The financial industry of the Principality of Andorra (Andorra) has historically been one of the contributors to the domestic economy. In turn, the banking sector is the cornerstone of the Andorran financial system, which represents roughly 20% of the Andorran Gross Domestic Product (according to the most recent data published by the Andorran Banking Association).
Due to the country's proximity with neighbouring European countries, along with the signature of the Monetary Agreement in 2011 between Andorra and the EU), the Andorran legal framework is aligned with EU legal initiatives in terms of banking regulation, namely solvency, capital requirements, supervision, investor protection and anti-money laundering and terrorist financing.
The most relevant Andorran regulations governing the banking sector are as follows:
The Andorran regulatory and supervisory authorities for the banking sector are as follows.
Lastly, it is also relevant to point out the self-regulation activity carried out historically by banking entities. Likewise, those Andorran banking entities which are, in turn, parent companies of consolidated groups also apply international standards on a self-regulation basis.
Prior authorisation from the AFA is required in order to provide banking activities in Andorra.
Pursuant to Law 7/2013, Andorran banking entities are authorised to render the following financial services:
Banking entities are also authorised to render the following investment and ancillary services:
The authorisation process for setting up a banking entity in Andorra is governed by Law 35/2010. The submission form must be addressed to the AFA, along with the following documentation:
Upon submitting this documentation, the AFA has a maximum of six months to notify its decision.
According to the Technical Communication 1/19 issued by the AFA, the submission fee for setting up a banking entity in Andorra is EUR30,995, and the annual supervision fee shall vary according to the banking entity’s balance sheet, with a maximum fee of EUR211,470.
Changes in the shareholding of a banking entity are subject to the prior authorisation and later registration by the AFA, when these changes imply the following:
Qualified shareholding (participació qualificada) means any participation that, directly or indirectly, represents 10% or more of the share capital or voting rights of the banking entity. A shareholding is also deemed to be qualified if, without reaching the aforementioned percentage, it allows significant influence to be exercised over the entity. It is presumed that a natural or legal person can exercise a significant influence when, among other things, it has the power to appoint or remove a member of the board of directors.
There are no specific restrictions on foreign ownership applicable to banking entities.
Pursuant to Law 8/2013, banking entities must have robust corporate governance arrangements, which include a clear organisational structure with well-defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report the risks they are or might be exposed to, adequate internal control mechanisms, including sound administration and accounting procedures, and remuneration policies and practices that are consistent with and promote sound and effective risk management. Notwithstanding this, the aforementioned arrangements, processes and mechanisms shall be comprehensive and proportionate to the nature, scale and complexity of the risks inherent in the business model and the entity's activities.
Accordingly, the board of directors of Andorran banking entities is obliged to define its risk appetite and approve the relevant risk management policies and periodically monitor its compliance, and to adopt adequate internal policies and procedures.
As far as organisational requirements are concerned, Andorran banking entities must implement a compliance function, a risk-management function and an internal audit department.
The compliance function is in charge of the supervision, monitoring and verification of the effective compliance of legal provisions and professional standards by employees and financial agents, in order to protect clients and minimise compliance risk. Moreover, in order to guarantee that the compliance function works appropriately, the entities must ensure that they have adequate authority and both technical and human resources, and must appoint a person in charge of the compliance function, in addition to avoiding participating economically in the services or activities which they are controlling.
The risk-management function carries out the following activities:
The internal audit function is entitled to prepare, on an annual basis, a report establishing its opinion regarding the efficiency and design of the internal control and the risk management systems of the entity. This report is addressed to the management body for its review. A copy of this report must also be addressed to the AFA within the first semester following the closing of the exercise.
Law 8/2013 also establishes as a general principle that banking entities shall take all necessary measures in order to detect and prevent any conflict of interest that may arise during the performance of activities by any employee, director or assistant, which may cause any prejudice to clients.
Additionally, according to the proportionality principle, banking entities may have the following committees: audit committee; risk committee; appointments committee; and remuneration committee.
The committees must be composed of members who do not perform executive functions, and chairmen must be independent directors.
Law 8/2013 also provides for the possibility of combining the audit and risk committees and the appointments and remuneration committees, according to the proportionality principle and upon the AFA’s authorisation.
Additionally, banking entities must develop adequate procedures to the extent that employees can notify possible infringements internally (ie, whistle-blowing channels). These procedures must guarantee the confidentiality of both the reporting person and the offender.
Technical communication 163/05, issued by the AFA, highlights some rules on ethics and professional behaviour applicable to Andorran banking entities, namely the prohibition on carrying out own-account operations under identical or better conditions than those of clients to the latter’s detriment, and on providing incentives and compensation to clients with relevant influence on the entity.
The Andorran Banking Association published a Code of Conducts in 2017 that reflects the minimum professional standards and recommendations for the banking sector.
Law 7/2013 sets a limit on the number of directorships that may be held by a member of the management body in a banking entity, taking into account individual circumstances and the nature, scale and complexity of the entity’s activities.
In this vein, banking entities may not hold more than one of the following combinations of directorships at the same time: (i) one executive directorship with two non-executive directorships; and (ii) four non-executive directorships.
Moreover, the board members must be persons of recognised commercial and professional honour, and must also possess adequate knowledge and experience in order to exercise their duties.
The requirements of honour, adequate knowledge and experience must also be met by the managing directors, and by those responsible for internal control functions (ie, those in charge of the compliance function, the risk-management function and the internal audit department, as stated in 4.1 Corporate Governance Requirements).
Prior authorisation by the AFA and subsequent registration is required for every appointment and replacement of directors and those responsible for the internal control functions.
Likewise, banking entities must periodically assess, at least once a year, the continued suitability of their board of directors and of each of its members, as well as of the relevant committees.
Remuneration requirements applicable to Andorran banking entities are aligned with European provisions and the guidelines on sound remuneration policies issued by the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA).
Pursuant to Law 8/2013, banking entities at the group level, parent companies and subsidiaries, including subsidiaries established in third countries (with the exception of foreign subsidiaries located in jurisdictions considered by the AFA to be equivalent for regulatory and supervisory purposes), are obliged to comply with the remuneration requirements set forth in the applicable laws, regulations and technical communications issued by the AFA.
The principles that are applicable to remuneration policies are as follows:
In this line, Law 8/2013 also establishes the following ratios between the fixed and variable components of total remuneration:
Andorran banking entities must follow the inspiring principles when implementing the remuneration policy, including salaries and discretionary retirement benefits for categories of staff including senior management, employees who take risks, those who exercise internal control functions, and any employee who receives a lump-sum payment that includes him/her in the same scale of remuneration as senior management and other risk-taking employees.
Law 8/2013 also establishes that infringements of these provisions may be sanctioned according to the Disciplinary Law.
Andorra is totally committed to complying with international standards on anti-money laundering and terrorism financing through the implementation of the Fourth Anti-Money Laundering Directive and the Financial Action Task Force’s recommendations.
In this vein, both the European provisions and the Financial Action Task Force’s recommendations are intended to serve as the backbone of the Andorran system for the prevention of money laundering and terrorism financing.
In turn, the UIFAND is entitled to draw up and publish annual reports and statistics to assess the effectiveness of the Andorran system for the prevention of money laundering and terrorism financing. Additionally, Andorra is periodically subject to the assessments of the Council of Europe, carried out by the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (Moneyval).
Banking entities must comply with the following obligations:
FAGADI Law regulates the guarantee system for deposits aligned with Directive 2014/49/EU of the European Parliament and of the Council of 16 April 2014 on deposit guarantee schemes. It also states that FAGADI administers the scheme, as well as the relevant limits.
The key regulatory features of the deposit guarantee system are as follows:
The Andorran Criminal Law regulates the breach of professional secrecy, whereby a professional discloses or reveals the secrets of an individual, as a criminal offence punishable by imprisonment of three months to three years and disqualification for the position for up to six years.
Bank secrecy is no longer applicable within Andorra due to the adoption of the international requirements on exchange of information on tax purposes recommended by the OECD.
Thereupon, three types of exchange of information on tax purposes are regulated in Andorra: (i) the exchange of information on request; (ii) the automatic exchange of information; and (iii) the spontaneous exchange of information.
Law 35/2018 is aligned with both Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC and Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, and requires banking entities to have minimum internal capital that, having regard to the risks to which they are or may be exposed, is adequate in quantity, quality and distribution. Accordingly, Andorran banking entities must develop strategies and processes for assessing and maintaining the adequacy of their internal capital.
The amount of capital maintained by banking entities is subdivided as follows:
As far as the minimum capital requirements are concerned, the total amount of capital required to be held by banking entities must be at least 8% of their risk-weighted assets. The part corresponding to the highest quality capital – Common Equity Tier 1 capital – must represent 4.5% of the risk-weighted assets and 6% the part corresponding to Tier 1 capital.
Law 35/2018 also introduces the obligation to cover 100% of liquidity outflows net of liquidity inflows with high liquidity assets, within 30 days and in a stress scenario, such as a major withdrawal of deposits.
Other obligations include the inclusion of intra-day operations in the supervision regime, the obligation to develop methodologies to manage the positions of financing, the distinction between pledged assets and unencumbered assets, and the adoption of liquidity recovery plans.
Regarding structural long-term liquidity ratio or stable funding, Andorran provisions require banking entities to cover their long-term liabilities (ie, longer than 12 months) through a variety of stable funding instruments, under both normal and stress conditions. On a quarterly basis and in a single currency, they must also report to the AFA the elements that require stable financing.
Law 35/2018 also includes the obligation to publish the so-called solvency report, which must include the following information:
Likewise, banking entities must have policies and processes in place for the identification, management and monitoring of the risk of excessive leverage.
These indicators include the leverage ratio, which is the amount of Tier 1 capital of the entity divided into the total exposure value of the entity, expressed as a percentage. To this extent, the obliged entity shall address the risk of excessive leverage in a precautionary manner by taking due account of potential increases in the risk of excessive leverage caused by reductions of the entity's own funds through expected or realised losses, depending on the applicable accounting rules. Additionally, entities must submit information on the leverage ratio to the AFA, which must monitor the levels of leverage in order to reduce the risk of excessive leverage.
In addition to other own fund requirements, banking entities must hold a capital conservation buffer and a countercyclical capital buffer to ensure that they accumulate, during periods of economic growth, a sufficient capital base to absorb losses in stressed periods. The countercyclical capital buffer should be built up when aggregate growth in credit and other asset classes with a significant impact on the risk profile of such banking entities are judged to be associated with a build-up of system-wide risk, and drawn down during stressed periods.
Note also that Andorran banking entities have implemented IFRS standards with the Decree approving the accounting framework for entities and collective investment undertakings created under Andorran law operating in the Andorran financial system, dated 22 December 2016, which requires entities operating in the Andorran financial system and Andorran collective investment undertakings to prepare their individual and consolidated annual accounts in accordance with the international financial reporting standards adopted by the European Union (IFRS-EU).
Law 8/2015 establishes a framework for the recovery and resolution of Andorran banking entities, and also regulates the legal status of the resolution authority, namely AREB.
This piece of law establishes that a banking entity is under a restructuring situation when it breaches or could breach the applicable liquidity and solvency regulations in the near future, but it is able to comply again with that regulations by its own means.
In such a situation, the bank must give notice to the AFA in order for it to adopt ex officio measures such as a formal requirement to the bank’s management body to draft an action plan to redress the situation, the appointment of a special administrator, or the removal of one or more members of the management body, among others.
If the banking entity cannot redress its stressed situation, the AREB shall assess whether it has to initiate its resolution process.
The resolution process of a banking entity requires the fulfilment of the following requirements:
Law 8/2015 entitles the AREB to apply a set catalogue of resolution tools (instruments de resolució) and to intervene in a banking entity to ensure continuity in its critical financial and economic functions, while minimising the impact of the banking entity’s failure on the Andorran economy and national financial system, and minimising the total resolution costs for taxpayers.
The resolution measures established by Law 8/2015 encompass the sale of business tool, the bridge institution tool, the asset separation tool and the bail-in tool (ie, including the exercise of write down and conversion powers).
The bail-in tool does not apply to claims insofar as they are secured, collateralised or otherwise guaranteed. Certain kinds of unsecured liability are excluded from the bail-in tool, as covered deposits.
Note that a draft bill amending Law 8/2015 is in the process of being ratified. Overall, the most relevant amendments are as follows:
Andorran banking entities are continuously monitoring the most up-to-date significant developments in banking regulation.
According to the Monetary Agreement, the implementation of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (MiFID II) and Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (EMIR) is planned by 2020-2021.
Andorra recently joined the International Monetary Fund. Andorra’s General Council (Consell General) passed a law on 5 October 2020 that specifically points out the commitments and appointments that Andorra has to undertake for its effective adherence into this organisation.
In addition, Andorra is currently negotiating the Association Agreement with the EU.
To this extent, Andorran banking entities face a twofold challenge: (i) the regulatory challenge; and (ii) technological innovation and digital transformation.
Regarding the latest challenge, the Andorran Banking Association has drawn up a report that compiles the main indicators on the digital transformation that Andorran banking entities are undergoing. According to this report, within the last five years, the Andorran banking sector has invested more than EUR120 million in digital projects in order to modify the entities’ technological architecture, to improve the digital transformation of communication channels and to develop electronic banking, among others.
As a consequence, the banking industry is facing a substantive transformation of its activity because of the need to renew the provision of its services in the interest of investors and society at large.
Challenges Facing the Andorran Banking Industry
The economic openness of the Principality of Andorra has unlocked unprecedented levels of growth and development within recent decades. The Andorran legal framework has been enriched exponentially by the signature of the Monetary Agreement with the EU, and presents a level playing field comparable with the most advanced jurisdictions; on the other hand, the Monetary Agreement has posed significant challenges to the local banking sector within a short period of time.
Along with existing regulations based on European standards and already implemented into local law according to the Monetary Agreement, the regulatory avalanche scheduled for 2020 and 2021 is likely to be very challenging for Andorran banking entities, namely the adoption of:
The following two recent milestones should also be noted:
The Association Agreement will be key for the development of the Andorran banking sector. On the one hand, it will determine whether Andorra is capable of establishing a reciprocal passport (or soft passport) regime with EU jurisdictions for the rendering of banking and financial activities, enabling foreign banks to operate locally and vice versa. On the other hand, how the freedom of movement of persons is negotiated will determine whether exit taxes will apply in home countries to new residents. If these two obstacles are overcome, private banking activities in the jurisdiction are likely to receive a boost.
The regulatory pressure combined with the supervisory activity carried out by the Andorran Financial Authority (AFA), mainly as a result of the new IFRS accounting standard and both the capital and solvency requirements, may slow down the R&D initiatives of banking entities due to the associated economic and human costs.
Notwithstanding this, the Andorran government is actively promoting the use of innovative and disruptive technological tools (digital identity, distributed ledger technologies and artificial intelligence), focusing mainly on digitalisation in both the public sphere and the private sector. To this extent, in July 2020 the Andorran government announced the so-called “Horitzó 23”, a plan adapted to the new scenario emerging from the COVID-19 pandemic, in order to promote Andorra as "a resilient, sustainable and global country". The plan includes a total of 77 actions divided into 20 initiatives framed in three pillars: welfare and social cohesion, economy, and innovation. Some of the legislative initiatives included in this plan are related to the enhancement of e-commerce business, the boosting of digital transformation and the modernisation of the public administration.
Likewise, Andorran public institutions are working on a large-scale transformation of the Andorran economy to attract new investments, predominantly orientated towards fashionable niche markets such as fintech, esports and start-ups that develop distributed ledger technologies. However, this transformation should come with an enhancement of the process of setting up an Andorran company, the deadline for which may be extended for some months (ie, including the foreign investment authorisation).
In this emerging scenario, Andorran banking entities may benefit from these new business opportunities, in terms of cost reduction strategies and collaboration agreements entered into with these new players.
The COVID-19 outbreak has also triggered a considerable effort for the Andorran economy, notably for small and medium-sized enterprises. The exceptional measures adopted by the Andorran government (ie, financial support) and the proactive approach of the banking sector (ie, promoting telecommuting) are contributing towards mitigating the negative impact of the pandemic on the economy and society at large.
The Act of exceptional and urgent measures for the health situation caused by the pandemic SARS-CoV-2 (the Omnibus Act) was approved by the General Council on 23 March 2020. The main target of the Omnibus Act was to mitigate the first effects of the health crisis on people and companies in Andorra, according to the principles of solidarity and co-responsibility. The Omnibus Act was based on a temporary situation and the COVID-19 outbreak continued beyond April 2020, so a second range of economic measures was approved pursuant to Act 5/2020, of 5 April (the Omnibus Act II). The relevant measures were related to employment and social security questions, along with tax and administrative deadlines. However, the most relevant measure adopted was the approval by the Andorran government of a special package of soft loans (crèdit tous). The soft loans were guaranteed with an interest rate of between 0.1% and 0.25% fully assumed by the Andorran government and channelled through the Andorran banking entities, up to a maximum amount of EUR130 million, intended to finance companies and business. The Andorran government then approved a second package of EUR100 million on 20 May. Within the second wave of COVID-19, new restrictive measures were adopted (the catering and leisure sectors were the most affected) along with an additional package of financial assistance, while avoiding a mandatory lockdown of the Andorran population.
Under this scenario of significant instability and high volatility in global capital markets, along with low interest rates, the core banking profitability is falling dramatically. An additional impact related to the health emergency is the increased credit risk of corporate and retail clients of banking entities (ie, associated with forthcoming insolvency proceedings). Hence, banking entities are called to distinguish between these temporary situations (ie, management or reclassification) and other longer lasting impacts (ie, loan loss provisions) in order to continue financing the real economy.
However, the COVID-19 outbreak has also led to an acceleration of the digital transformation of the banking sector (ie, through partnerships and collaborations within the fintech industry), promoting the offering of an excellent customer experience.