Law of 19 December 1996 regulating the operational powers of the financial system

 Unofficial translation of the version in Catalan

Law governing the operational powers of the various components of the

financial system

Seeing that the General Council in session on 19 December 1996 has passed the

following:

Law governing the operational powers of the various components of the financial system

Explanation of reasons

This law is promulgated in fulfilment of the fourth transitional provision of the law regulating

guarantee reserve deposits and other operational obligations to maintain and deposit

applied to bodies integrated into the financial system of 11 May 1995, which sets out that

prior to the enactment of the regulation of minimum capital referred to in article 16 of the

law ordering the financial system (LOSF) of 27 November 1993 – an enactment foreseen

by 31 December 1997 which will open the way to file applications for the incorporation and

establishment of new bodies to be integrated into the Andorran financial system – the

General Council shall in pursuance of a timetable established by the aforesaid transitional

provision pass other specific regulations to complement the basic legislative schema

concerning the financial sphere.

The information provided by the procedure of updating the permits of bodies authorized at

the date of publication of the LOSF, the experience accumulated since that date and the

reflections made on the prospect of opening up the financial system, enable the

governance of the operational powers of the various components of the financial system to

be now executed with a view to the present and to the future.

Hereinafter the basic contents of this law will be set out together with the reasons which

support them.

Just as in the LOSF the operative components of the financial system were defined as

three groups – banks, financial bodies with loan activity and other financial bodies – so as to

group separately bodies which have a funding component clearly differentiated from others,

so from now on the groups forming the operational structure of the financial system will be

four: banks, non-banking financial bodies with specialized loans, financial investment

bodies and financial bodies providing various services.

As regards the banks, the LOSF sufficiently defines their operational field. However this law

provides various precisions, specifies activities which if carried out they must practice

through a legally independent company, and explicitly defines their capacity for mercantile

action outside the financial sphere. On another level, a dateline is set for the normalization

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of special cases and the administrative normalization of the Caixa d’Estalvis i Pensions in

Andorra is regulated in virtue of the historical, institutional and technical characteristics

present in this case.

The results of the procedure of updating permits established by the LOSF have shown that

the group of financial bodies with loan activity – which with greater terminological precision

are now to be called non-banking financial bodies with specialized loans – is in fact

minimally present; moreover, in principle it has been considered that the economic

characteristics of the country are not favourable to a significant development of this group.

For this reason, it has been considered appropriate to provide for a simplification of their

overall structure and to introduce some precisions with regard to the mechanics of

financing.

The group hitherto called other financial bodies is the object of greater development.

Indeed, the LOSF limited itself to stating the bodies making up the group and did not enter

into the definition of their respective activities. With the basis of information now available

the regulation of these bodies can be undertaken with more objective knowledge and a

greater conceptual precision.

This group has been split into two: financial investment bodies and financial bodies

providing various services. The division has been made in order to separate bodies having

powers and responsibility for management on behalf of third parties from those which imply

a financial service without including a managerial component.

On the other hand, this division was particularly appropriate because of the inclusion within

the financial system of those bodies which, by limiting themselves to consultancy, had

remained on the margin; it is a decision which has been taken because international

experience shows that it is appropriate to have activity of this type under the control of the

financial authority.

When formulating the governance of these financial bodies, as is usual the starting point

has been Andorra’s specific reality and its commodity and the activities, structures and

denominations prevailing in countries which can be a reference for us have been taken into

account. Care has been taken for the necessary specific terminology to introduce no

possibility of interpretational misunderstanding. For this same reason the law includes

some definitions for which care has been taken that they should be clear and precise.

It is also appropriate to note that the principle that, until such time as new circumstances

arise which may alter this criterion, only banks have the power to habitually receive

deposits and other reimbursable funds from the public. The legislators wish the functional

structure of the financial system to give priority to the security of depositors and to facilitate

procedures in the fight against the laundering of money coming from organized crime.

Without entering into contradiction with the contents of the preceding paragraph but

formulating the circumstance which illustrates the non-habitual nature of receiving

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reimbursable funds from the public, the law defines the conditions to be met by the financial

bodies, like any other merchant company, in order to be able to incorporate into their

financial structure reimbursable funds in return for the issue of specific stock.

The maintenance of the exclusive nature of the power of receiving deposits and other

reimbursable funds from the public must imply that in successive regulatory enactments

banks will continue to be subject to a special degree of technical and economic

requirements.

This law contains the amendments to chapters two and three of the LOSF and certain

lesser amendments. The legislators consider that once the legislative program scheduled

for 1996 and 1997 has been completed, there will be a possibility of consolidating in a

single general law the basic legal corpus which is to govern the financial system from the

beginning of 1998 onward.

Chapter 1. Composition of the financial system

Article 1

The whole of the Andorran financial system comprises:

- banks, non-banking financial bodies with specialized loans, financial investment

bodies and financial bodies providing various services

- professional associations of the financial sector

- technical executive bodies of authority

Chapter 2. Operational components of the financial system

Article 2

Banks

a) By bank shall be understood a business which deals in receiving deposits and

reimbursable funds from the public and granting loans of whatever kind on its own

behalf.

b) Banks may also carry on the following activities:

- granting guarantees and the like

- payment operations

- issuing and managing means of payment (credit cards, traveller’s cheques, letters

of credit)

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- operations – on their own behalf or on behalf of their clients – of money changing,

stocks and shares, monetary and financial instruments, futures and options

- participation in the issuing of stock and providing related services

- management and custody of stock

- capital management

- financial consultancy

- commercial reports

- the hiring out of strong boxes

c) Banks which also wish to carry on the management activities of investment bodies

and/or the activities of life insurance companies may do so only by holding a majority or

minority equity in bodies managing investment bodies and/or life insurance companies,

which may be incorporated for this object and must be legally distinct and sited

elsewhere.

This notwithstanding, the contracting of life insurance policies may be carried on through

the bank’s own structures.

d) Banks may not undertake, whether directly or indirectly, any economic activity which is

not limited to the financial sphere.

e) Direct or indirect holdings by banks in non-financial bodies may not exceed 25% of the

capital of the body in which a share is held.

Shares in instrumental non-financial companies, the object of which is solely to provide

a service to the bank itself or to manage assets belonging to the bank itself, are not

subject to this limitation.

In cases in which, as a result of a loan operation or other circumstances foreign to the

desire of the bank, the latter has to take over a higher share in a non-financial company

than that fixed in the first paragraph, it must inform the Andorran National Institute of

Finance and must regularize the situation within two years. For an eventual extension of

this regularization period, it will need the authorization of the Ministry of Finance after a

report by INAF.

f) The accountancy value of the direct or indirect shares of banks in non-financial bodies

may not exceed 40% of the bank’s own funds. This percentage is computed within the

limits fixed by article 13 of the law governing the criteria for the solvency and liquidity of

financial bodies.

g) The General Council fixes the criteria and indicates the circumstances to be born in

mind to be able to define certain investments as being of general interest.

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Once the provision of the previous paragraph has been defined by law, the Ministry of

Finance after a report from INAF grants exceptions to points e) and f) of this article for a

definite or indefinite period.

h) As regards this law, shares in public companies as defined by the General law on public

finance are excluded from the application of sections e) and f) of article 2.

Article 3

Non-banking financial bodies with specialized loans

a) The non-banking financial bodies with specialized loans are financial bodies which

habitually and on their own behalf carry on one or more of the following four types of

specialized loan activity:

- mortgages

- hire purchase financing

- leasing

- factoring

b) Non-banking financial bodies with specialized loans may not, whether directly or

indirectly, take part in any type of economic activity other than the types of specialized

loan activity listed in point a) above.

c) Direct or indirect holdings by non-banking financial bodies with specialized loans in

merchant bodies not governed by this article may not exceed 25% of the capital of the

body in which a share is held.

In cases in which, as a result of a loan operation or other operations foreign to the desire

of a non-banking financial body with specialized loans, the latter has to take over a

higher share in a body than that fixed in the preceding paragraph, it must inform the

Andorran National Institute of Finance and must regularize the situation within two years.

For an eventual extension of this regularization period, it will need the authorization of the

Ministry of Finance after a report by INAF.

Article 4

Financial investment bodies

a) The following are financial investment bodies:

- financial bodies managing capitals

- financial bodies managing investment bodies

- financial bodies for promotions and capital ventures

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b) Financial bodies managing capitals normally carry on the management of individual

capitals.

Financial bodies managing investment bodies normally manage these bodies which

they administer and represent.

Financial bodies for promotions and capital ventures are financial bodies which normally

promote and hold the capital of non-financial bodies not quoted on stock exchanges.

c) Financial bodies managing capitals, financial bodies managing investment bodies,

financial bodies for promotions and capital ventures may not engage, directly or

indirectly, in any economic activity other than that which is specifically proper to it under

this article.

d) Direct or indirect holdings by financial bodies managing capitals and financial bodies

managing investment bodies in merchant bodies may not exceed 25% of the capital of

the body in which a share is held.

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Article 5

Financial bodies providing various services

a) Financial bodies habitually engaged in one of the following activities are financial bodies

providing various services:

- money changing

- financial consultancy

- finance brokerage

b) Financial bodies providing various services may not engage, directly or indirectly, in any

economic activity other than that which is specifically proper to it under this article.

c) Direct or indirect holdings by financial bodies providing various services in merchant

bodies may not exceed 25% of the capital of the body in which a share is held.

Article 6

Bodies of a financial nature which are not part of the financial system

Bodies which, while having a company aim which is financial in nature, are instrumental

companies whose by-laws limit their activity to the economy sphere of their shareholders

(and do not allow the public sale of shares), are not considered financial bodies for the

effects of this law and thus are not part of the financial system.

Article 7

Insurance companies and reinsurance bodies

Insurance companies are governed by the law regulating the actions of insurance

companies in the Principality while awaiting their future incorporation into the financial

system. As regards reinsurance activities, it will be necessary to await the relevant

legislative enactment.

Holdings by banks in exclusively life insurance company are considered, as regards the

effects of article 2 of this law, to be holdings in financial bodies.

Chapter 3. Complementary clauses regarding the operational components of

the financial system

Article 8

The introduction of new financial activities

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a) The Government, faced with the introduction of new activities of a financial nature which

are cannot technically be assimilated to those provided for by this law or on becoming

aware of the same, shall submit to the General Council a proposal for the incorporation

of these new activities into the Andorran financial system, together with a technical

report from INAF.

b) The Government, after a report from INAF, is empowered to provide for the suspense as

a precautionary measure of the eventual introduction or carrying on of the activities dealt

with in point a) above while the documentation and information necessary for the

General Council to regulate the new activities in question is being sent to the latter body.

Article 9

Prohibition on non-banking bodies habitually receiving deposits and other reimbursable

funds from the public

a) Non-banking financial bodies and non-financial bodies are not empowered to habitually

receive deposits and other reimbursable funds from the public.

b) Without prejudice to the provision of the preceding point, non-banking financial bodies

and non-financial bodies may only issue debentures or other non-banking credit

certificates which admit or create a debt for a term not less than three years.

At no time may the volume of issue in circulation of a non-banking financial body or of a

non-financial body exceed 75% of its own funds.

Article 10

Legal status

The authorization to carry on activities in the financial sphere is granted only to bodies

legally constituted under Andorran law.

Chapter 4. Investment bodies

Article 11

Definition and characteristics of investment bodies

a) For the effects of this law, investment bodies are collective bodies, the aim of which is to

acquire, hold, manage and dispose of assets by publicly offering their shares or

participations according to the principle of diversifying risk.

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b) The management and representation of investment bodies must be held by a body

which manages investment bodies.

c) The role of the depositary, which is to have custody of investment bodies, must be held

by a bank.

d) One single body may not simultaneously assume the roles of manager and depositary.

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Article 12

Characteristics of mutual investment funds

Mutual investment funds are investment bodies, the aim of which is to acquire, hold,

manage and dispose of stocks and shares and other financial assets negotiable on

organized and regulated markets according to the principle of diversifying risk, using

resources coming from the underwriting of shares.

The assets corresponding to interbank deposits and the like need not satisfy the condition

of being negotiable on organized and regulated markets.

Article 13

Characteristics of pension funds

Pension funds are investment bodies, the aim of which is to acquire, hold, manage and

dispose of assets in accordance with the principle of diversifying risk, using resources

coming from the underwriting of shares.

First additional provision

In all legal texts mentioning financial bodies with loan activity, this shall be understood to

mean non-banking financial bodies with specialized loans. In all legal texts mentioning other

financial bodies, this shall be understood to mean, as appropriate, financial investment

bodies or financial bodies with various services applying the contents of articles 4 and 5 of

this law. And in all legal texts mentioning the hitherto three groups of financial bodies, it

shall be understood to refer to the four groups defined in article 2 of this law.

Second additional provision

The updating of permits granted to portfolio companies is transformed into the upgrading of

permits as financial bodies managing investment bodies.

INAF notifies bodies affected within thirty days of the publication of this law in the Official

Gazette of the Principality of Andorra.

First transitional provision

a) Physical persons and legally constituted bodies which, in pursuance of article 5 of this

law, now become part of the financial system must file a dossier for the updating of their

permit.

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1. As regards legally constituted bodies, the application must be accompanied by the

following documents:

- certificate of the registration of the permit

- list of shareholders

- certificate to the effect that shareholders with more than 10% of their

equity have no criminal record

- audited balance sheet and profit and loss account for the last two financial

years

- memorandum of activities for the last two financial years

- composition of the present board of directors or of the higher

administrative body

2. As regards physical persons, the application must be accompanied by the following

documents:

- certificate of residence

- certificate of a clean criminal record

- presentation of the appropriate diploma, certifying a good reputation and

adequate professional qualifications

- memorandum of financial activities during the last two financial years

- other professional activities engaged in by the applicant

b) Applications must be filed with the Ministry of Finance within three months of this law

coming into force.

c) Failure to present an application for updating will be taken to mean abandoning the

permit.

d) The updating of the already existing permit is declared by the Ministry of Finance on the

basis of the technical report from INAF.

e) A provisional updating may be granted to an already existing permit held by physical

persons for the professional practice of financial consultancy and finance brokerage

services incorporated into the group of financial bodies with various services. In these

cases, those concerned will have to adapt their situation to the provisions of article 10 by

31 December 1997.

f) The declaration of updating of a permit, whenever appropriate, must be granted within a

period not longer than six months counting from the date on which the application was

received or the presentation of the complementary explanatory information which INAF

may demand.

g) Once the declaration of updating has been obtained, the bodies incorporated into the

financial system under this law must adapt their structure to the provisions of the law

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ordering the financial system of 27 November 1993 and whatever other legal provision

may be applicable to them by 31 December 1997.

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Second transitional provision

a) Banks and financial investment bodies which at present manage or are depositaries of

some investment body must notify the Ministry of Finance of this by 30 June 1997,

indicating the name of the investment body and the depositary, and their characteristics,

and must include the following documents: by-laws, regulations, informational and

advertising documents, audited yearly financial statements for 1995 and 1996.

b) Banks are obliged to adapt their structure for managing investment bodies to the

provisions of this law, particularly as regards the creation or updating of the relevant

financial investment body, by 31 December 1997.

The Government is expressly empowered to decide on applications for permits or

updating of permits of the financial bodies managing investment bodies referred to in the

preceding paragraph.

Third transitional provision

a) Bodies incorporated in the financial system which hold participations which are not in

line with the provisions of this law must notify the Ministry of Finance by 31 December

1997, giving details.

b) All bodies incorporated in the Andorran financial system must update the structure of

their participations to satisfy the provisions of articles 2, 3, 4 and 5 by 31 December

1998.

c) Bodies incorporated in the financial system which wish to maintain beyond 31

December 1998 a structure in their participations which does not satisfy the provisions

of articles 2, 3, 4 and 5 will have to file a reasoned application to the Ministry of Finance

by 30 June 1998; with the technical report from INAF the latter will give a decision within

at most two months.

Fourth transitional provision

The special cases referred to in the fifth transitional provision of the LOSF must be finally

settled by 31 December 1997 unless this dateline is changed by law.

Fifth transitional provision

a) Without prejudice and in relation to the provisions of the preceding fourth transitional

provision, the Caixa d’Estalvis i Pensions is authorized to set up a corporation under

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Andorran law, the company aim of which will be to continue its banking activity in

Andorra.

b) Until 31 December 2011 this new body will not be subject to the limitations provided for

by article 3 of the Regulation for merchant companies of 19 May 1983 as regards foreign

participation in company capital.

c) With the technical reports from INAF, the Government establishes the procedure

necessary for the proper carrying out of the contents of this provision.

d) Before the incorporation of the corporation noted in point a) above, the Govern will come

to an agreement with the Caixa d’Estalvis i Pensions to ensure that, particularly while

the exception set out in point b) above is in effect, that Andorra will equitably benefit from

the social work carried out by the body in question.

Sixth transitional provision

By 31 December 1997 the General Council will regulate the system for investments by

mutual investment funds, pension funds and companies for promotion and capital venture,

and the rights and duties of the managers, depositaries and investors concerned in these

investment instruments.

Provision for abrogation

Articles 2, 3, 4 and 5 of the law ordering the financial system of 27 November 1993 are

hereby abrogated as well as any other provision of equal or lesser rank which contradicts

the provisions of this law.

First final provision

No physical person or legally constituted body may carry on professionally the activities

related to articles 2, 3, 4 and 5 unless they have the relevant permit under pain of the

sanctions incurred in pursuance of legislation in force and those to be provided for in the

regulation foreseen for the disciplinary system of financial bodies.

Second final provision

The Government is expressly empowered to regulate any other question related to this law.

Casa de la Vall, on 19 December 1996

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Josep Dalleres Codina

General Syndic

We the Coprinces give it our sanction and promulgate it and order it to be published in the

Official Gazette of the Principality of Andorra.

Jacques Chirac Joan Martí Alanis

President of the

French Republic Bishop of Urgell

Coprince of Andorra Coprince of Andorra

 

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