The Banking Regulation Review: Liechtenstein
Liechtenstein, which is located in the heart of Europe, is known to be a niche player in financial services. Many investors and advisers know about its liberal company system, including the company limited by shares, Anstalt,2 foundation3 and the Anglo-Saxon style trust. Liechtenstein banks support these companies and entities by delivering the necessary banking services.
Over the years, there have been quite considerable changes in the financial and banking system of Liechtenstein. The turning point for Liechtenstein's banking and financial market system was seen in the mid-1990s. With internet technology, and especially through entering the European Economic Area (EEA), Liechtenstein left its principle of highest confidentiality and blocking of information in exchange for free access to the European market. In the ensuing years, this led to a situation in which cooperation in tax issues and in other aspects of international cooperation grew increasingly important. Today, Liechtenstein has 12 banks4 that mainly concentrate on asset management. In the past, transaction banking, and especially the field of fintech, has grown more important for the Liechtenstein market. Currently, Bank Frick & Co AG is the leading bank in this field.
Of the 12 banks licensed in Liechtenstein today, five are subsidiaries of Swiss, Austrian and Luxembourgian banks.
Liechtenstein banks traditionally focus on private banking. They do not engage in investment banking, and carry comparatively low risks. Thanks to Liechtenstein's participation in the European single market, Liechtenstein banks enjoy full freedom of services, capital, persons and goods throughout the entire EEA. This makes it possible to offer financial products from Liechtenstein that are based on the Swiss franc (Liechtenstein's official currency) and are authorised throughout the entire EU. Thanks to this special status, Liechtenstein offers attractive diversification options to globally orientated investors.
Three of the banks are systemically relevant for the Liechtenstein financial market: LGT Bank AG, Liechtensteinische Landesbank AG and VP Bank AG.
The regulatory regime applicable to banks
Although Liechtenstein is a small country with roughly only 38,000 inhabitants, it has a workforce of approximately 37,000. The majority come from Liechtenstein's neighbouring countries, Switzerland and Austria. Hence, Liechtenstein is dependent on its close neighbours. Every day, 20,000 employees commute from Austria and Switzerland, as well as a few from Germany.5 Liechtenstein enjoys the best of both worlds in this context: on one hand, there is a long-standing and traditional partnership with Switzerland, which is not a member of the EEA or the European Union; on the other, there is the strong relationship with the EU through Liechtenstein's membership of the EEA since 1995. Below is a brief summary of these aspects.
i Currency treaty and Swiss National Bank
For Liechtenstein's financial services sector, the currency treaty with Switzerland6 is of significance in several respects. The 1980 currency treaty not only declared the Swiss franc to be the official means of payment in Liechtenstein, but also declared certain Swiss legal and administrative provisions to be applicable in Liechtenstein under the currency treaty (see the annexes to the currency treaty). The Swiss National Bank (SNB) acts as the national bank for Liechtenstein. This means that certain financial intermediaries (banks, investment undertakings) have to comply with reporting obligations to the SNB for monetary policy reasons. However, supervision of all financial service providers licensed in Liechtenstein remains exclusively with the competent supervisory authority. The currency treaty is a bilateral treaty under international law that is regularly updated and, if necessary, adjusted.
The SNB maintains current accounts in fulfilment of its monetary policy mandate. It is also part of its statutory tasks to facilitate and ensure the functioning of cashless payment systems. The Swiss Interbank Clearing payment system is used to settle cashless payment transactions in Swiss francs and is operated by SIX Interbank Clearing Ltd on behalf of the SNB. Banks with a licence in Switzerland and Liechtenstein are granted access to this system. Prior to 2020, it was assumed that European banks that only have a branch in Liechtenstein within the scope of passporting would also have access to this system. However, this no longer applies, and only banks with a Liechtenstein licence can access the system.
ii Switzerland and infrastructure
Liechtenstein financial intermediaries make extensive use of the Swiss financial market infrastructure. The most important components are combined under the umbrella of the SIX Group. This mainly involves the use of clearing and settlement services, custody of and the use of the settlement systems for securities (SECOM) and Swiss franc payment transactions (SIC). Challenges arise due to Liechtenstein's membership in the Swiss franc currency area on the one hand and the European Economic Area (EEA) on the other. Access to service providers or infrastructures in third countries is subject to increasingly far-reaching restrictions and usually requires an equivalence decision by the European Commission. The broken-off negotiations between Switzerland and the EU on an institutional framework agreement also have a blocking effect on pending equivalence decisions. The exchange equivalence of the Swiss exchanges was no longer extended and the decisions regarding central counterparties and central securities depositories are pending. The use of the Swiss infrastructure without an equivalence decision on the part of the European Commission is limited to regulatory transition periods. With the passage of time, the risk of losing access increases. Liechtenstein financial intermediaries would be forced to use central securities depository services for the issuance of Liechtenstein financial instruments, such as funds, from another provider. Such a change would take a considerable amount of time and cause high costs. The Financial Market Authority Liechtenstein (FMA) is raising awareness among the financial intermediaries concerned so that they have exit strategies.
iii The Vaduz Convention
As a member of the EEA,7 Liechtenstein – together with Norway and Iceland – participates in the four economic freedoms (services, capital, persons, goods) within the EU. As a result, European guidelines, ordinances and directives concerning banking, alternative investment funds, undertakings for the collective investment in transferable securities, asset management and all the other financial market aspects in Liechtenstein are regulated according to EU legislation. As such, Liechtenstein has a European passport for its financial market companies as well as for its financial market products.
Because Switzerland did not join the EEA, this led to a situation in which several transitional periods and solutions had to be implemented. With the signing into force of the Vaduz Convention, most of these problems were solved. Switzerland still does not have the same access to the European market – especially in the field of services – as Liechtenstein and other EEA members. However, the Vaduz Convention8 helps.
The Convention was a complete revision of the European Free Trade Association (EFTA) Convention, which was originally limited to trade in goods. This revision became necessary due to bilateral negotiations between Switzerland and the EU. This brings the contractual relations between Switzerland and the other three EFTA states to a level comparable to that created by the bilateral agreements between Switzerland and the EU. The Vaduz Convention entered into force on 1 June 2002 at the same time as the seven bilateral agreements between the EU and Switzerland. The EFTA Convention also contains provisions on trade in services and investments. The EFTA states grant each other access to markets that goes beyond World Trade Organization standards.
iv Main banking acts and laws
The main acts and laws governing the activities of banks9 are:
- the Banking Act (BA);10
- the Banking Ordinance;11
- the Act of 18 June 2004 on financial market supervision;
- the Act of 11 December 2008 on professional due diligence to combat money laundering, organised crime and terrorist financing;
- the Financial Market Stabilisation Institution Act;12
- the Restructuring and Winding-up Act;
- the Market Abuse Act;13
- the Asset Management Act;14
- the Consumer Credit Act of 24 November 2011; and
- the Persons and Companies Act of 20 January 1926 (PGR).
v Banking association guidelines
The Liechtenstein Bankers Association was founded in 1969. While it is an association representing the interests of banks, in recent years it has issued its own directives and guidelines to an increasing extent (some believe too much). As far as recommendations are concerned, this quasi-regulatory activity is also undisputed. However, if these guidelines are imposed as binding on the member banks, this could be seen as problematic, as it would constitute entering into competition with the regulator: it is questionable from the point of view of the rule of law and of external perception if the Bankers Association believes that it wants to 'regulate' certain areas more strictly than the competent authority according to the law. This also undermines the authority of the FMA.
The following documents are relevant for banks in Liechtenstein:
- the Code of Conduct;
- the Guideline on due diligence obligations of banks in dealing with foreign correspondent banks;
- the Guideline on basic standards for the assessment of knowledge and competence of client advisers of banks;
- the Guideline on due diligence obligations of banks with regards to their customers' tax compliance (2019);
- the Public Affairs guiding principles; and
- documents on data protection.
In the past, many new EU rules and regulations have been implemented in Liechtenstein that have made it necessary for market participants to have special licences for payment services, e-money and many other aspects in the field of financial market business.
Banking licences are the most comprehensive licence, putting banks in a special situation: with a full banking licence, they may engage in all of these activities without additional licences15 as long as they provide the necessary knowledge, employees and organisation to undertake these activities. Banks engage in activities set out in Article 3, Paragraph 3 of the BA on a professional basis. Natural and legal persons that are not a bank may not accept deposits or other repayable funds on a professional basis. According to Article 3, Paragraph 3 of the BA, banking activities are:
- the acceptance of deposits and other repayable funds; in the case of an e-money transaction in accordance with subparagraph (f), the receipt of a sum of money shall not constitute an acceptance of deposits or other repayable funds if the received sum is directly exchanged against e-money;
- the lending of third-party funds to an indeterminate circle of borrowers;
- safekeeping transactions;
- the provision of investment services and ancillary services referred to in Annex 2 Sections A and B [of the BA] as well as the execution of other bank related off-balance-sheet transactions;
- the issuance of electronic money pursuant to Article 3(b) of the E-Money Act;
- the assumption of suretyships, guarantees, and other forms of liability for other parties where the obligation assumed is monetary in nature;
- trading of foreign currency for one's own account or on behalf of others.
Liechtenstein has implemented the rules and regulations according to EU standards; reference is made to the guidelines of the European Banking Authority (EBA).
There is only one supervisory authority for Liechtenstein banks: the FMA.
The FMA has been a regular member of the International Organization of Securities Commissions since April 2011, has had observer status in the EBA and the European Securities and Markets Authority since May 2011, and also has observer status in the European Insurance and Occupational Pensions Authority.
ii Relationship with the prudential regulator
The Banking Division is responsible for supervising banks and investment firms in Liechtenstein, and it monitors compliance with the applicable legal norms. As part of the licensing procedure, submitted documents are reviewed for content and completeness. Ongoing monitoring is ensured with reports banks and investment firms are legally required to submit, as well as through direct and periodic contact with the boards of directors and management of institutions.
Similar to Switzerland, Liechtenstein has implemented the dual supervision model. This means that independent, qualified auditors supervise the fulfilment of a bank's legal duties. Additionally, internal audits are mandatory. Smaller banks often use other independent, qualified auditors for this part of the auditing process as well. The FMA may also carry out its own audits or accompany external audits. Since 2018, the FMA has consciously and regularly attended external audits to gain an immediate understanding of the situation. In the authors' view, this is mainly due to the expectations of other supervisory authorities and international bodies. In the vast majority of countries, there is a monistic system of supervision in which external auditors are only called for in special situations. It has not been proven that an audit by auditors should have more significant consequences than if the FMA carries out the audit itself, but this is the public perception.
Where violations of legal norms or grievances come to the attention of the Banking Supervision Section of the FMA, it undertakes necessary measures to restore a lawful state of affairs.
To ensure transparency as well as to improve the working of the internal banking market, the Capital Requirement Directive (CRD) IV16 obliges the competent authorities to disclose specific information. The published information should permit a meaningful comparison of the approaches adopted by the competent authorities of the different Member States.
The FMA keeps regular contact with members of boards of directors and management to discuss and address financial market observations and any potential conflicts. The FMA is a proactive financial market player: it not only takes on the role of supervisory authority but also that of researching partner for new developments within the field. For example, it has its own laboratory to research, inter alia, new technologies and new developments. This sandbox allows financial market players to learn about new developments and approaches within the market, and thereby to not be surprised by them. Additionally, the size of Liechtenstein's financial market system, the accessibility of the authorities and the rapid processing of any potential issues are big advantages for the local market, which gives enterprises a competitive advantage when filing for licences across the EEA.
There are several reports17 that banks must deliver to the FMA during the course of the year concerning financial stability, liquidity, fulfilment of different tasks and – as previously mentioned – auditors' reports. These reports must fulfil the general legal requirements according to the Basel III agreements (CRD IV and the Capital Requirements Regulation (CRR)18), and are part of the Single Supervisory Mechanism across the EU.
iii Management of banks
Banks are organised as public companies (companies limited by shares or joint-stock companies). Shares are normally registered shares, to comply with the duty to identify shareholders for fit and proper evaluation (see below).
Pursuant to Article 22 of the Banking Act (BA), banks and investment firms must be organised in accordance with their business profile and business cases, and require:
- a board of directors responsible for overall direction, supervision and control;
- general management responsible for operations that consists of at least two members who perform their activities with joint responsibility and who may not simultaneously be members of the board of directors;
- an internal audit department that reports directly to the board of directors (see Article 33 of the Banking Ordinance on delegation of the responsibilities of the internal audit department);
- risk management that is independent of management responsible for the operational business;
- an audit committee of the board of directors; and
- appropriate procedures by which employees can report violations of the BA and the CRR.
The distribution of functions between the board of directors and the general management must guarantee proper monitoring of business conduct.19 The board of directors is responsible for the overall direction, supervision and control of the bank or investment firm.20
In addition to the BA, the PGR also applies. Article 261 et seq. of the PGR regulates the basic rules for joint-stock companies, such as rules on the structure of shares, organisation and capital increases. Furthermore, the PGR accounting provisions supplement the rules in Article 24a(ss) of the Banking Ordinance. The PGR accounting rules are divided into five sections: Articles 1045 to 1062a contain general provisions;
- Articles 1063 to 1130 are supplementary provisions for certain types of companies;
- Articles 1131 to 1138 standardise supplementary provisions for certain sectors of the economy (banks and investment firms, as well as insurance companies);
- Articles 1131 to 1138 contain supplementary provisions for certain types of companies (banks and investment firms as well as insurance companies); and
- Article 1139 regulates the relationship with international accounting standards.
Remuneration and bonus system
According to Article 7a, Paragraph 6 of the BA, banks and investment firms shall introduce and permanently maintain remuneration policies and practices that are consistent with sound and effective risk management. The FMA will share this information with the European supervision bodies.
This rule on remuneration was implemented in the wake of the financial crisis, and the bonus discussion with regard to Article 1(3) of CRD III.21 A risk-oriented and appropriate remuneration policy for banks and investment firms is stipulated to ensure that their remuneration policies are in line with the long-term interests of banks and investment firms. The details of these remuneration policies and practices, which must subsequently be introduced and maintained by institutions, can be found in Article 92 of CRD IV and in Annex 4.4 to the Banking Ordinance.
Liechtenstein follows the requirements of CRD IV, which gives clear rules concerning the relationship between fixed salary and variable components. Most banks in Liechtenstein pay bonuses. Their systems vary: some banks pay bonuses connected to specific goals, while others pay bonuses as a fully discretionary add-on to the salary.
Within the framework of the principle of proportionality, the FMA has determined that certain rules do not apply to small institutions or to employees who receive relatively low variable remuneration compared with other international institutions. These are the provisions concerning:
- the composition of variable remuneration;22
- retention;23 and
- the treatment of voluntary retirement benefits in the event of an employee leaving a company.24
A bank qualifies as a small institution if its assets do not exceed 5 billion Swiss francs.
iv Regulatory capital and liquidity
CRD and CRR
Liechtenstein banks are distinguished by their financial strength and stability. They have solid and high-quality equity capital resources. With an average core capital (Tier 1 ratio) of more than 20 per cent, Liechtenstein banks hold, on average, more than what is required under Basel III or the EU capital requirements of CRD IV. They are thus among the best-capitalised banks across Europe and worldwide. Since the beginning of the financial crisis, no bank in Liechtenstein has required state aid. Liechtenstein's AAA rating by Standard & Poor's underscores the country's reliability and stability.
In its Guidance 2017/10, the FMA defines the obligations with regard to own funds and capital adequacy requirements. In doing so, it relies on CRD, and especially CRR, which is implemented in the BA and the Banking Ordinance. The guidelines ensure that banks have sound, effective and comprehensive strategies and procedures in place with which they can maintain the level, types and distribution of internal capital required under the Internal Capital Adequacy Assessment Process (ICAAP). The required capital is related to current and possible future risks.25 The FMA has issued a special directive on ICAAP.
Pursuant to Article 7e and 7f of the Banking Ordinance, the FMA is obliged to conduct an annual analysis to identify other systemically relevant institutions in Liechtenstein, report results to the relevant institutions (A-SRIs) and publish those results. Pursuant to Article 4a of the BA, these A-SRIs may be assigned an additional capital buffer of up to a maximum of 2 per cent of the total risk amount, pursuant to Article 92 of CRR.
v Recovery and resolution
The Recovery and Resolution Act (RRA), transposing the European Recovery and Resolution Directive (BRRD),26 provides a framework for solving the too-big-to-fail issue, and hence contributes to strengthening the stability of the Liechtenstein financial system. The BRRD requires EEA Member States to establish a national resolution authority vested with specifically designed resolution powers. The RRA appointed the FMA as Liechtenstein's resolution authority. For this function, the FMA is obliged to create a separate organisational unit within its organisational structure. The FMA has to ensure that the resolution authority is able to exercise its functions operationally independent from the FMA's other organisational units and to prevent conflicts of interest between the resolution functions and the FMA's other functions. The resolution authority assumed its function on 1 January 2017, and, among other things, is tasked with drawing up resolution plans. With regard to the resolution objectives, it is authorised to apply the resolution tools and to exercise its resolution powers.27
The resolution objectives are:
- to ensure the continuity of critical functions;
- to avoid a significant adverse effect on the financial system;
- to protect public funds by minimising reliance on extraordinary public financial support;
- to protect covered deposits and investments; and
- to protect client funds and client assets.
The tools for resolution are as follows:
- sale of business tool;
- bridge institution tool;
- asset separation tool; and
- bail-in tool.
vi Specific fields of business
Liechtenstein is a small market. To enable the market to exist internationally, policy has always endeavoured to anticipate developments. Since the early 2000s, it has also been undisputed that where new initiatives affect the financial sector, there is a particular need for specialised regulation.
The Law on Token and Trustworthy Technology Service Providers entered into force on 1 January 2020. With the creation of the Law, the registration and supervision of 10 new categories of service providers in the trustworthy technology sector (e.g., blockchain) were delegated to the FMA. The Law also implements role recommendations for these services, which provide for supervision under the Due Diligence Act. In addition, the government has adopted the associated Amendment to the Due Diligence Ordinance, which regulates know your customer, anti-money laundering and customer documentation requirements. The Law and the Ordinance provide a framework for the establishment, storage, trading and monitoring of blockchain and distributed ledger technology products. Anyone wishing to participate in these markets must obtain a corresponding licence from the FMA, which is only valid in Liechtenstein; the European Union and the EEA have not yet established joint standards. In the summer of 2020, the European Commission published the draft Regulation on Markets in Crypto-assets, which stipulates requirements for capital and asset safekeeping, and defines the investor complaints procedure and other investor rights. Issuers of stablecoins will be subject to particularly strict requirements with regard to equity capital, investor rights and supervision.
In Liechtenstein, the first alternative investment funds investing exclusively in 'cryptos' or that are fully tokenised have already been issued.
Conduct of business
Banks and investment firms may be established only in the legal form of a public limited company or a European company (societas Europaea). However, in justified cases, the FMA may permit exceptions.28
The main activity of banks is the management of the risks involved in taking people's money, managing it, and deciding how to invest assets or how to finance endeavours. The manner in which a bank conducts its business must ensure that risk management is carried out correctly, and particularly in a manner that protects the interests of consumers and investors and supports financial stability. As such, a bank's organisation, its reporting system (especially concerning risks) and its management of liabilities are crucial.
A bank must have a board of directors that is responsible for the general organisation, strategy and supervision of the activities of the bank. The management of the day-to-day running of the bank must be delegated to a management team responsible for the details of the organisation and all reporting duties.
The following areas, among others, must be available:
- a sufficient number of employees and tools for know your customer and anti-money laundering tasks;
- automated control of the financial behaviour of the bank;
- a compliance department;
- a department for legal affairs; and
- a financial department for own accounting and for reporting to the FMA.
Furthermore, banks must guarantee they are able to undertake the necessary reporting on tax issues. Under various agreements with the EU,29 the Organisation for Economic Co-operation and Development, and other countries30 and institutions, Liechtenstein reports several data streams concerning the bank accounts of people residing outside Liechtenstein. These common reporting standards (also called the automatic exchange of information on tax aspects) have been in place since 2017. The corresponding laws and duties are very specific and require a thorough knowledge of clients' private details, hence the rising importance of client data departments.
ii Risk management
Article 7 of the BA states that banks must provide a risk management framework as well as regulations or internal directives outlining responsibilities and processes for the approval of risky business activities. In particular, banks must detect, mitigate and monitor market, credit, default, residual, settlement, liquidity, concentration, securitisation, counterparty, interest rate, reputational, operational and legal risks, as well as the risk of over-indebtedness.
The FMA attaches great importance to clear regulation and effective control of conflicts of interest. This concerns the relationship of shareholders to the bank and of employees when it comes to loans. But it also concerns trading activities of employees and, as importantly, dealings with clients. To this end, internal governance must be ensured through a variety of rules and mechanisms that meet the scope of requirements of Chapters 11 and 12 of the European Banking Authority (EBA) Guidelines. In particular, when granting loans to related parties (shareholders, employees), clarity must be ensured and an impartial attitude must be adopted at each step of the credit process.
The systematic and comprehensible separation of functions and competencies within the framework of a risk-adequate process organisation is central to this. Furthermore, when appointing and re-electing or filling key positions, consideration must be given to whether there is a guarantee of impeccable business conduct, suitability and competence based on clear assessment criteria.
Banks or the persons acting on their behalf are liable in several respects if they commit a misconduct. For example, if persons or companies are active without a banking licence, this is against the law and triggers liability.
Criminal and administrative liability
Article 3(ss) of the BA states it is a criminal offence to conduct banking business without a licence. Furthermore, breach of duties by management and the board of a bank (e.g., reporting duties) will be punished as a criminal offence. As these duties are far-reaching, this puts an enormous amount of pressure on banks and their employees. To mitigate this, Article 63b explicitly states that the principles of proportionality and efficiency must be respected when judging failures of duties. At the same time, Article 64 makes it clear that it will mainly be the persons who acted or should have acted who are responsible together with the legal person that will be jointly and severally liable for monetary penalties.
Article 64a requires that the FMA has an effective and reliable reporting system through which employees of a bank can observe and report any violations, misconduct or unlawful behaviour of their institution.
In principle, the provisions of the General Civil Code (ABGB) apply. The requirements of Section 1290 et seq. of the ABGB also apply to banking law. In principle, therefore, there must be damage caused by unlawful and culpable conduct on the part of the bank, and the bank will have to pay for this damage. A person who violates a contractual obligation is therefore liable to his or her contractual partner for the resulting damages to the extent that those interests are violated. The conduct of an employee in the performance of his or her duties is generally credited to the bank.
There is a legal liability of a bank towards its clients if the bank fails to fulfil its duties and consequently causes damage to clients.
The basis for claims for damages on the basis of incorrect information is, generally speaking, to be found in Section 1300, Sentence 1 of the ABGB, whose conditions of fact are summarised as:
incorrect information or advice given to the injured party,
by an expert according to § 1299 ABGB within his field of expertise,
in exchange for a reward/fee.
Specific rules apply in the field of asset management. As long as an adviser follows the business judgment rules, it is not very likely that a bank will be held liable for losses in asset management. An asset manager's investment decisions are subject to the supervisory and civil law duty to safeguard interests. As a rule, the asset manager is responsible for observing due diligence in the management of a client portfolio, but not for the success of the investment. For loss-making investment decisions within the framework agreed upon with the client as the investment strategy, the asset manager has no liability discretion in favour of the client. The burden of proof for damages, amount of damages, causality and the violation of (objective) duties of care as prerequisites for the claim is borne by the investor. The asset manager is not obliged to disclose internal reports and decision processes, or to justify why he or she has made certain investment decisions within the framework of the agreed-upon investment guidelines.
There is also direct liability of managers towards clients. If a manager acts outside of normal banking activities, he or she will be held liable on a personal basis. This applies explicitly if he or she offers services that a bank no longer offers. For example, if a bank does not offer asset management services and a specific bank manager nevertheless does so, he or she will be personally liable for any damage.
At the same time, managers are also liable towards the bank. Management and all other employees are liable to the bank for any damage they cause, whether intentionally or negligently.31
iv Banking secrecy
Article 14, Paragraph 1 of the BA reads:
The members of the governing bodies of banks and their employees as well as any persons otherwise working for such banks shall keep secret all facts that they are entrusted with or that become available to them as a result of business relations with clients. The obligation of secrecy shall apply without any time limit.
However, this secrecy is not absolute. If a criminal court, the Supervisory Board of the Financial Intelligence Unit or foreign authorities within the framework of international agreements (e.g., common reporting standards, automatic information exchange in tax issues) ask for information, it will be granted. Thus, banking secrecy is no longer as absolute as it used to be.
The high capitalisation of the Liechtenstein banking sector, healthy liquidity indicators and a very low ratio of non-performing loans simultaneously underscore the stability of the banking sector in Liechtenstein. Liechtenstein is part of the Swiss franc currency area, which means that banks have the same access to refinancing with the SNB as Swiss banks.
Aside from that, classical funding also applies for Liechtenstein banks. This means that they rely on deposits from customers, unsecured and secured capital market products, deposits from other banks and other money market instruments.
Control of banks and transfers of banking business
Every proposed direct or indirect acquisition and every proposed direct or indirect disposal of a qualifying holding in a bank or investment firm must be notified in writing to the FMA by the person or persons interested in the acquisition and the disposal.
Every proposed direct or indirect increase and every proposed direct or indirect reduction of a qualifying holding must also be notified if, as a consequence of the increase or reduction:
- the thresholds of 20, 30 or 50 per cent of the capital or voting rights of a bank or investment firm were to be reached or crossed in either direction;
- the bank or investment firm were to become a subsidiary of an acquirer; or
- the bank or investment firm would no longer be a subsidiary of the person disposing of the qualifying holding.
The FMA's Guidance 2017/20 provides guidelines regarding the supervisory assessment of the acquisition, increase or disposal of qualifying holdings in banks, investment firms, asset management companies and insurance undertakings. This guidance defines what must be delivered to make a change of control possible.
Shareholders with a qualifying holding (10 per cent or more) must be suitable and capable of ensuring the sound and prudent management of the bank or investment firm.32
If a bank or investment firm forms part of a foreign group working in the financial sector, a licence is granted only if the group is subject to consolidated supervision comparable to Liechtenstein supervision and the supervisory authority of the home country does not object to the establishment of a subsidiary.33
Fit and proper requirements
The professional and personal qualities of the persons entrusted with the administration or management of a bank or investment firm must always guarantee sound and proper business operation.34 In particular, according to Article 29(1) of the Banking Ordinance, the persons intended to serve as the following must have sufficient professional qualifications (training or education, or both; previous job experience) for the tasks that are to be assigned to them:
- members of the board of directors;
- the head of the internal audit department;
- members of the risk committee; and
- members of the general management.
Meanwhile, the FMA also asks for a self-assessment of the board as a whole. The bank must describe the qualifications of the individual members of the board of directors, the areas they cover with their skills, the interaction between them and how any new person will complement this team.
Change of control
According to Article 26a of the BA, every proposed direct or indirect acquisition and every proposed direct or indirect disposal of a qualifying holding in a bank or investment firm must be notified in writing to the FMA. This also applies if the thresholds of 20, 30 or 50 per cent of the capital or voting rights of the bank or investment firm would be reached or crossed.
Transfers of banking business
There are no specific rules concerning the transfer of banking business from one bank to another: the general provisions of civil law apply. In principle, claims against others may be assigned to new creditors. In the case of assumption of debt by a third party, the consent of the old creditor is required. A special feature applies to the overall assumption of a transaction: anyone who takes over assets or a transaction with assets and liabilities is automatically obliged to the creditors for the associated debts as soon as the transfer has been notified to the creditors by the transferee or has been made public. However, the previous debtor shall be jointly and severally liable with the new debtor for a period of two years, beginning with the notification or termination of the contract in the case of receivables due and payable and with the due date in the case of receivables due and payable at a later date. Moreover, this assumption of debt has the same effect as the assumption of an individual debt.
With respect to banking secrecy, however, it is advisable to give clients the possibility to look for another bank on their own behalf.
With respect to consumer loans, it might be advisable to observe the respective law (consumer and credit law). If a loan is concerned with banking business, it is not possible to transfer anything from a bank to a non-bank. If a bank stops rendering certain services – for example, discretionary portfolio management – it cannot transfer this business; rather, it must terminate the respective agreement with the client.
The year in review
As in 2020, covid-19 not only dominated the news in Liechtenstein in 2021, it also significantly affected the daily life of citizens. However, the effects on the banking sector were not nearly as critical as was feared at the beginning of the pandemic. Liechtenstein's banking sector has weathered the covid-19-related economic downturn remarkably well so far, and could even increase its profitability, with capitalisation levels rising, in contrast to the international trend.
i Free trade agreement with the United Kingdom
In June 2021, a comprehensive free trade agreement was successfully concluded between the United Kingdom and the three EEA/EFTA states: Norway, Iceland and Liechtenstein. In addition to cross-border trade in services, including financial services, the free trade agreement also covers areas such as investment, intellectual property protection, digital trade, capital movements and public procurement. In particular, the agreement prevents discrimination against companies from the EU and offers Liechtenstein companies preferential market access compared to countries that do not have an agreement with the UK.
The agreement with the UK is the most comprehensive free trade agreement Liechtenstein has concluded to date and achieves the same level of commitment as the agreement between the EU and the UK. However, it cannot replace the EEA Agreement. With its withdrawal from the EU and EEA, the UK has changed from being a member of the common internal market to being a third country. As a result, it no longer participates in the legal harmonisation and mutual recognition of approvals, authorisations and certificates of conformity among EU Member States. A continuation of the four freedoms of the internal market is not possible with a free trade agreement. The agreement will enter into force on 1 January 2022.35
ii Central Account Register
The purpose of the Central Account Register, in the context of combating money laundering, organised crime and terrorist financing, is to provide the authorised national authorities with timely access to information on the identity of the holders, authorised representatives and beneficial owners of bank and payment accounts and safe deposit boxes. The basis for the Central Account Register, which was introduced in Liechtenstein in October 2021,36 is the Fifth Money Laundering Directive.37 The requirements for the Central Account Register were implemented differently in the various EU countries. In Liechtenstein, implementation is based on Article 29e ff Due Diligence Act or the corresponding Ordinance on the Central Account Register of 6 July 2021. Only Liechtenstein authorities have the right to inspect this Register.
Key EU banking regulations such as CRD IV and CRR and the EU resolution regime (BRRD) are currently being revised. In the area of supervisory law, central requirements of the Basel Committee on Banking Supervision as well as the Financial Stability Board for the EEA are being implemented. These include, among others, more risk-sensitive capital requirements, a binding leverage ratio to avoid the excessive indebtedness of institutions as well as a binding structural liquidity ratio to overcome the excessive dependence on short-term refinancing on the interbank market, as well as to reduce long-term funding risks. Furthermore, the capacity of banks to lend to small and medium-sized enterprises should be improved and the administrative burden for less complex, small banks, which sometimes appears disproportionate, should be reduced. Parliament discussed a bill for the implementation of CRD V in its first reading in December 2021. The national entry into force for CRD V or CRR II is scheduled for 1 May 2022. On 2 November 2021, the government adopted the report and motion (i.e., the motive report including the motion to deal with the matter) concerning the implementation of the CRD V Directive.
Outlook and conclusions
Prospects are good for the Liechtenstein banking centre, where regulation continues to become tighter and stricter. At the same time, it is noticeable that the FMA sanctions the conduct of banks with fines much more frequently than it did in the past. This has been common practice in other countries for some time, but has been received quite critically in Liechtenstein. Until now, Liechtenstein banks have communicated very openly, in the knowledge that this would quickly provide clarity about the interpretation of regulations and the procedure desired by the supervisory authority. Now, one must rather expect that openness will be turned against oneself, and 'rewarded' with a fine. Obviously, however, this adaptation to the approach in other countries is necessary.
The securities markets have been very volatile in the recent past and have tended to move upwards. This has brought large turnovers and thus considerable income through fees and commissions. This is likely to continue in 2022.
It will be exciting to see whether and how the central banks set key interest rates for the euro, the dollar, the pound and the Swiss franc. Inflation was seen at the end of 2021 and also at the beginning of 2022. It is unclear whether this is merely a momentary reaction to supply bottlenecks and shortages due to the covid-19 pandemic, or whether a trend is emerging.
A team of evaluators from the Council of Europe's Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism carried out an onsite visit to Liechtenstein from 6 to 17 September 2021. The visit was held within the framework of a mutual evaluation aimed at assessing jurisdictions' technical compliance with and effective implementation of international standards in the area of anti-money laundering and the combating of the financing of terrorism in line with the 2013 Methodology of the Financial Action Task Force. The results of this visit will be announced in 2022.
1 Mario Frick is a partner and Christine Reiff-Näscher is an associate at Advocatur Seeger, Frick & Partner AG.
2 The Anstalt (establishment) is a capital company, which in many respects (organs, field of activity) is quite similar to a joint-stock company. The big difference is that an establishment does not have shares, but rather founders' rights. The establishment is therefore often used when there is only one owner or possibly two owners. The establishment also benefits from some administrative simplifications (no obligation to publish the balance sheets).
3 The foundation comes into being when a founder dedicates assets to a specific purpose and issues statutes (articles) that govern the use of these assets. The foundation has no 'owner' and is a legal entity. In its scope of application, it is quite comparable to the Anglo-Saxon trust. The foundation boards (directors) form the will of the foundation. With by-laws, the founder usually regulates who is to be a beneficiary of the foundation and in what form. As a rule, after the foundation has been established and the by-laws have been enacted, the founder relinquishes the possibility of exerting influence on the foundation; in this case, the foundation is what is known as a non-transparent foundation. Non-transparent because one cannot see through it – especially from a tax point of view. This is known as the genuine, true foundation. The transparent foundation, in which the founder continues to have considerable rights of influence, is for this reason still attributed to the founder for tax purposes.
4 A list of the banks and the licensed credit institutions can be found on the Financial Market Authority Liechtenstein (FMA) website: www.fma-li.li. Union Bank AG resigned its licence in August 2020. It is currently in liquidation. In March 2021, Mason Private Bank followed its example. Mason Group Holding Ltd said it believed that voluntary liquidation was in the best interests of the company itself and the group's shareholders as a whole.
5 Details can be found in the yearly report of Amt für Statistik: https://www.llv.li/files/as/liechtenstein_in_figures_2022.pdf" (llv.li).
6 Currency agreement between the Principality of Liechtenstein and the Swiss Confederation. LR 0.951.910.11.
8 EFTA Agreement. LR 0.632.310.
10 Act of 21 October 1992 on banks and investment firms.
11 Regulation of 22 February 1994 on banks and investment firms.
12 Act of 4 November 2016 on the institution for the financing of financial market stabilisation measures.
13 Act of 24 November 2006 on market abuse in trading in financial instruments.
14 Asset Management Act of 25 November 2005.
15 Exception: according to Article 30t, Paragraph 2 of the Banking Act (BA), the operation of a multilateral or organised trading facility requires a licence issued by the FMA.
16 Directive 2013/36/EU.
17 The FMA sends to-do lists to the different banks. Forms and guidelines are published on the FMA website: www.fma-li.li/de/aufsicht/bereich-banken/banken-und-wertpapierfirmen/meldewesen.html.
18 Regulation (EU) No. 575/2013.
19 Article 22, Paragraph 4, BA.
20 For details, see Article 23, Paragraph 2, BA.
21 Directive 2010/76/EU.
22 Annex 4.4, No. 1, Paragraph 2, Subparagraph k, Banking Ordinance.
23 Annex 4.4, No. 1, Paragraph 2, Subparagraph l, Banking Ordinance.
24 Annex 4.4, No. 1, Paragraph 2, Subparagraph n, Sentence 2, Banking Ordinance.
25 Article 7a, Paragraph 3, BA.
26 Directive 2014/59/EU.
27 Article 82, Recovery and Resolution Act.
28 Article 18, Paragraph 1, BA.
29 AEOI-Agreement Liechtenstein-EU (Legal Gazette 2015 No. 354), which covers the exchange of information upon request and the automatic exchange of information of financial accounts.
30 Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (Legal Gazette 2016 No. 398).
31 Article 218(ss), Persons and Companies Act.
32 Article 17, BA.
33 Article 15(2), BA.
34 Article 19, BA.
35 0.632.62 Freihandelsabkommen zwischen Island, dem Fürstentum Liechtenstein und dem Königreich Norwegen und dem Vereinigten Königreich von Grossbritannien und Nordirland, legal gazette 2021 No. 426.
36 952.12 Verordnung vom 6 Juli 2021 über das Zentrale Kontenregister, legal gazette 2021 No. 234.
37 Directive (EU) 2018/843.