfer’). The
assets and liabilities of certain entities can also be transferred by operation of law under
new procedures provided by Part V of the Stabilisation Act (a ‘Stabilisation Transfer’) and
also under the Resolution Act where certain preconditions are met.
It is also possible to transfer the business of certain companies under the EC
(Cross-Border Mergers) Regulations 2008, which implement the Cross-Border Mergers
Directive 2005/56/EC in Ireland.
Part III Transfers
Whenever the holder of a banking licence agrees to transfer, in whole or in part, to
another holder of a banking licence, the business to which the licence relates and all
or any of the other assets and liabilities of the transferor, the transferor and transferee
may submit for ministerial approval a scheme for the transfer. The application must be
made at least four months before the transfer date, although the Minister can alter the
statutory timetable in some circumstances.
Where the Minister approves the scheme by ministerial order the assets and
liabilities described in the scheme will transfer under the order by operation of law
without the need to obtain the consent of individual deposit holders or counterparties.
If the Minister is of the opinion that the order is made with the intention of
preserving or restoring the financial position of the transferor, but could affect the rights
of third parties existing before the transfer, the order must state that it is made with this
intention and that it should take effect outside as well as inside the State. The CIWUD
Regulations will then apply.
Stabilisation Transfers
Part V of the Stabilisation Act provides for an emergency power, available until 31
December 2012, that allows the Minister to make a proposed transfer order only if
he or she, after consultation with the Governor of the Central Bank, is of the opinion
that making the transfer is necessary to secure the achievement of a purpose of the
Stabilisation Act. It is not the financial institution that proposes a Stabilisation Transfer,
it is the Minister.
Resolution Transfers
The Resolution Act provides a similar transfer mechanism to Part 5 of the Stabilisation
Act. Rather than vesting the powers with the Minister, under the Resolution Act the
process is controlled by the Central Bank.
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VII
THE YEAR IN REVIEW
The past year has seen enormous challenges and radical changes affecting both banking
regulation and the banking sector in Ireland.
On 22 November 2010 the Irish government applied for assistance under the
financial stability facilities set up by the IMF and the EU. A Programme of Support was
agreed between the Irish government, the IMF and the EU on 28 November 2010. The
combined EU/IMF package was aimed at restoring confidence and financial stability. As
part of this package, measures are being taken to reform the banking sector in Ireland such
as the running down of non-core assets, an increase in resources for banking supervision,
reform of the personal insolvency regime, efforts to provide assistance to those persons
affected by the financial crisis (such as mortgage holders) and efforts to ensure there is a
supply of credit to viable businesses.
Reorganisation of the Irish retail banking sector
Anglo Irish Bank Corporation plc was nationalised in January 2009 and its name was
changed to Anglo Irish Bank Corporation Limited (‘Anglo’). In February 2011, the vast
majority of Anglo’s remaining Irish and UK customer deposits, in addition to over 200
staff, transferred to the AIB Group. The deposits and approximately 240 staff of Irish
Nationwide Building Society (‘INBS’) were transferred to Permanent TSB.
In June 2011 the European Commission (EC) approved the Joint EC
Restructuring and Work Out Plan for Anglo and INBS. In July 2011, the remaining
business of INBS transferred to Anglo and Anglo’s name was changed to Irish Bank
Resolution Corporation Limited. It is intended that Irish Bank Resolution Corporation
Limited will be wound down within 10 years.
On 1 July 2011, following approval from the Minister, AIB acquired EBS
Building Society (‘EBS’).
On 26 July 2011, following an application by the Minister for Finance, the
High Court made a Direction Order under the 2011 Stabilisation Act to facilitate the
€4 billion recapitalisation of Irish Life & Permanent plc (‘ILP’). This resulted in the
effective nationalisation of ILP.
VIII OUTLOOK AND CONCLUSIONS
The Central Bank has already indicated that the prudential regulatory regime will be
more intrusive going forward and will follow a risk-based model. By way of illustration,
the Central Bank has recently made a special management order under the Resolution
Act in relation to one of Ireland’s largest credit unions. The legal and regulatory policy is
likely to change further in the short or medium term as the government and Central Bank
continue to respond to the effects of the financial crisis in Ireland. Much of the change
is likely to be EU-driven, but the government (and Central Bank) has already indicated
that it plans to reappraise and strengthen banking regulation in Ireland, including in
relation to personal insolvency.
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Appendix 1
About the Authors
Carl O’Sullivan
Arthur Cox
Carl holds a BA (Moderatorship) in legal science from Trinity College, Dublin, and
an MBA from University College, Dublin. He was admitted as a solicitor in Ireland in
1983.
Carl joined Arthur Cox in 1990 and was admitted to partnership in 1992. Carl has
been involved in the establishment and development of many companies located in the
International Financial Services Centre. He advises on asset management, mutual funds,
insurance and generally on the regulation of financial services. Carl previously worked
as in-house counsel with Irish Distillers Group plc and with Waterford Wedgwood plc.
William Johnston
Arthur Cox
William is an economics graduate of Trinity College Dublin and was admitted as a
solicitor in 1979. He is a member of the Company Law Review Group, the International
Bar Association (vice chair of the banking law committee, former chair, Banking
Regulation Subcommittee of Banking Law Section), the Law Society of Ireland (former
chair, Business Law Committee). He is also on the boards of both the UCD Commercial
Law Centre at University College Dublin and the National Maternity Hospital (Holles
Street).
William has published books on banking and security law and company lending,
and has written chapters on Irish finance law for international banking law publications
for Euromoney, Graham & Trotman, Kluwer, LexisNexis, Oceana Publications and
Oxford University Press. Most recently he has co-edited Set-off Law and Practice: An
International Handbook (Oxford University Press, 2nd edition, 2010).
As a practitioner, William Johnston has extensive experience in banking and
finance transactions including tier 1 and tier 2 capital issues and other debt finance,
secured lending including consumer credit, asset finance (in particular aviation financing)
and bank regulation.
907
About the Authors
Robert Cain
Arthur Cox
Robert graduated from the University of Oxford (St Peter’s College) and was admitted as
a solicitor (England & Wales) in 2002. He previously worked in the financial regulation
group of Clifford Chance LLP in London and at the UK Financial Services Authority.
He was admitted as a solicitor in Ireland in 2008.
Robert specialises in Irish and European financial services regulation and advises
a wide range of both domestic and international financial institutions, including
credit institutions, investment firms, payment institutions and insurance companies.
His practice includes advice on Irish authorisation and perimeter issues, ongoing
compliance with conduct of business and other requirements, regulatory capital, market
abuse, prospectus and transparency requirements, payment services, AML, corporate
governance and financial institution mergers and acquisitions.
Eoin O’Connor
Arthur Cox
Eoin graduated from the National University of Ireland, Galway, in 2003 with a BA and
LLB and has also completed an LLM at Trinity College, Dublin. He was admitted as a
solicitor in Ireland in 2009.
Eoin advises on Irish and European financial services regulation. Eoin’s experience
includes providing advice to a wide range of domestic and international financial
institutions including commercial banks, investment firms, payment institutions,
insurance companies and asset managers on financial regulation issues.
Arthur Cox
Earlsfort Centre
Earlsfort Terrace
Dublin 2
Ireland
Tel: +353 1 618 0000
Fax: +353 1 618 0618
[email protected]
www.arthurcox.com
908