Latvia: Major Developments in Latvian Credit Institution law

On May 1 2004 Latvia joined the European Union, and thereby undertook to obey EU law and implement its provisions into the national legislation. Therefore, the Latvian Parliament (Saeima) has adopted several substantial amendments to the legal acts regulating provision of financial services in Latvia by credit institutions registered in the Member States of the EU or EEA, outsourcing functions of credit institutions and reorganization and winding up of credit institutions.

In particular, significant amendments have been made to the Credit institution law and the Law on the Financial Instruments Market.

The amendments to the Credit institution law have introduced several provisions concerning activities of credit institutions registered in the Member States of the EU or EEA. The said provide that banks registered in the European Union or European Economic Area may open branches in Latvia without obtaining the licence specified in the Credit institution law, as soon as:

1. the Latvian Finance and Capital Market Commission (FCMC) receives a notification from the supervisory authority of bank's home state which includes:

1. confirmation that the relevant bank has a licence to operate as a credit institution;
2. the agenda for the activities of the branch;
3. the address of the branch;
4. the identity of the head of the branch;
5. information on the amount of bank's own capital and indicators of capital adequacy;
6. information on indicators of capital adequacy of bank's parent undertaking, which must be a credit institution or financial holding company; and
7. information on the investment guarantee system in which the bank participates;
2. the FCMC receives a written confirmation from the home state supervisory authority that it will inform the commission in a timely manner on inspections of the Latvian branch, will not hinder representatives of the FCMC from participating in such inspections, and will submit the FCMC a notice on the results of such inspections without delay; and
3. the FCMC notifies the home state supervisory authority on its readiness to commence supervision of the branch (or two months have passed since the FCMC has received such a notification from the home state supervisory authority).

A bank registered in any Member State of the EU or EEA is obliged to inform the FCMC one month in advance on any amendments to the information submitted to the FCMC, as well as on any intentions to suspend the operations of a branch.

The law also provides that in order to open a branch without obtaining a licence, as specified in the Credit institution law, documentation providing clear indication on the following has to be submitted:

1. operational strategy of the branch;
2. financial forecasts for the next two years;
3. market research plan;
4. organizational structure of the branch, identifying individual units and duties of the chief executives of such units;
5. risk-management policy and procedures;
6. the key principles of accounting and record-keeping policies;
7. description of the management information system;
8. regulations for protection of assets and information systems;
9. internal audit policy and procedures; and
10. procedure for identification of suspicious financial transactions.

The amendments to the Credit institution law also provide that banks registered in any EU or EEA Member State may provide financial services in Latvia without opening a branch, if they have notified their home state supervisory authority on their intention to provide financial services in Latvia at least 30 days before commencing such activities, and the FCMC has not issued a justified written refusal to the home state supervisory authority within 30 days after receipt of such notification.

Some of the provisions, which were introduced by the amendments to the Credit institution law, concern supervision of banks registered in the Member States of the EU or EEA, which provide financial services with or without a branch in Latvia. These generally provide that if the FCMC determines that a bank registered in any Member State of the EU or EEA or its Latvian branch has acted in a manner that contravenes the Latvian law, the FCMC may request the bank to terminate such activities. If the activities are not terminated, the FCMC informs the home state supervisory authority thereof. If the illegal activities are still proceeded, the FCMC is entitled to take measures to stop them and duly inform the home state supervisory authority.

The FCMC is allowed to remedy any violations at any time contravening Latvian laws, which safeguard the interests of the society.

The Credit Institutions law has been supplemented by quite a number of provisions regarding outsourcing of functions of credit institutions to entities not supervised by the FCMC. Such functions are:

1. book keeping (accountancy) of a credit institution;
2. supervision and development of IT technologies or systems of a credit institution;
3. organization of the internal control of a credit institution;
4. obligations of the internal auditors of a credit institution;
5. provision of some or substantial elements of the financial services of a credit institution.

However, credit institutions are prohibited to outsource:

1. acceptance of deposits and other repayable funds; and
2. emission of guarantees or similar activities pursuant to which the credit institution has undertaken the obligation to guarantee the creditor repayment of any third persons’ debts.

Before receipt of outsourcing services, credit institutions has to submit the FCMC a substantiated written application on receipt of the planned outsourcing service by attaching to the application a certified copy of outsourcing policy, description of the procedure and the original of the outsourcing agreement.

The FCMC is entitled to inspect the activities of the outsourcing service provider ‘on site’ or at the service rendering place, including investigation of all the documents, accounting and document registers, making copies of the documents and requesting information from the service provider on provision of the outsourcing services or any other information necessary for execution of the functions of the FCMC.

The service provider shall render outsourcing services to the credit institution if the credit institution has not received a prohibition thereof from the FCMC within 30 days after submission of the application mentioned above.

The outsourcing provisions have not been implemented due to approximation of the national legislation with the EU directives, but have been recommended by the Groupe de Contact of the credit institution supervisors.

The Credit Institution Law has also been supplemented with the provisions deriving from the Directive 2001/24/EC, thereby, improving credit institution reorganization, insolvency and winding-up proceedings. In fact, quite substantial amendments have been made and the Credit Institution Law has been supplemented with section XVI, concerning the specifics of the reorganization measures and winding – up proceedings for credit institutions and foreign credit institutions (also branch offices), containing nearly all the core provisions of the Directive 2001/24/EC.

The provisions of the supplemented section are applicable to:

1. Credit institutions registered in the Republic of Latvia having branch offices in other Member States;
2. Credit institutions registered in the Member States having branch offices in the Republic of Latvia;
3. Foreign credit institutions having at least one branch office in the Republic of Latvia and one in any other Member State;
4. Credit institutions registered in the Republic of Latvia having creditors in another Member State;

The amendments to the Law also stipulate that a credit institution (or a branch) shall be supervised by the supervisory authorities of the "home state" of the credit institution i.e. the state where the credit institution is registered, has got its licence or has got permission to engage in business activities in all other EU Member States.

Some provisions of the Law on the Financial Instruments Market were not effectuated until May 1 2004. These were basically provisions concerning the rights of the credit institutions established in the Member States of the EU or EEA to participate in the Latvian financial instruments market:

1. Credit institutions registered in other EU Member Sates are entitled to provide investment and ancillary services in Latvia after receipt of the legal rights to initiate commercial activities of a credit institution in Latvia;
2. A credit institution registered in any Member State of the EU which has a branch office and provides investment services in Latvia may acquire market member status from the day it is granted the right to initiate provision of investment services in Latvia; and
3. A credit institution registered in any Member State of the EU which has opened a branch office and provides investment services in Latvia may become a participant of the Central Depository from the day it is granted the right to engage in credit institution activities in Latvia, provided that it is duly authorized to hold financial instruments in its country of registration.

Several other amendments and improvements have been introduced to the provisions regarding acquisition of a substantial part of a credit institution by granting the FCMC the rights to request information on the identity or free accessible funds of a person who acquires or increases a substantial part or influence in a credit institution.

The draft of the legal acts was prepared by the FCMC, which, according to the law, has the obligation to introduce proposals for development of legislation concerning financial market participants. The above-mentioned amendments to the Credit Institution Law show that the Republic of Latvia is actively developing its legislative basis concerning banking in compliance with the provisions of EC directives.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.