The financial industry of the Principality of Andorra ("Andorra") has historically been a key contributor 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 and almost 5% of Andorra's wage earners (according to the most recent data published by the Andorran Banking Association).
Due to the country's proximity to 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 that 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 Technical Communication 1/22 issued by the AFA, the submission fee for setting up a banking entity in Andorra is EUR32,018, and the annual supervision fee shall vary according to the banking entity’s balance sheet, with a maximum fee of EUR218,449.
Changes in the shareholding of a banking entity are subject to prior authorisation from and later registration with the AFA when such 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.
No specific restrictions on foreign ownership apply to banking entities.
Pursuant to Law 8/2013, banking entities must have robust corporate governance arrangements, which include the following:
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 with 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 to be 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 an annual report establishing its opinion regarding the efficiency and design of the internal control and 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.
In addition, according to the proportionality principle, banking entities may have the following committees:
The committees must be composed of members who do not perform executive functions, and the chairpersons 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.
Banking entities must also 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 that apply 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 the prohibition on providing incentives and compensation to clients with relevant influence on the entity.
The Andorran Banking Association published a Code of Conducts in 2017, which was updated in 2022 and 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:
Moreover, 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 such as senior management, employees who take risks, those who exercise internal control functions, and any employee who receives a lump-sum payment that includes them 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 FATF’s recommendations.
In this vein, both the European provisions and the FATF’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. Andorra is also periodically subject to the assessments of the Council of Europe, carried out by MONEYVAL.
Banking entities must comply with the following obligations:
The 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 the 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 from the position for up to six years.
Bank secrecy is no longer applicable within Andorra due to the adoption of the international requirements on the exchange of information on tax purposes recommended by the OECD.
Thereupon, three types of exchange of information for tax purposes are regulated in Andorra:
Law 35/2018 is aligned with both (i) 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 (ii) 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, amending Regulation (EU) No 648/2012. It requires banking entities to have minimum internal capital that is adequate in quantity, quality and distribution, having regard to the risks to which they are or may be exposed. 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% of the part corresponding to Tier 1 capital.
Law 35/2018 also introduces the obligation to cover 100% of the 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 ratios 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 on 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. In addition, 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 a sufficient capital base, during periods of economic growth, 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 is 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 7/2021 establishes a framework for the recovery and resolution of Andorran banking entities and is extended to investment firms and other financial institutions (with the exclusion of insurance companies); it also regulates the legal status of the resolution authority, the 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 those 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 for 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 7/2021 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 Act 7/2021 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.
The most relevant provisions of Law 7/2021 are as follows:
If the AFA detects any material deficiency in the recovery plans (preliminary phase) drawn up by the institutions, it may require the modification of the plan or the enforcement of the following measures (they are not numerus clausus):
In any case, the AREB will also have to be informed.
As far as early intervention measures are concerned, Law 7/2021 establishes that the AFA may adopt other measures, which may include the segregation of assets to an asset management company.
Law 7/2021 also sets out the measures that the AREB, in co-ordination with the AFA, may adopt to overcome the obstacles identified in the resolution plans (assessment of the potential resolution of the institution), including:
The powers of the AREB include the power to oblige institutions under resolution to adopt effective measures in relation to assets held in third countries, or even to halt the adoption of measures or revoke measures already adopted when they are not effective.
In respect of procedural issues, Law 7/2021 implements the following:
Regarding the winding-up regime, the most important aspects are as follows:
Andorran banking entities continuously monitor the most up-to-date, significant developments in banking regulation.
A draft bill is under discussion in the Andorran Parliament to integrate 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) into the Andorran legal framework.
Likewise, 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) is planned by the end of 2022.
Andorra is also currently negotiating the Association Agreement with the EU.
To this extent, Andorran banking entities face a twofold challenge:
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. To illustrate this, two new pieces of legislation have been developed:
Andorran banking entities have been contributing to a more sustainable development for the last 20 years in terms of complying with corporate social responsibility principles.
In terms of ESG requirements, the Andorran Banking Association published a report in 2020 in order to promote sustainable finance. ESG criteria followed by the European Commission, the Paris Agreement (signed by the Principality of Andorra in 2016) and the 2030 agenda of the United Nations are the cornerstones of sustainability, and the Principality of Andorra undertakes to adopt and implement them.
All of these embryonic steps have materialised in specific actions carried out by both the Andorran government and banking entities. The most relevant action has been the first international global debt issuance programme of up to EUR 1.2 billion and the issue of EUR500 million sustainable notes under this programme by the Andorran government. The development of investment products based on social responsibility criteria is also a premise for Andorran banking entities.
Banking Regulation in Andorra – an Introduction
The economic openness of the Principality of Andorra (“Andorra”) has unlocked unprecedented levels of growth and development within recent decades. The signature of the Monetary Agreement with the European Union has exponentially enrichened the Andorran legal framework, but has presented a challenge to the 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 agenda of 2022 includes the transposition of Directive 2014/65 on markets in financial instruments (“MiFID II”), although no draft bill has yet been published.
Two recent milestones will dominate developments over the coming years:
It is worth noting that the regulatory pressure combined with the supervisory activity of 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 economic and human costs associated.
However, 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 both in the public sphere and in the private sector.
Likewise, Andorran public institutions are working on a large-scale transformation of the Andorran economy to attract new investments, predominantly oriented towards fashionable niche markets such as fintech, esports, start-ups and companies developing distributed ledger/blockchain technologies.
To illustrate this, the following pieces of legislation have been approved or are under Andorran Parliamentary discussion: