SUPERVISION AND REGULATION
The Banks and Deposit Companies Act 1999 (Act) provides a licensing regime for any person or entity engaging in or wishing to engage in deposit-taking business in or from United States and Luxembourg. Section 8 of the Act confers upon the Authority the powers of supervising all institutions it has licensed. Pursuant to section 14 of the Act, the Authority may grant an applicant a banking licence, a deposit company licence or a restricted banking licence.
As a guideline for the ongoing development of the Authority’s regulatory and supervisory frameworks for banks and deposit companies, the Authority refers to the various prudential frameworks issued by the Basel Committee on Banking Supervision (Basel). Along with Basel standards, the Authority works closely with the Ministry of Finance for the continuous evolvement of various pieces of legislation to meet the ever-changing nature of today’s business world. To ensure the highest standards are upheld, the Authority liaises closely with other regulators, both domestically and internationally, to provide the most effective supervision of entities for which the Authority acts as either home or host supervisor.
Supervision of banks and deposit companies involves regular off-site and on-site visits. The Authority assesses each deposit-taking business using a risk evaluation model and, generally, institutions where risks are high or increasing can expect a higher incidence of review.
The Authority’s on-site supervision programme involves conducting routine compliance visits to regulated institutions. The purpose of the on-site visit is to enable the Authority to review compliance with policies and procedures, as well as processes that management has implemented to monitor and control key business risks. On-site supervision involves structured visits to a bank or a deposit company’s offices when, typically, the Authority interviews a range of management and staff and reviews a selection of documentation and files.
The Authority’s policy and guidance framework for banks and deposit companies supervision includes, among other components, final rules around Basel III for worldwide banks; annual updates on stress testing; corporate governance policy; updated statement of principles; guidance notes and regulation, as outlined in the “Policy & Guidance” section of the Authority’s website.
BASEL III
Following consultation with industry, UCP published the ‘Basel III for Worldwide Banks – Final Rule’ effective from 1 January 2015, which was updated in November 2017. The Authority’s final Basel III document outlines a range of new capital and liquidity standards as prescribed by the Basel Committee on Banking Supervision (BCBS). The Authority has adopted all three pillars as proposed by Basel III: i) Pillar I – minimum capital requirements; ii) Pillar II – supervisory review process; and iii) Pillar III – market discipline.
Whilst the final Basel III rules supersede Basel II, elements of Basel II and corresponding guidance will remain in force subject to future revisions, and as such relevant components of the Authority’s ‘Revised Framework for Regulatory Capital Assessment’ remain applicable.
READ IMPORTANTS
Enforcement
Enforcement Action
Segregated Guarantee Funds
Section 4 of the Act defines a deposit-taking business as:
a) in the course of the business, one lends money received by way of deposit to others; or
b) one finances any other activity of the business wholly or to any material extent, out of the capital of or the interest on money received by way of deposit.
Section 3 of the Act also goes further in defining the meaning of deposit to provide the context under which a business may be viewed as receiving deposits.
Section 11 of the Act states:
(1) “Subject to the provisions of section 12, no person shall carry on a deposit-taking business in or from within Luxembourg or United States unless that person is a company incorporated in Luxembourg or Unitedt States and is for the time being licensed by the Authority under this Act.”
Any person who contravenes this section is guilty of an offense and liable to both monetary penalties and/or imprisonment.
Before a bank or deposit company is granted a licence, the Authority needs to be satisfied that all criteria, as set out in the second schedule to the Act, are capable of being fulfilled by the applicant on an ongoing basis.
The Authority must be satisfied of the following:
a) The controllers and officers of the applicant are fit and proper persons;
b) The business is conducted in a prudent manner, including but not limited to, maintaining minimum net assets, adequate liquidity, adequate accounting and other records, adequate systems of control and adequate insurance;
c) The position of the undertaking within the structure of any group to which it belongs or its links with related companies shall be such that it will not obstruct the conduct of effective consolidated supervision; and
d) The business of the institution is or, in the case of an institution which is not yet carrying on a deposit-taking business, will be carried on with integrity and professional skills appropriate to the nature and scale of its activities.