22-04-2013

Regulatory And Supervisory Rules Of Banks And Financial Services Companies

Authors

  • Sokol Nako, Attorney at Law, Partner
    Endrit Shijaku, Attorney at Law, Senior associate
    at Wolf Theiss Law Firm

As the economic development of Albania advances so has the quality of legislation and the banking law which came into force in 2007 and was further amended and improved recently in 2011. As a result of the phenomenon of the collapse of the pyramid scheme in 1996, which was unprecedented due to its scale relative to the size of the economy, the fate of Albania’s banking activities looked extremely bleak. Not only was there huge economic loss and severe destabilisation of the country but it had shaken the public’s confidence in the country’s banking system. But the resilience of the country’s economy has shown through and now the financial stability of the country and people’s confidence is indeed restored. At present the banking law in Albania comprises of a Banking Act approved and passed by parliament, and several regulations issued by the Bank of Albania (BoA) that largely legislate for the way in which all banks in the country are being licensed and supervised. The regulations of the Bank of Albania are approved by a supervisory council that is mostly selected by parliament that is to act independently of the government. There is almost no case law to speak of that assists with the interpretation of any banking law or regulation in practice as banking litigation is almost non-existent in Albania. The law provides notably for the formation and the activities of banks as well as non-banking financial institutions including the micro-credit institutions, payment services, adequacy of capital of investment companies, credit institution monitoring and controls of the large risk exposures of the credit institutions, as well as the consolidated supervision of the credit institutions now to be regulated in compliance with European standards1. The Banking Act is also detailed in the description of the provisions leaving less room for interpretation and use of arbitrary powers. A fee payable by the banks has also been introduced in respect of the supervision of the banking activity indorsing principle 1 of the Fundamental Principles of the Bank for International Settlement (BIS). The act stipulates better rules to administer the way that banks and branches of the foreign banks are organized and managed, further minimising the risks related to the management of the banks. The act goes some way into detailing the powers of the board of directors while imposing liabilities on its members regarding bank management. It also contains more detailed provisions regarding potential conflicts of interest in the management of the bank. The law provides for stricter risk management through capital adequacy ratio. Under this Act, the branches of a foreign bank have to retain a certain amount of liquid assets within the Republic of Albania. A duty is also imposed on the banks to specify detailed methods for the calculation of the risks both on an individual and consolidated basis. Specific risk elements are detailed in the act.

In this chapter we consider some aspects of the Albanian banking law. The banking act centres around the regulation of two main areas, that of banking activities and that of financial activities carried out by banks or branches of foreign banks and more pertinently by non-banking financial institutions.

What is a “Banking Activity”?

The banking act includes within the scope of banking activities, services of accepting monetary deposits or other repayable funds from the public and extending loans and other placements from these resources in its own name or for its own account. It is however accepted that banks may also lend other money which are not deposits within their licence2 . There is no case law or guidelines that assist with the interpretation of the term “public” from which funds may be taken. All the activities of the bank must be authorised by the Bank of Albania, as must a number of other financial activities. It could be argued that the mere activity of extending a loan, not in the course of one’s normal business3, will not come under the remit of banking activity and will remain to be governed by the Civil Code4, provided of course it proves to be a legal transaction. The distinction between entering into a lending transaction and carrying out an activity of collection of deposits has proved vital in Albanian legal history where the court had to deal with the legitimacy of pyramid schemes. Deposits collected in the course of the pyramid schemes in 1996 were held by the court to be outside of the scope of a banking activity thus deemed not required to be regulated or supervised, and this led to catastrophic results for the economy. The advertising and/or soliciting of banking services by non-licensed entities, is not explicitly defined in the law as a banking activity. Nonetheless, it may arguably be considered as part and parcel of the banking activity thus triggering the licensing requirement.

Who can carry out banking activities?

Banking activities may only be carried out by banks or branches of foreign banks, both of which must go through a two tier licensing process with the BoA. The first tier is what is known as the ‘initial approval’ and the second tier the ‘granting of the license’. Initial approval is the process by which preliminary approval is given to the founders of the proposed legal entity seeking to carry out banking activities in Albania; this shall enable them to register their legal entity with the Commercial Registers and only after that will they be able to apply for an actual licence. We further consider some of the main criteria set by the law and regulations for the licensing of a bank in the Republic of Albania.

  • The bank or branch of the foreign bank has to be incorporated as a joint styock company (Shoqeri Anonime)5 .
  • The bank or branch of the foreign bank must deposit a minimal initial capital of 1 billion Albanian leke approximately [ ] with the BoA with its application prior to being licensed. The BoA may change the threshold of the required capital for all banks from time to time. This initial minimum capital should not have been made through loans from the public or credits or advancement of money from third parties.
  • In line with EU legislation the proposed shareholders and management of a bank have to be what is generally known as “fit and proper”. Thus, Albanian Banking Act imposes a requirement for the shareholders and managers of the proposed bank or branch of a foreign bank to have a good reputation (i.e. to be “proper”).
  • In addition, qualifications, experience and reputation of the directors of the bank or branch of foreign bank, as well as shareholders with influential participation6 should be suitable for the implementation of the business plan of the activities for which the bank is being licensed for. In other words, the directors are also required to be “fit”.
  • The operational and control structures including the policies and procedures of the bank or branch of foreign bank must reflect the purpose and the degree of fulfilment of their proposed activities.
  • The bank or branch of the foreign bank must have no less than 2 executive directors (note that the actual terminology for this position within Albanian Company Law is Administrator).
  • The bank or branch of foreign bank must also have in place sufficient processes and procedures for its internal audit and accounting.
  • Ensuring that certain insurances are in place, the most important of which is that of deposits that can only be taken out from the designated public body named the Deposit Insurance Agency.

It is worth highlighting that it is possible for fully owned subsidiaries of foreign banks to be licensed as a bank in Albania, and as stated above they are exempt from the requirement that each shareholder should have not less than a third of the capital or shares with voting rights. In some jurisdictions the requirement for licensing, for example that concerning the minimal capital required and/or of the management, are different for subsidiaries and in comparison to that required of a bank or branches of the foreign banks. But in Albania the requirements for both these organisational forms are almost the same. The only material difference is that branches of the foreign banks may not be licensed for activities beyond those stipulated in the licence of the parent bank. Any further change which has an effect on the criteria upon which a bank has been licensed has to have prior approval of the Bank of Albania. One of the more frequent

changes occurring is where there is a change of the shareholders either of the bank or the parent bank. Under the present law, a person (be it a legal or natural person) having an influential participation/control over a bank or branch of a foreign bank in Albania must not transfer such participation/control without the approval of the Bank of Albania. The term “influential participation” is defined as the direct or indirect ownership of 10% or more of the capital of a legal person or its shares with voting rights, or ownership to the extent that it is possible to influence in a considerable way the management or policies of a legal person.

What falls within the remit of “Financial Activity”?

The Banking Act defines, exhaustively, all financial activities which would trigger the licensing requirement. BoA will be entitled to issue licences for, in brief, the following activities7:

(a) all forms of crediting, including here the consumer’s credit and the real estate credit;

(b) factoring and the financing commercial transactions;

(c) leasing;

(d) all the services of payments and transfers of moneys, including here the credit cards and debit cards, travellers’’ checks, bank’s checks and payments’ cards;

(e) offering securities;

(f) trading securities on own account and for the account of the customers,

(g) a range of intermediary services in relation to portfolio management, insurances and

transfer of financial data. The law also provides that any ancillary service which supports the above defined financial services will fall within the definition of the financial activity. This provision is significant as it is so broadly termed it may also be interpreted so as to include soliciting, publication or marketing services. Although there is no case law to this effect and the wording is highly ambiguous one can only resolve that any body interpreting such a paragraph shall certainly have a degree of reluctance in determining that there is no prohibition of publications in relation to banks.

Regulation of Financial Activities:

There is to be a hybrid system of regulating financial activities in Albania. Most of the financial activities are currently being regulated by the Bank of Albania, with the curious overlapping regulation of a few other financial activities by the Financial Supervision Authority (FSA). The banking law seemingly overlaps with the Law on financial activities8, insofar as both the BoA and the FSA seem to have been vested with the power to approve statutory instruments for the supervision and licensing of the non-banking financial activities. It may be noted that the banking law unlike the FSA Law is more specific in the financial activities that it seeks to regulate as it has provided some definition of each and every activity which it considers to be financial activity. It is, however difficult to envisage any other activity that may be considered financial and has been left outside the scope of the banking law. Interestingly both laws have been passed in a short span of time (i.e. within six months) and the banking act which is the most recent does not expressly repeal the provisions of the earlier FSA Law. Applying well established principles of interpretation one may safely argue that the later law is to be enforced resulting therefore in the FSA being stripped by Parliament of its granted powers to regulate non-financial activities. In practice the Financial Supervision Authority is at present responsible for the supervision and licensing of:

a) Companies in the Securities market.

b) Insurance market and insurance activity and also all intermediary operations in support of these activities.

c) Supplementary pension funds offered by the private pension institutions. In any case the Bank of Albania is vested with the power to exclude financial institutions from the requirement of a license or supervision on the basis of its size or volume of nature of activities.

Who can carry out financial activities?

The law prescribes that Albanian banks and branches of the foreign banks wishing to carry out financial activities in addition to their banking activities must be licensed thereof. Additionally, Bank of Albania has through a power delegated by law issued licensing requirement for non-banking financial institutions which wish to carry out financial activities in the Republic of Albania. The problem at the moment is that a financial activity is not defined explicitly enough and does not determine whether it can be carried out only in the capacity of a business. It is clear that the legislators did not intend for the definition of a financial activity to encompass such financial activity being carried out on a personal basis, i.e. they intended it to be limited to persons intending to carry on business. It is hoped that the Bank of Albania will issue further legislation in relation to this. Nonetheless, it may be argued that since the term ‘activity’ is used, it is implied that these services are to be carried out on a continual basis thus forming part of or all of a business arrangement (at least this is the connotation of the term activity in Albanian). In this context any of the transactions defined in the law as “financial activities” carried out by a company in the course of their business are subject to the licensing requirement, and therefore deemed to be non-banking financial institutions. There is no specific definition of what a non-banking institution is, in terms of organisational form. BoA has specified the following financial activities for which a company other than bank may be licensed.

  • Granting Credit
  • Factoring
  • Financial Leasing
  • Offering payment and money transfer services
  • Issuing payment instruments
  • Offering guarantees and undertaking commitments
  • Currency exchange;
  • Acting as a financial agent or advisor in relation to the above.

The main licensing requirements for non-financial banking institutions that BoA has prescribed at the moment are:

  • There is a requirement for a minimum capital ranging from 30.000.000 to 100.000.000 ALL depending on the financial activity that the financial non-banking institution wishes to obtain a licence for.
  • The directors of the company must be “fit and proper” with a requirement that they must have adequate professional skills and knowledge.
  • There are in place adequate insurance policies and equipment for exercise of the activity.

Territoriality in banking and financial activities:

Banking

It is well established under the law that no one can carry out banking activities in the Republic of Albania without a licence either as a bank or branch of a foreign bank. Furthermore the law prohibits unlicensed entities from using the word “bank” or other derivative words thereof in exercising commercial or promotional activities in the Republic of Albania. Although the term ‘promotional activities’ is not defined one could argue that it includes all forms of advertisements. The act of soliciting banking activities, also, may arguably be interpreted as commercial activities. Interestingly however there is a gap here in that, if the argument that a banking activity should include also solicitation of such activity is not adopted, a foreign bank may arguably solicit or advertise through tacitly suggesting that they carry out banking activities, without using the word “bank” or any other words deriving thereof. The question of whether a foreign bank may solicit its banking services that are to be conducted outside of the territory of Albania remains open, but given the tone of the banking act and its protectiveness towards the consumer it is arguable that the activity shall be deemed to require a license. Although most foreign banks are licensed and regulated within their own territories, some may not be and may neither be regulated to the standard sought by the Albanian Banking Act. This supposition is also in light of the view taken by some Western countries that banking activities encompass solicitations for such activities as well.

Financial activities

As described above there is some doubt as to the context in which the transactions set out in the definitions of financial activities, above, would be deemed as such. As opposed to the provisions mentioned above in respect of soliciting and advertising, there is nothing governing ‘promotion activities’ for the acts of financial activities. Taking again the situation where a company is seeking to advertise its services in Albania that are to be carried out outside the territory of the Republic of Albania, it is ambiguous as to whether that company shall be subject to the requirement of a license. The law states that all the activities that support the financial activities expressly provided for in the law would also be deemed to require licensing. It has been argued that this would include any form of soliciting or advertisement; there are however in practice, a number of institutions who carry out financial activities for which they are licensed and advertise these activities without holding a further licence for such advertisement.

Sanctions in relation to breaches of banking law:

The law establishes a number of criminal offences in relation to breaches of the banking law the most important of which are:

  • Carrying out financial activities or banking without a licence. This offence may be punishable by a fine or imprisonment for a term of up to two years and if it has resulted in grave damages to the interests of the public this offence carries a extended punishment of a fine or up to seven years imprisonment.
  • Breaching of confidentiality. This carries a punishment of a fine or up to one year imprisonment.
  • There are also a number of summary offences established for the directors of the bank that have not observed the banking law requirements and they carry fines which vary from ALL 500.000 to ALL 2.500.000.

The Bank of Albania has the power to take other measures where it finds that a bank or a branch of a foreign bank is operating in breach of the law. Any decision that the Bank of Albania may take in exercise of this power attracts a right of administrative complaint. The complaint is heard by the Bank of Albania which may decide to act on the decision even pending the outcome of the complaint. Any right to judicial redress in respect of the banks decision is limited to a process where the courts will have no power to look at the merits of the Bank of Albania’s decision rather they will look at the manner in which the decision is taken.


1. (Directive 2000/12)

2. The bank of Albania commentary to the banking law.

3. If one was to extend a loan in the course of one’s business, be it for example a bakery, and a loan is extended to one of the customers that activity should have been registered as a financial activity as part of its commercial activities when registering with the Commercial Register If, within the commercial activities of the baker, there are to be financial activities then consideration should be given to the Banking regulations and consideration as to whether a license should be sought.

4. Art 1050 to Art 1055 of the Civil Code of the Republic of Albania approved by law 7850, dated 29.07.1994 as amended.

5. This is a form of Public Limited Company, known under the Albanian Company Law as a Joint Stock Company.

6. Influential participation is defined in Albanian law as the direct or indirect ownership of 10% or more of the capital of a legal person or its shares with voting rights, or ownership to the extent that it is possible to influence in a considerable way in the management or policies of a legal person.

7. Article 54 point 2 of Law no.9662, date 18.12.2006, “On Banks on the Albanian Republic”.

8. Art.2(ç) and Art.13(2)ofLawno.9572,dated3.7.2006“OnthefinancialsupervisionAuthority”andArt.126andArt.90 of the Law No. 9662, dated 18.12.2006 “On the banks in the Republic of Albania”.

GREEK LAW DIGEST REPUBLIC OF ALBANIA MINISTRY OF INTEGRATION Union of Chambers of Commerce and Industry of Albania
Nomiki Bibliothiki ALBANIA INVESTMENT DEVELOPMENT AGENCY Foreign Investors Association of Albania
     

 

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