Contents

i

The BankingRegulation

Review

Law Business Research

Third Edition

Editor

Jan Putnis

ii

The Banking Regulation Review

Reproduced with permission from Law Business Research Ltd.

This article was first published in The Banking Regulation Review,3rd edition (published in May 2012 – editor Jan Putnis).

For further information please email Adam.Sargent@lbresearch.com

THE BAnking REguLATion

REViEW

Third Edition

EditorJan Putnis

Law Business Research Ltd

PuBLiSHER gideon Roberton

BuSinESS dEVELoPMEnT MAnAgER Adam Sargent

MARkETing MAnAgERS nick Barette, katherine Jablonowska

MARkETing ASSiSTAnT Robin Andrews

EdiToRiAL ASSiSTAnT Lydia gerges

PRoducTion MAnAgER Adam Myers

PRoducTion EdiToR caroline Rawson

SuBEdiToR charlotte Stretch

EdiToR-in-cHiEF callum campbell

MAnAging diREcToR Richard davey

Published in the united kingdom by Law Business Research Ltd, London

87 Lancaster Road, London, W11 1QQ, uk© 2012 Law Business Research Ltd

www.TheLawReviews.co.ukno photocopying: copyright licences do not apply.

The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. The publishers accept no responsibility for any acts or

omissions contained herein. Although the information provided is accurate as of April 2012, be advised that this is a developing area.

Enquiries concerning reproduction should be sent to Law Business Research, at the address above. Enquiries concerning editorial content should be directed

to the Publisher – gideon.roberton@lbresearch.com

iSBn: 978-1-907606-30-4

Printed in great Britain by Encompass Print Solutions, derbyshire

Tel: +44 870 897 3239

v

AcknoWLEdgEMEnTS

The publisher acknowledges and thanks the following law firms for their learned assistance throughout the preparation of this book:

ABduLAziz ALgASiM LAW FiRM in association with ALLEn & oVERy LLP

AFRidi & AngELL

ALi BudiARdJo, nugRoHo, REkSodiPuTRo

AndERSon MōRi & ToMoTSunE

ARTHuR cox

BonELLi EREdE PAPPALARdo

BREdin PRAT

BuggE, AREnTz-HAnSEn & RASMuSSEn

Bun & ASSociATES

cHAncERy cHAMBERS

cLAyTon uTz

conSoRTiuM cEnTRo AMéRicA ABogAdoS

conSoRTiuM – TABoAdA & ASociAdoS

dAVid gRiScTi & ASSociATES

dAViES WARd PHiLLiPS & VinEBERg LLP

vi

Acknowledgements

dAViS PoLk & WARdWELL LLP

dE BRAuW BLAckSTonE WESTBRoEk

dLA PiPER WEiSS-TESSBAcH REcHTSAnWäLTE gMBH

ELVingER, HoSS & PRuSSEn

F.o. AkinRELE & co

FoRMoSA TRAnSnATionAL ATToRnEyS AT LAW

gERnAndT & dAniELSSon

gidE LoyRETTE nouEL AARPi

goRRiSSEn FEdERSPiEL

HEngELER MuELLER

kAdiR AndRi & PARTnERS

kiM & cHAng

LEnz & STAEHELin

LS HoRizon LiMiTEd

MARVAL, o’FARRELL & MAiRAL

MATToS FiLHo AdVogAdoS

MAyoRA & MAyoRA, Sc

MoRATiS PASSAS LAW FiRM

MouRAnT ozAnnES

vii

MuLLA & MuLLA & cRAigiE BLunT & cARoE

Muñoz TAMAyo & ASociAdoS ABogAdoS SA

nAgy éS TRócSányi ÜgyVédi iRodA

nAuTAduTiLH

PAkSoy

RuSSELL McVEAgH

RužičkA cSEkES SRo

ScHoEnHERR şi ASociAţii ScA

SkudRA & udRiS

SLAugHTER And MAy

SyciP SALAzAR HERnAndEz & gATMAiTAn

T STudnicki, k PłESzkA, z ĆWiąkALSki, J góRSki SPk

uRíA MEnéndEz

ViEiRA dE ALMEidA & ASSociAdoS

WASELiuS & WiST

WEBBER WEnTzEL

WongPARTnERSHiP LLP

zHong Lun LAW FiRM

Acknowledgements

Contents

viii

Editor’s Preface ������������������������������������������������������������������������������������������xviiJan Putnis

Chapter 1 International Initiatives �������������������������������������������������������� 1Jan Putnis and Tolek Petch

Chapter 2 Argentina �����������������������������������������������������������������������������29Santiago Carregal, Martín G Vázquez Acuña and Josefina Tobias

Chapter 3 Australia ������������������������������������������������������������������������������41Louise McCoach and David Landy

Chapter 4 Austria ���������������������������������������������������������������������������������76Wolfgang Freund

Chapter 5 Barbados ������������������������������������������������������������������������������86Trevor A Carmichael QC

Chapter 6 Belgium �������������������������������������������������������������������������������95Anne Fontaine

Chapter 7 Brazil ���������������������������������������������������������������������������������107José Eduardo Carneiro Queiroz

Chapter 8 Cambodia ��������������������������������������������������������������������������113Bun Youdy

conTEnTS

Contents

ix

Chapter 9 Canada ������������������������������������������������������������������������������127Scott Hyman, Carol Pennycook, Derek Vesey and Nicholas Williams

Chapter 10 Cayman Islands �����������������������������������������������������������������143Richard de Basto

Chapter 11 China ���������������������������������������������������������������������������������154Wantao Yang, Emily Xiaoqian Wang and Carol Dongping Cao

Chapter 12 Colombia ���������������������������������������������������������������������������175Diego Muñoz-Tamayo

Chapter 13 Denmark ���������������������������������������������������������������������������191Tomas Haagen Jensen and Tobias Linde

Chapter 14 El Salvador ������������������������������������������������������������������������203Aquiles A Delgado and Oscar Samour

Chapter 15 European Union ����������������������������������������������������������������214Jan Putnis and Benjamin Hammond

Chapter 16 Finland ������������������������������������������������������������������������������236Tarja Wist and Jussi Salo

Chapter 17 France ��������������������������������������������������������������������������������247Olivier Saba, Samuel Pariente, Jennifer Downing, Jessica Chartier and Hubert Yu Zhang

Chapter 18 Germany ����������������������������������������������������������������������������278Thomas Paul and Sven H Schneider

Chapter 19 Greece ��������������������������������������������������������������������������������292Dimitris Passas and Vassilis Saliaris

Contents

x

Chapter 20 Guatemala �������������������������������������������������������������������������312María Fernanda Morales Pellecer

Chapter 21 Guernsey ����������������������������������������������������������������������������325John Lewis and Jeremy Berchem

Chapter 22 Hong Kong ������������������������������������������������������������������������337Laurence Rudge and Peter Lake

Chapter 23 Hungary ����������������������������������������������������������������������������353Zoltán Varga and Tamás Pásztor

Chapter 24 India ����������������������������������������������������������������������������������366Shardul Thacker

Chapter 25 Indonesia ���������������������������������������������������������������������������379Ferry P Madian and Yanny Meuthia S

Chapter 26 Ireland �������������������������������������������������������������������������������398Carl O’Sullivan, William Johnston, Robert Cain and Eoin O’Connor

Chapter 27 Italy �����������������������������������������������������������������������������������410Giuseppe Rumi and Andrea Savigliano

Chapter 28 Japan ���������������������������������������������������������������������������������421Hirohito Akagami, Toshinori Yagi and Wataru Ishii

Chapter 29 Jersey ���������������������������������������������������������������������������������432Simon Gould and Sarah Huelin

Chapter 30 Korea ���������������������������������������������������������������������������������444Sang Hwan Lee, Chan Moon Park and Hoin Lee

Contents

Contents

xi

Chapter 31 Latvia ���������������������������������������������������������������������������������457Armands Skudra

Chapter 32 Luxembourg ����������������������������������������������������������������������468Franz Fayot

Chapter 33 Malaysia ����������������������������������������������������������������������������485Andri Aidham bin Dato’ Ahmad Badri, Julian Mahmud Hashim and Tan Kong Yam

Chapter 34 Malta ���������������������������������������������������������������������������������495David Griscti and Clint Bennetti

Chapter 35 Netherlands �����������������������������������������������������������������������506Joost Schutte, Annick Houben and Mariken van Loopik

Chapter 36 New Zealand ����������������������������������������������������������������������519Debbie Booth and Guy Lethbridge

Chapter 37 Nicaragua ��������������������������������������������������������������������������533Rodrigo Taboada R

Chapter 38 Nigeria �������������������������������������������������������������������������������545Adamu M Usman and Jumoke Onigbogi

Chapter 39 Norway ������������������������������������������������������������������������������560Terje Sommer, Markus Nilssen and Mats Nygaard Johnsen

Chapter 40 Philippines ������������������������������������������������������������������������571Rafael A Morales

Chapter 41 Poland �������������������������������������������������������������������������������586Tomasz Gizbert-Studnicki, Tomasz Spyra and Michał Bobrzyński

Contents

xii

Chapter 42 Portugal �����������������������������������������������������������������������������600Pedro Cassiano Santos

Chapter 43 Romania ����������������������������������������������������������������������������615Adela-Ioana Florescu and Diana-Maria Moroianu

Chapter 44 Saudi Arabia ����������������������������������������������������������������������626Johannes Bruski and Julian Johansen

Chapter 45 Singapore ���������������������������������������������������������������������������635Elaine Chan

Chapter 46 Slovakia �����������������������������������������������������������������������������649Sylvia Szabó

Chapter 47 South Africa �����������������������������������������������������������������������663Johan de Lange and Matthew Gibson

Chapter 48 Spain ���������������������������������������������������������������������������������677Juan Carlos Machuca

Chapter 49 Sweden ������������������������������������������������������������������������������699Niclas Rockborn and Nils Unckel

Chapter 50 Switzerland ������������������������������������������������������������������������715Shelby R du Pasquier, Patrick Hünerwadel, Marcel Tranchet and Valérie Menoud

Chapter 51 Taiwan �������������������������������������������������������������������������������736Chun-yih Cheng

Chapter 52 Thailand ����������������������������������������������������������������������������749Montien Bunjarnondha and Rahat Alikhan

Contents

xiii

Chapter 53 Turkey �������������������������������������������������������������������������������763Serdar Paksoy and Nazlı Bezirci

Chapter 54 United Arab Emirates ��������������������������������������������������������775Amjad Ali Khan and Stuart Walker

Chapter 55 United Kingdom ����������������������������������������������������������������783Jan Putnis, Michael Sholem and Nick Bonsall

Chapter 56 United States����������������������������������������������������������������������821Luigi L De Ghenghi and Reena Agrawal Sahni

Chapter 57 Vietnam �����������������������������������������������������������������������������887Samantha Campbell, Pham Bach Duong and Nguyen Thi Tinh Tam

Appendix 1 About the Authors �������������������������������������������������������������907

Appendix 2 Contributing Law Firms’ Contact Details ��������������������������942

xvii

Editor’s PrEfacE

Jan Putnis

When the first edition of this book was published in mid-2010, banking regulation seemed to be undergoing a transformation driven by a reasonably coherent international agenda. There were questions about how long it would be before nationalist and protectionist tendencies fractured the broad consensus that seemed to have built up on such issues as the need for more and better quality capital resources, liquidity requirements and the strengthening and reform of vital market infrastructure. However, there appeared to be a reasonable degree of certainty about the direction and speed of reform, at least among the G20 countries.

Events, as they always do, have since conspired to make the position considerably more complicated, in two separate ways. first, achieving many of the regulatory reforms agreed in principle at the meeting of G20 leaders in London in 2009 has proved to be a far more complex and difficult task than even those expert in the field of banking regulation had expected. secondly, as concerns about solvency have spread to governments, sovereign debt has assumed centre stage. The eurozone crisis, as it has come to be known, rumbles on with no obvious short-term solution that would avoid significant economic and social upheaval in parts of the European Union. There is also the potential existential threat that sovereign defaults of eurozone countries would pose to banks that are either established in those countries or have significant exposure to banks or assets in those countries. Events in the eurozone have given the frenetic activity in the area of financial regulatory reform in the European Union a slightly surreal quality against the backdrop of the consequences of potential economic and financial upheaval in one or more eurozone countries. Meanwhile, in the United states, the rule-making process under the dodd-frank act has continued, behind its original schedule, and banks continue to digest the consequences of the Volcker rule.

on both sides of the atlantic the volume and complexity of new and proposed rules has continued to be a cause of criticism and frustration. a banking sector that was roundly blamed for creating the complexity in products, markets and business structures that exacerbated aspects of the financial crisis is facing the irony of a wall of

Editor’s Preface

xviii

new regulation of such complexity that the complexity itself might end up being the main reason that the new regulation fails to achieve its objectives.

separately, in many asian financial centres reforms are underway but are, in general, far behind those proposed and enacted in the United states and the European Union. Many governments, regulators and bankers in asia saw (and continue to see) the western financial crisis of 2007–2009 as exactly that, a western financial crisis, and view the gradual liberalisation of the chinese banking system and greater convertibility of the renminbi as the greater challenge and opportunity.

if we set ourselves the task of summarising the positive things that have emerged for banking regulation from that western financial crisis, what would we say now, three years on? There is little doubt that there is now much greater awareness among policymakers and regulators in all major jurisdictions of two important factors that will probably dominate any future international banking crisis:a Banks, however well capitalised, risk collapse in sufficiently extreme circumstances

and the crisis demonstrated that those circumstances should never be regarded as too extreme to contemplate. assumptions about the credit quality and liquidity of assets, and about withdrawal of sources of funding (including deposits), may cease to apply in stressed market conditions. That means that the maturity transformation role of banks (‘borrowing short term and lending long term’, as it is often simplistically described) makes them subject to existential threats that are, by their very nature, difficult to anticipate and address accurately.

b contagion can spread through financial systems in unexpected ways, or at least in ways that are unexpected by governments and regulators. studying the potential routes of contagion and considering whether there are ways of closing down those routes without adverse unintended consequences for economies that are recovering from recession is therefore an important aspect of regulatory endeavour.

it might seem incredible now that these points were not appreciated sufficiently by governments and regulators before the financial crisis first erupted in the United states in 2007 and then spread to Europe in the following year. But that was undoubtedly the case.

The past year has seen international banking groups grappling with the practical realities of regulatory reform. doubts about the ability of some banks to raise the additional capital (particularly tier i capital) that they will require in order to meet the gradually increasing capital requirements set out in the Basel iii agreement are feeding concerns about the long-term viability of some banks’ business models and, more generally, about previously long-held expectations as to returns on equity of banking groups. Banks have begun to respond to actual and prospective higher capital requirements, in some cases by raising equity with varying degrees of success (which has been difficult in the market conditions prevailing in most of the world in the past year) and in other cases by selling or preparing to sell assets and business units, or simply by closing down business lines.

Politics have intervened in banking in the past year in ways that have made the debate about the direction of regulatory reform in the banking sector more complicated. in some countries, concern about the remuneration of senior management of banking groups has reached fever pitch in the media while, at the same time, a less emotive and

Editor’s Preface

xix

generally more thoughtful debate has continued on the need for more financing for businesses, particularly small and medium-sized enterprises.

The apparent shortage of finance for businesses in many economies, coupled with expected further pressure on the ability of banks to provide that finance as their capital requirements continue to increase, has led to concerns about the development of other sources of finance. is credit risk, and the contagion to which it can give rise if borrowers default, shifting in dangerous ways out of the banking sector into the so-called ‘shadow banking sector’? The European commission looks set to start investigating this topic in earnest in 2012. The consequences of regulatory intervention in this area are currently very difficult to predict, not least because any attempt to regulate non-bank sources of finance more heavily is bound to attract criticism from those who claim that it will only reduce further the sources of finance available to the ‘real’ economy.

another area of regulatory reform that banking groups continue to grapple with in 2012 is transparency with regulators. There are various examples of the ways in which this is starting to affect the sector. The most immediate and relevant example concerns the work that many of the largest banking groups in the United states and Europe are currently involved in to draw up ‘recovery plans’ and to draw up, or to assist their regulators in drawing up, ‘resolution plans’, those plans being collectively (and somewhat misleadingly) referred to as ‘living wills’. The phrase of the moment is ‘barriers to resolution’, describing factors that would prevent or inhibit the orderly resolution of a bank at or close to its collapse. Plenty of barriers to resolution are being identified as recovery and resolution plans are prepared. The second half of 2012 and 2013 will likely be an interesting period in which regulators ponder these barriers and deepen their discussions with banking groups as to what might be done about them.

fears of enforced structural reorganisations and changes to business models have led some banking groups to spend considerable amounts of time and resources developing their own solutions to perceived barriers to resolution. More immediately, the process of preparing recovery and resolution plans has proved difficult, the main challenges including how to reconcile differences between the statutory resolution and insolvency procedures for banks in different jurisdictions and to understand the cross-border elements of those procedures. fundamental questions about the availability of cross-border services to banking operations in a crisis, the treatment of banks’ global hedging arrangements, and ultimately the resolvability of banking groups, are at stake. it seems likely that we are many years away from having recovery and resolution plans that carry the benefit of clarity around how regulators would operate them on a cross-border basis in a crisis. it also remains to be seen whether cross-border cooperation between regulators would work in such circumstances given the significant differences between national resolution and insolvency procedures and the desire in many jurisdictions to protect local depositors. another major area of uncertainty concerns the proposals by some regulators that debt issued by banking groups be ‘bailed in’ (i.e., written off or converted into equity) in a crisis and how that could happen without spreading contagion through the banking system and the wider economy via the holders of that debt.

Meanwhile, scrutiny of the structure of banks themselves has continued in some countries. The likely implementation in the United Kingdom of proposals to require the ‘ring-fencing’ of retail banking activities within banking groups may be the start of a trend that spreads to other countries. despite the prevalence of ‘universal’ banks,

Editor’s Preface

xx

combining retail and investment banking activities in single legal entities in many of the other Member states of the European Union, the European commissioner for the internal Market has commissioned a study into the structure of banks with a remit to consider ring-fencing of retail banking.

Liquidity has remained a central concern for many banking groups in the past year. short-term liquidity problems at banks (arising, in particular, from concerns about the strength of some banks as counterparties) have resulted in an increase in the range of funding for which banks generally are now expected to provide collateral. This trend is expected to be exacerbated by longer-term developments such as the Basel iii requirements on liquidity and the proposed introduction of depositor preference in some countries for the first time. Liquidity pressures have led to many banks engaging in new types of transactions, such as so-called ‘liquidity swaps’, to increase the amount of high-quality collateral that they have available for their funding operations. This ongoing search for liquidity, and for the collateral required to obtain liquidity, has made some financial regulators concerned about the potential spread of contagion within the banking sector and from the banking sector to other sectors. for example, some liquidity swap transactions have involved banks receiving liquid assets from insurers in return for assets that are less liquid.

This third edition of The Banking Regulation Review updates the position on important aspects of banking regulation in the countries covered, in most cases to february 2012. While the book is aimed principally at staff in the legal and compliance departments of banks, it is to be hoped that senior management also find it helpful. The book focuses most closely on the deposit-taking activities of banks. The constraints of space and time mean that it will never be possible to do full justice to all of the subjects covered in each chapter, but readers are of course welcome to contact me if they have any suggestions for future editions.

Preparing successive editions of this book continues to be an onerous task for the busy lawyers who contribute the chapters and who are otherwise much in demand. My thanks go to them for their dedication to the task. significant changes to a book such as this also mean much more work than would otherwise be the case for the publisher. i am therefore very grateful to the publisher’s team for their understanding, hard work and patience with a group of authors who often have many other commitments.

finally, i would like to thank the partners and staff of the financial regulation group at slaughter and May for appreciating this book’s value and for encouraging our involvement in it for a third successive year.

Jan Putnisslaughter and MayLondonapril 2012

398

Chapter 26

Ireland

Carl O’Sullivan, William Johnston, Robert Cain and Eoin O’Connor1

I INTRODUCTION

2011 was another year of crisis for domestically owned Irish credit institutions but Ireland has taken exceptional steps to contain the crisis in the banking sector. Its strategy has been to provide liability guarantees, transfer non-performing eligible assets to a government backed entity (the national asset Management agency, ‘naMa’), established by legislation enacted in 2009, and to provide capital and liquidity to weakened and distressed banks and building societies.

The strain on the State’s resources ultimately led to the intervention of the eU and the IMF in november 2010. The eU/IMF Programme of national Support for Ireland has necessitated an ongoing restructuring and downsizing of the banking sector. legislation to facilitate the immediate stabilisation of the domestic banking sector was passed in december 2010, in the form of the Credit Institutions (Stabilisation) act 2010 (‘the Stabilisation act’). More recently, a permanent resolution regime has been introduced under the Credit Institutions (resolution) act 2011 (‘the resolution act’), which aims to provide an effective and expeditious regime for dealing with failing credit institutions. details of both the Stabilisation act and the resolution act are set out in Section III below. Following the significant restructuring of the Irish banking sector in 2011 detailed below (in particular in Section VII), it is intended that Bank of Ireland and allied Irish Banks, plc (‘aIB’) will act as ‘pillar banks’ of a reformed Irish retail banking system. It is envisaged that additional competition in the sector will be provided by subsidiaries of foreign owned banking groups, including the royal Bank of Scotland, KBC and rabobank groups.

Banking regulation has undergone considerable change since the start of the crisis. Institutionally there has been a reconstitution of the regulator, the Central Bank

1 Carl O’Sullivan, William Johnston, robert Cain are partners and eoin O’Connor is an associate at arthur Cox.

Ireland

399

of Ireland (‘the Central Bank’), while regulatory policy and objectives have also been refocused.

II THE REGULATORY REGIME APPLICABLE TO BANKS

i The regulator

The Central Bank is responsible for prudential regulation and conduct of business of financial institutions in Ireland. The Central Bank was established under the Central Bank act 1942. This legislation has been subject to extensive amendment since its enactment.

ii Objectives

The Central Bank is required to ensure proper and effective regulation of financial institutions and markets and to ensure that the public interest and interests of consumers are protected, and ensure the stability of the financial system overall.

In the context of the regulation of financial institutions and markets, the objective of regulation in Ireland is to minimise the risks of systemic failure or insolvency of an institution by ensuring compliance with prudential and other requirements.

The Central Bank is responsible for developing rules governing the authorisation of financial services providers and for the continuing supervision of the entities that it has authorised.

iii Legislation in respect of regulation of banks

The primary legislation in respect of the regulation of banks is the Central Bank acts 1942 to 2011 (‘the Central Bank acts’).

Building societies and credit unions are regulated under the Building Societies act 1989 and the Credit Union act 1997 respectively.

Certain secondary legislation also applies to banks, including the eC (licensing and Supervision of Credit Institutions) regulations 1992 (the ‘licensing and Supervision regulations’). These regulations, inter alia, provide the framework for the provision of eU-wide banking services into and from Ireland under the eU passport.

In addition, certain non-statutory guidelines have also been issued by the Central Bank. For example, the Central Bank’s Consumer Protection Code sets out conduct of business requirements applicable to banking services (and other types of financial services) provided in Ireland.

iv Legal structures of banks

The Central Bank is not prescriptive as to a bank’s legal structure, beyond stating that a bank must have an acceptable legal form. Most banks have been established as limited liability companies although the Central Bank has authorised banks established as unlimited companies with limited liability holding companies. Building societies and credit unions are typically constituted as mutual societies.

Ireland

400

III PRUDENTIAL REGULATION

i Relationship with the prudential regulator

The Central Bank employs a risk-based approach to regulation, supported by the ability to take enforcement action where breaches of its requirements are identified. The risk-based approach is used so that resources are focused on financial institutions with the highest impact and risk profile.

Compliance monitoringCentral Bank compliance monitoring involves (1) reviewing regulatory returns provided by banks and (2) conducting both on-site and off-site review meetings and inspections. Those institutions that carry the greatest risk to the stability of the financial system or which deal directly with customers are subject to a higher level of scrutiny.

The Central Bank has the power to impose administrative sanctions to ensure compliance with the regulatory requirements imposed on banks. legislation proposed in 2011 will, if enacted, substantially strengthen the Central Bank’s powers and increase the potential enforcement remedies.

The Central Bank’s Strategic Plan for 2010–2012 states that it is intended that the Central Bank’s banking supervision will become more intrusive and challenging than in the past, additional staff will be recruited and a risk experts Panel will be set up.

Disclosure obligationsThe Central Bank has broad supervisory powers and can compel licensed banks to make disclosure relating to any aspect of their business. Following the enactment of the Companies (amendment) act 2009, licensed banks are also required to disclose increased levels of detail relating to certain transactions (including loans) with directors and connected persons in their annual accounts.

On 20 October 2010, the Central Bank issued a Code of Practice on lending to related Parties, which introduces statutory requirements (including disclosure obligations) in relation to lending by banks and building societies to related parties.

Principal matters in which the regulator will become involvedThe most common form of enforcement issue is failure by a bank to comply with the technical requirements of a regulation or code. Based on an analysis of the Central Bank’s recently published sanctions, a major concern of the Central Bank is of systems and controls failures by regulated entities. Sanctions are disclosed on the Central Bank’s website.

ii Management of banks

The Central Bank must be satisfied with the structure of the board and senior management of a bank and that internal control systems and reporting arrangements are such as to provide for the effective, prudent and efficient administration of its assets and liabilities. In this respect, it is necessary for all banks to have in place such committees of directors and management and other management structures as are necessary to ensure

Ireland

401

that the business of the credit institution is being managed, conducted and controlled in a prudent manner.

a new fitness and probity regime established under Part 3 of the Central Bank reform act 2010 (‘the reform act’) came into effect on 1 december 2011 and will be fully implemented by 1 december 2012. regulated financial services providers, including banks, are responsible for ensuring that persons performing pre-approval controlled functions or controlled functions comply with the Fitness and Probity Standards (the ‘Standards’), both on appointment to such functions and on an ongoing basis. Specifically, a regulated financial services provider must not permit a person to perform a pre-approval controlled function or controlled function unless it is satisfied on reasonable grounds that the person complies with the Standards and has obtained confirmation that the person has agreed to abide by those standards.

The Central Bank must be satisfied that directors and senior executives are fit and proper persons and have appropriate competence and experience in banking and financial services to enable them to fulfil their duties.

all appointments to the board of a bank and its subsidiaries and certain senior management appointments are subject to the prior approval of the Central Bank.

a proposed director or senior manager must complete an ‘individual questionnaire’ disclosing details of his interests, background and any regulatory censures to which he has been subjected. a detailed curriculum vitae outlining the proposed appointee’s relevant experience must also be attached. all retirements from the board must also be notified to the Central Bank.

The Central Bank requires that the ultimate decision-making body of a bank be located in Ireland and that the bank be adequately staffed to carry out its head office operations in Ireland.

On 8 november 2010, the Central Bank issued its Corporate Governance Code for Credit Institutions and Insurance Undertakings (‘the Corporate Governance Code’), which sets out minimum statutory corporate governance requirements for Irish incorporated credit institutions and insurance undertakings. Compliance with the Corporate Governance Code is mandatory and there is no scope to ‘explain’ departures from the Corporate Governance Code.

In addition to the regulatory requirements imposed on directors of Irish banks, directors must also comply with those directors’ duties imposed by Irish company law and Irish common law.

RemunerationOn 1 december 2010, the Central Bank of Ireland published the findings of a review conducted in September and October 2010 of remuneration policies and practices in a number of Irish retail banks and building societies. The findings of the review were highly critical of practice and procedure.

Crd III, as implemented in Ireland, places an obligation upon firms to have remuneration policies that are consistent with effective risk management by establishing remuneration guidelines for staff whose professional activities have a material impact on an institution’s risk profile. disclosure requirements related to remuneration policies and practices are also introduced. remuneration practices that are not consistent with

Ireland

402

effective risk management and/or run contrary to the Crd III remuneration principles will be scrutinised by the Central Bank.

The Corporate Governance Code also contains certain guidelines relating to remuneration, including a prohibition on remuneration policies which encourage risk taking and a requirement that major institutions appoint a remuneration committee.

iii Regulatory capital

eU directives 2006/48/eC and 2006/49/eC (together referred to as ‘the Capital requirements directive’) were implemented in Ireland by the eC (Capital adequacy of Credit Institutions) regulations 2006 and the eC (Capital adequacy of Investment Firms) regulations 2006 (‘the Capital adequacy regulations’). a bank is required to have an initial paid-up share capital of not less than €6.35 million and then to comply with risk-based ongoing capital requirements. The thrust of the Capital adequacy regulations is that a bank should have sufficient reserves to cover the risk of losses.

a range of sanctions may be imposed by the Central Bank to ensure enforcement of the Capital adequacy regulations, but in any event the Central Bank will require a bank to inject additional capital immediately should it fail to meet the minimum capital requirements.

InsolvencyIn the event that a bank becomes insolvent an examiner may be appointed to a bank. If a bank is or is likely to be unable to pay its debts the Central Bank may present a petition to the court for the appointment of an examiner to the bank. The petition to appoint an examiner must be accompanied by a report prepared by an independent accountant, a statement of the bank’s assets and liabilities and the opinion of the independent accountant as to whether the bank, or part of it, would have a reasonable prospect of survival and whether an attempt to continue the whole or part of the business would be more advantageous to the members and creditors than a winding up.

an examiner may be appointed for 70 or 100 days during which time no proceedings for the winding up of the bank may be taken and no receiver may be appointed over any part of the bank’s property and no attachments, sequestration, distress or execution may be carried out. an examiner is required to formulate proposals for a compromise or scheme of arrangement in relation to the bank and may carry out such other duties as the court may direct.

In the event that a bank is unable to pay its debts, a creditor may petition the court to have the bank wound up or the shareholders may convene a meeting of the shareholders to resolve to wind up the bank. In the former case the court may appoint a liquidator. If the shareholders resolve to wind up the bank, the creditors will appoint a liquidator.

The eU Insolvency regulation will also apply to an insolvency when the bank has a place of establishment in another eU Member State (other than denmark).

The eC (reorganisation or Winding-Up of Credit Institutions) regulations 2011 (‘the CIWUd regulations’) give effect to the Credit Institutions reorganisation and Winding-Up directive. These regulations apply to banks whose head office is located in Ireland and to branches of those institutions located in eU Member States.

Ireland

403

The resolution act came into effect on 28 October 2011 and aims to provide an effective and expeditious regime for dealing with failing credit institutions while minimising the cost to the State. The resolution act will apply to all authorised credit institutions in Ireland once the temporary emergency regime under the Stabilisation act expires (the Stabilisation act continues to apply to those credit institutions that have received financial support from the Irish government until the end of 2012). The Central Bank has been given sweeping powers to intervene where a credit institution is failing. Further details on the Stabilisation act and the resolution act are set out in subsection iv, ‘recovery and resolution’, infra.

Future developmentsat this stage, there are no plans for purely domestic legislation that would alter Irish capital adequacy requirements. However, Ireland will be required to implement Basel III and revised eU capital requirements in due course. The Central Bank has also undertaken stress testing on those credit institutions who have received State support and has imposed strict new capital requirements on these institutions, including Tier I capital ratios that are significantly in excess of current eU and Irish statutory requirements.

iv Recovery and resolution

Ireland has introduced two specific pieces of resolution legislation following the crisis of recent years.

The Stabilisation ActOn 21 december 2010, the Stabilisation act became law. The Stabilisation act provided a legislative basis for the immediate restructuring and stabilisation of the Irish banking system as set out in the national recovery Plan 2011–2014 and agreed in the joint eU/IMF Programme of Financial Support for Ireland. The powers in the Stabilisation act are time limited and will expire on 31 december 2012.

The Stabilisation act allows the Minister for Finance (the ‘Minister’) to make the following orders in relation to credit institutions that have received financial support from the state, as well as credit unions:a a ‘direction order’ directing a credit institution to take, or refrain from taking, any

action that, in the Minister’s opinion is necessary to achieve any purpose specified in the Stabilisation act;

b a ‘special management order’ allowing the Minister to appoint a special manager of a credit institution;

c a ‘subordinated liabilities order’ allowing the Minister to provide for the modification of rights of subordinated creditors; this includes, but is not limited to, rights relating to repayment of principal interest payments and what constitutes an event of default; and

d a ‘transfer order’ allowing the Minister to make an order transferring some or all of the rights or liabilities of a proposed institution.

Ireland

404

The Resolution ActThe resolution act came into effect on 28 October 2011 and will replace the temporary powers under the Stabilisation act on a permanent basis, granting the Central Bank sweeping powers to intervene where any Irish credit institution is failing (not just those credit institutions that have received financial support from the Irish government).

There are various preconditions which must be met before the Central Bank can intervene under the resolution act, which include: a the existence of a present or imminent serious threat to the financial stability of

the credit institution or serious concerns relating to its financial stability or that of the State;

b the credit institution failing, or the likelihood that a credit institution will fail, to meet a regulatory requirement; and

c circumstances exist in which it is not in the public interest to wind up the credit institution immediately.

The resolution act proposes that a fund be established for the resolution of financial instability in credit institutions. This fund will be financed by a levy on credit institutions and any contribution from the Minister for Finance.

If the preconditions are met, and if it is considered necessary, the Central Bank is able to make an application to the High Court seeking an order to transfer the assets/liabilities of a failing institution and/or impose a special management regime on that failing institution.

The Central Bank is empowered to present a petition to the High Court for the winding up of a failing credit institution in certain circumstances, and further, no person is allowed to petition to wind up a credit institution without giving the Central Bank notice and receiving the approval of the Central Bank.

The Central Bank is able to direct an ailing credit institution to submit and implement a recovery plan. The Central Bank could itself prepare a resolution plan in relation to a credit institution if deemed necessary.

IV CONDUCT OF BUSINESS

i Consumer Credit Act, 1995

The Consumer Credit act, 1995 (‘the CCa’) applies to consumer lending in Ireland. However, the CCa is not limited to banks and financial services companies. The CCa regulates some credit related activities such as moneylending and credit and mortgage intermediaries. The CCa also contains detailed provisions relating to housing loans. Certain of the consumer credit provisions of the CCa have been replaced by the eC (Consumer Credit agreements) regulations 2010, which give effect to directive 2008/48/eC. nevertheless the CCa remains in force in relation to credit agreements outside the scope of these regulations.

ii Consumer Protection Code

a general Consumer Protection Code for financial institutions providing financial services (except MiFId investment services), including banks, was introduced by the

Ireland

405

Central Bank in 2006 and substantially overhauled with effect from 1 January 2012. regulated entities must comply with the Consumer Protection Code as a matter of law and the Central Bank has the power to administer sanctions for a contravention of it.

The Consumer Protection Code contains a set of general principles combined with more detailed requirements in certain areas and applies to financial service providers operating in Ireland, as well as those passporting into Ireland on a branch or services basis.

iii Code of Conduct on Mortgage Arrears

The Central Bank has issued a Code of Conduct on Mortgage arrears, which applies to the mortgage lending activities of all regulated entities operating in Ireland, including mortgage lending provided by a regulated entity into Ireland on a branch or cross-border basis.

The Code of Conduct on Mortgage arrears contains a number of requirements with which mortgage lenders must comply including a moratorium of one year on repossessions where a borrower in arrears continues to cooperate in good faith with a mortgage lender.

iv SME Code

The Central Bank has also issued a code of conduct to be followed when lending for business purposes to small and medium sized enterprises. Small and medium-sized enterprises are defined as enterprises that employ fewer than 250 persons and which have an annual turnover not exceeding €50 million, and/or an annual balance sheet total not exceeding €43 million. Originally introduced in 2009, a revised SMe Code was introduced in 2011.

v Investment services

The Central Bank regulates a wide range of investment services carried on in Ireland, including the provision of investment advice, dealing in financial instruments, receiving and transmitting orders and portfolio management. Where a bank intends to provide investment services, it must notify the Central Bank. The provision of investment services in Ireland is subject to detailed conduct of business rules, including those contained in the eC (Markets in Financial Instruments) regulations 2007.

vi Payment services and e-money

Ireland has implemented the Payment Services directive 2007/64/eC, which contains certain licensing and conduct of business requirements for entities that provide payment services. Ireland has also implemented the e-Money directive 2009/110/eC.

vii Bank secrecy and confidentiality

an obligation of bank/client confidentiality in Ireland arises from the operation of the common law. The common law implies a duty of confidentiality on a bank in its relationship with its customer, unless the terms of the contract with the customer provide

Ireland

406

otherwise, or a bank is compelled by law to disclose. Obligations in relation to personal data also arise under the data Protection acts 1988 and 2003.

V FUNDING

i Typical sources

In addition to the taking of deposits, domestic banks have typically relied heavily on wholesale funding and the capital markets through issuing bonds and short term instruments. Since September 2008 some domestic credit institutions’ issues have benefited from Ireland’s State guarantee measures in the form of the Credit Institutions (Financial Support) Scheme 2008 (‘the CIFS Scheme’) and the Credit Institutions (eligible liabilities Guarantee) Scheme 2009 (‘the elG Scheme’).

Funding pressures have been alleviated largely by a very significant increase in recourse to eurosystem financing facilities and emergency liquidity assistance by the Central Bank.

ii Recent national measures to improve access to liquidity

State guaranteesOn 20 September 2008, the government increased the limit for the deposit guarantee scheme for banks and building societies from €20,000 to €100,000 per depositor per institution. a depositor who suffers a loss must make a claim under this scheme before invoking any of the guarantees provided for below.

On 20 October 2008, the Minister established the CIFS Scheme. The CIFS Scheme gave effect to the state bank guarantee announced by the Irish government on 30 September 2008. Under the CIFS Scheme, the Minister guaranteed certain ‘covered liabilities’ of ‘covered institutions’ from 30 September 2008 to 29 September 2010 inclusive.

The elG Scheme commenced on 9 november 2009. The elG Scheme enables those domestic institutions (and certain of their subsidiaries) who benefited from the CIFS Scheme to issue debt securities and take deposits with a maturity post-June 2012 on a State guaranteed basis.

eligible liabilities for the purposes of the elG Scheme are any of the following:a all deposits (to the extent not covered by deposit protection schemes in Ireland

other than the CIFS Scheme or any other jurisdiction);b senior unsecured certificates of deposit;c senior unsecured commercial paper; andd other senior unsecured bonds and notes.

an eligible liability (including deposits) must not have a maturity in excess of five years and an eligible liability must be incurred during the period from the date a participating institution joins the elG Scheme to 30 June 2012. This period can be extended to 31 december 2012 subject to the approval of the eU Commission in due course. The Central Bank has significantly enhanced supervisory powers under the elG Scheme in relation to participating credit institutions.

Ireland

407

National Asset Management AgencynaMa is a commercial, semi-state entity under the governance, direction and management of the national Treasury Management agency. The central objective of naMa is to stabilise Irish credit institutions by strengthening their balance sheets and reducing uncertainty in relation to their distressed loans, so as to facilitate lending to individuals and businesses.

naMa purchases eligible assets (for example credit facilities issued, created or otherwise provided by a participating institution to a debtor for the direct or indirect purpose, whether in whole or in part, of purchasing, exploiting or developing development land, or to a debtor for any purpose, where the security connected with the credit facility is or includes development land) from participating banks by issuing government-backed bonds to the participating banks.

Discussion paper reviewing the requirements for management of liquidity riskOn 7 October 2011, the Central Bank issued a discussion paper inviting submissions from industry on a range of issues related to liquidity risk management and regulation, which are under consideration within the Central Bank and internationally. The consultation process has now terminated and a position paper is awaited.

VI CONTROL OF BANKS AND TRANSFERS OF BANKING BUSINESS

i Control regime

GeneralThe Central Bank is opposed to an individual holding a ‘dominant’ interest in a bank. The Central Bank has a preference that ownership of a bank be held by ‘one or more banks or other financial institutions of standing’, or that there be a wide spread of ownership (such as through a stock exchange listing). an insurance company would not be permitted to hold a controlling interest in a bank.

There are no restrictions on foreign ownership of banks. Where a bank is owned by a foreign bank or financial institution, the Central Bank will consult with the relevant foreign supervisor before granting the application.

The eC (Credit Institutions) (Consolidated Supervision) regulations 2009 require the Central Bank to supervise credit institutions and their subsidiary and associated companies on a consolidated basis.

an entity or individual that controls a bank will have certain duties and responsibilities. The Central Bank will require the controlling entity to give an undertaking that the bank will be in a position to meet its liabilities during such time as the controlling entity holds a majority of the bank’s ordinary share capital. In the event that a bank becomes insolvent the controlling entity will be required to provide sufficient capital to the bank to make it solvent.

Ireland

408

Changes in controlThe licensing and Supervision regulations set out the regulatory approvals required to acquire control of a bank. essentially these regulations implement the change of control provisions of the acquisitions directive 2007/44/eC.

ii Transfers of banking business

The assets and liabilities of a bank can be transferred by operation of law under a procedure provided by Part III of the Central Bank act 1971 (a ‘Part III Transfer’). The assets and liabilities of certain entities can also be transferred by operation of law under new procedures provided by Part V of the Stabilisation act (a ‘Stabilisation Transfer’) and also under the resolution act where certain preconditions are met.

It is also possible to transfer the business of certain companies under the eC (Cross-Border Mergers) regulations 2008, which implement the Cross-Border Mergers directive 2005/56/eC in Ireland.

Part III TransfersWhenever the holder of a banking licence agrees to transfer, in whole or in part, to another holder of a banking licence, the business to which the licence relates and all or any of the other assets and liabilities of the transferor, the transferor and transferee may submit for ministerial approval a scheme for the transfer. The application must be made at least four months before the transfer date, although the Minister can alter the statutory timetable in some circumstances.

Where the Minister approves the scheme by ministerial order the assets and liabilities described in the scheme will transfer under the order by operation of law without the need to obtain the consent of individual deposit holders or counterparties.

If the Minister is of the opinion that the order is made with the intention of preserving or restoring the financial position of the transferor, but could affect the rights of third parties existing before the transfer, the order must state that it is made with this intention and that it should take effect outside as well as inside the State. The CIWUd regulations will then apply.

Stabilisation TransfersPart V of the Stabilisation act provides for an emergency power, available until 31 december 2012, that allows the Minister to make a proposed transfer order only if he or she, after consultation with the Governor of the Central Bank, is of the opinion that making the transfer is necessary to secure the achievement of a purpose of the Stabilisation act. It is not the financial institution that proposes a Stabilisation Transfer, it is the Minister.

Resolution TransfersThe resolution act provides a similar transfer mechanism to Part 5 of the Stabilisation act. rather than vesting the powers with the Minister, under the resolution act the process is controlled by the Central Bank.

Ireland

409

VII THE YEAR IN REVIEW

The past year has seen enormous challenges and radical changes affecting both banking regulation and the banking sector in Ireland.

On 22 november 2010 the Irish government applied for assistance under the financial stability facilities set up by the IMF and the eU. a Programme of Support was agreed between the Irish government, the IMF and the eU on 28 november 2010. The combined eU/IMF package was aimed at restoring confidence and financial stability. as part of this package, measures are being taken to reform the banking sector in Ireland such as the running down of non-core assets, an increase in resources for banking supervision, reform of the personal insolvency regime, efforts to provide assistance to those persons affected by the financial crisis (such as mortgage holders) and efforts to ensure there is a supply of credit to viable businesses.

Reorganisation of the Irish retail banking sectoranglo Irish Bank Corporation plc was nationalised in January 2009 and its name was changed to anglo Irish Bank Corporation limited (‘anglo’). In February 2011, the vast majority of anglo’s remaining Irish and UK customer deposits, in addition to over 200 staff, transferred to the aIB Group. The deposits and approximately 240 staff of Irish nationwide Building Society (‘InBS’) were transferred to Permanent TSB.

In June 2011 the european Commission (eC) approved the Joint eC restructuring and Work Out Plan for anglo and InBS. In July 2011, the remaining business of InBS transferred to anglo and anglo’s name was changed to Irish Bank resolution Corporation limited. It is intended that Irish Bank resolution Corporation limited will be wound down within 10 years.

On 1 July 2011, following approval from the Minister, aIB acquired eBS Building Society (‘eBS’).

On 26 July 2011, following an application by the Minister for Finance, the High Court made a direction Order under the 2011 Stabilisation act to facilitate the €4 billion recapitalisation of Irish life & Permanent plc (‘IlP’). This resulted in the effective nationalisation of IlP.

VIII OUTLOOK AND CONCLUSIONS

The Central Bank has already indicated that the prudential regulatory regime will be more intrusive going forward and will follow a risk-based model. By way of illustration, the Central Bank has recently made a special management order under the resolution act in relation to one of Ireland’s largest credit unions. The legal and regulatory policy is likely to change further in the short or medium term as the government and Central Bank continue to respond to the effects of the financial crisis in Ireland. Much of the change is likely to be eU-driven, but the government (and Central Bank) has already indicated that it plans to reappraise and strengthen banking regulation in Ireland, including in relation to personal insolvency.

907

Carl O’SullivanArthur CoxCarl holds a BA (Moderatorship) in legal science from Trinity College, Dublin, and an MBA from University College, Dublin. He was admitted as a solicitor in Ireland in 1983.

Carl joined Arthur Cox in 1990 and was admitted to partnership in 1992. Carl has been involved in the establishment and development of many companies located in the International Financial Services Centre. He advises on asset management, mutual funds, insurance and generally on the regulation of financial services. Carl previously worked as in-house counsel with Irish Distillers Group plc and with Waterford Wedgwood plc.

William JOhnStOnArthur CoxWilliam is an economics graduate of Trinity College Dublin and was admitted as a solicitor in 1979. He is a member of the Company Law Review Group, the International Bar Association (vice chair of the banking law committee, former chair, Banking Regulation Subcommittee of Banking Law Section), the Law Society of Ireland (former chair, Business Law Committee). He is also on the boards of both the UCD Commercial Law Centre at University College Dublin and the National Maternity Hospital (Holles Street).

William has published books on banking and security law and company lending, and has written chapters on Irish finance law for international banking law publications for Euromoney, Graham & Trotman, Kluwer, LexisNexis, Oceana Publications and Oxford University Press. Most recently he has co-edited Set-off Law and Practice: An International Handbook (Oxford University Press, 2nd edition, 2010).

As a practitioner, William Johnston has extensive experience in banking and finance transactions including tier 1 and tier 2 capital issues and other debt finance, secured lending including consumer credit, asset finance (in particular aviation financing) and bank regulation.

appendix 1

ABOUT THE AUTHORS

About the Authors

908

rObert CainArthur CoxRobert graduated from the University of Oxford (St Peter’s College) and was admitted as a solicitor (England & Wales) in 2002. He previously worked in the financial regulation group of Clifford Chance LLP in London and at the UK Financial Services Authority. He was admitted as a solicitor in Ireland in 2008.

Robert specialises in Irish and European financial services regulation and advises a wide range of both domestic and international financial institutions, including credit institutions, investment firms, payment institutions and insurance companies. His practice includes advice on Irish authorisation and perimeter issues, ongoing compliance with conduct of business and other requirements, regulatory capital, market abuse, prospectus and transparency requirements, payment services, AML, corporate governance and financial institution mergers and acquisitions.

eOin O’COnnOrArthur CoxEoin graduated from the National University of Ireland, Galway, in 2003 with a BA and LLB and has also completed an LLM at Trinity College, Dublin. He was admitted as a solicitor in Ireland in 2009.

Eoin advises on Irish and European financial services regulation. Eoin’s experience includes providing advice to a wide range of domestic and international financial institutions including commercial banks, investment firms, payment institutions, insurance companies and asset managers on financial regulation issues.

arthur COxEarlsfort CentreEarlsfort TerraceDublin 2IrelandTel: +353 1 618 0000Fax: +353 1 618 0618mail@arthurcox.comwww.arthurcox.com