Institutional and macroprudential setting, market structure overview

2. Liechtenstein has a GDP of CHF 4 billion, of which 42 percent comes from industry and 28 percent from financial services. The employed population is 30 thousand, and there are 34 thousand residents (including 34 percent foreigners).

3. Seventeen banks and two finance companies operate in Liechtenstein. Finance companies—which are also supervised by the FSA—are permitted to engage in general banking activities with the exception of deposit taking; one is a subsidiary of a major bank and is currently being wound up, the other engages in lending activities.

4. At end-2001, banking assets were CHF 34 billion, and assets under management were CHF 106 billion.¹ The market is highly concentrated with the three major banks accounting for 90 percent of the total banking assets; the fourteen other institutions have set up operation over the last 10 years. Regulations allow universal banking activities. Only the three largest banks conduct retail and corporate banking with mainly resident customers. The credit activities in banks are largely comprised of mortgage and Lombard loans. All banks report high capital adequacy ratio above 15 percent (and 16 above 20 percent at end-2001) with a minimum capital of CHF 20 million. The major business is in private banking and wealth management. The downturn in the financial markets has affected industry profits; in 2001, nine banks made profits, six broke even or made marginal profits or losses, and the two newest recorded substantial losses.

5. Two of the three largest banks are publicly quoted on the Swiss stock exchange; the third was once listed but is now privately held by the family of the Prince of Liechtenstein. Ten of the banks are subsidiaries of foreign banks (five from Austria, three from Switzerland, one from Germany, and one from France). The remaining four banks are owned by local interests. Four of these institutions have operations in foreign countries, generally in the form of banks and investment and trust companies, located mainly elsewhere in Europe and in the Caribbean. The total staff working in the banking sector is 1,760 people.

6. As a member of the European Economic Area (EEA) since 1995, Liechtenstein is obliged to transpose European Union (EU) legislation into national legislation. Accordingly, all its banking and accounting legislation is based on the relevant EU Directives. The Swiss franc is the official currency, and the Swiss central bank acts as lender of last resort. The Liechtenstein banks maintain close links with the Swiss financial system. These links include the stock exchange (two Liechtenstein banks are security dealers), interbank clearing, bankers association (six Liechtenstein banks are members), external auditors, accounting rules, and training.

7. In the nineties, the establishment of new banks, along with EEA membership, required that an efficient supervisory system be in place. At present, banking supervision is governed by the banking act of 1992 as amended, and the banking ordinance of 1994, as amended. Both the government and the Financial Services Authority² (FSA) share responsibility for banking supervision. The government is responsible for the granting, withdrawing, and revocation of licenses. The FSA is responsible for ongoing supervision. It operates an “indirect supervisory system” whereby onsite inspections are carried out by external auditors, licensed by the FSA. The banking act also provides for the establishment of a banking commission, which advises the government on banking supervisory matters; particularly, on licensing issues; it is also charged with counseling the independent work of the FSA. A due diligence unit (DDU) deals with anti-money laundering issues across the financial and related services sectors, including customer and transaction requirements for banks. Planning is underway to establish an integrated financial services supervisory authority that would bring together the oversight of banking, securities, and insurance activities. The creation of the new agency is now planned for early 2005, with legislative changes to be completed in mid 2004.

8. The Liechtenstein Bankers Association is active, employing four full-time staff. As part of its supportive role to the banking system, it manages a deposit and investment protection scheme based on the corresponding EU Directive. As a result of a working group initiated by the FSA, an independent foundation has been formed, which can call upon its member banks to cover customers’ deposits in cash and securities up to Euro 20 thousand each and a maximum of CHF 300 million.

Information and methodology used for assessment

9. The assessment of fulfillment of the core principles is not, and is not intended to be an exact science. Banking systems differ from one country to the next, as do their domestic circumstances. Furthermore, banking activities are changing rapidly around the world, and theories, policies, and best practices of supervision are swiftly evolving. Nevertheless, it is internationally acknowledged that the core principles are seen as minimum standards.

10. This assessment of compliance with each Principle has been made on a qualitative basis. A five-part assessment system is used: compliant, largely compliant, materially noncompliant, noncompliant, and not applicable. To achieve a “compliant” assessment with a Principle, all “essential” criteria generally must be met without any significant deficiencies. There may be instances where a country can demonstrate that the principle has been achieved through different means. Conversely, due to specific conditions in individual countries, the essential criteria may not always be sufficient to achieve the objective of the principle, and therefore, one or more additional criteria and/or other measures may also be deemed necessary by the assessor to judge that compliance is achieved. A “largely compliant” assessment is given if only minor shortcomings are observed, and these are not seen as sufficient to raise serious doubts about the authority’s ability to achieve the objective of that principle. A “materially non-compliant assessment” is given when the shortcoming is sufficient to raise doubts about the authority’s ability to achieve compliance, but substantive progress had been made. A “non-compliant” assessment is given when no substantive progress towards compliance has been achieved, or when insufficient information was available to allow a reliable determination that substantive progress had been made towards compliance. An assessment of “Not applicable” is rendered for a principle deemed by the assessors to not have relevance.”³

11. The assessment has been conducted in Liechtenstein under the OFC assessment program. It was carried out on the basis of the Law on Banks and Finance Companies (banking act) of October 21, 1992, as amended, and the Ordinance implementing the banking act of February 22, 1994, as amended. The assessors held working sessions with current and former representatives from the Financial Services Authority (FSA), the bankers association, and the auditors association, as well as commercial banks and banks’ external auditors. The mission was provided with written information on various issues and reviewed external auditor reports. Access to consolidated prudential data was limited due to the lack of resources within the offsite monitoring unit of the FSA.

General preconditions for effective banking supervision

12. The banking system operates in small, but highly developed, economy. It is expected that international standards and best practices are applied by all participants.

Supervisory framework (CP 1)

14. Since it joined the EEA in 1995, Liechtenstein has made significant efforts to incorporate all relevant EU Directives into its legal system. The banking act and the banking ordinance provide an adequate framework for banking supervision. On the legal side, clarification is required on two important aspects: firstly, the scope of banking secrecy is not defined within Article 36 of the banking act. A recent court ruling has reduced legal uncertainty regarding the banks ability to provide information to the FSA upon request of a foreign supervisory authority; however, sharing of client information in practices remains a concern. Secondly, fixed term appointment and disclosure of grounds for removal are required to ensure the independence of the FSA head. However, the most critical problem is the serious lack of resources within the Banking Supervision Department, notably in staff.

Licensing and structure (CP 2–5)

15. Banking activity and licensing criteria for banks and financial companies are consistent with international practices. They encompass strong governance requirements and, notably, a fit-and-proper test is applied to directors, senior managers, and heads of internal audits.

Prudential regulations and requirements (CP 6–13)

16. Banks operate within a well-defined prudential regulatory framework, in accordance with the EU and Basel standards that is largely modeled after the framework in Switzerland. Beside detailed provisions in the banking ordinance, the FSA, however, has not defined more specific guidelines for operational risk or for credit risk assessment but instead relies extensively on the external auditors who conduct the onsite examinations. Moreover, the absence of such specific guidelines means that more consistent and rigorous policies in these areas may not be applied across the industry.

Governance (CP 14, 15, 21)

17. The banking act and the banking ordinance have comprehensive provisions on corporate governance; banks must have a dual management structure with a board of non-executive directors and a management board; the internal audit function is defined as well as the external auditor function. All of them are subject to supervisory authorities’ scrutiny in the form of fit-and-proper tests for banks’ officials and licenses for audit firms. Based on the comprehensive DDA, AML policies and procedures are in place.

Methods of ongoing supervision (CP 16–20 and 22)

18. The supervisory authority’s ability to carry out its functions is materially undermined by the lack of staff and expertise. Current resources are limited to the head of the FSA, who took his position on October 1, 2001, a consultant, who is largely involved in the transposition of EU Directives, and an administrative staff. The limited staff prevents the Banking Supervision Department from conducting timely offsite monitoring of banks and from analyzing external audit reports promptly and thoroughly. The Department should aim at having a more comprehensive understanding of banks’ activities, risks and financial situations. In addition, enforcement powers, in the form of “orders” issued by the FSA, should be more detailed and specific.

Cross border banking (CP 23–25)

19. Consolidated supervision can be carried out whether Liechtenstein is the home or the host country; although, the FSA has not established MOUs with any foreign regulators. Specific provisions should be included in the legislation for Liechtenstein banks proposing to establish abroad.

Recommended Actions

20. Three major issues that cut across several Core Principles must be corrected:

• Priority should be given to recruiting two qualified staff. Constrains in financial resources may not allow the FSA to appoint people with expertise, which would be the most efficient way, both for quality and rapidity. The BSD has recently been in the process of recruiting two additional members of staff; one of these two vacancies was already filled in June 2003. Training with foreign supervisory authorities and the external auditors is essential.

• Meanwhile, in order to streamline the exchange of information process with foreign regulators, the scope of banking secrecy within Article 36 of the banking act must be clearly defined, and it would be useful that MOUs be signed with major home supervisors.

• Lastly, full compliance would be achieved if more clarification were brought into the supervisory standards and enforcement powers: in several areas, notably operational and credit risks, some of the external auditors commonly refer to Swiss rules or practices, although such norms have not been formally approved by the FSA; and remedial actions, in the form of undefined “orders,” should also be formulated into specific and gradual measures.

Table 1.3

Recommended Action Plan to Improve Compliance of the Basel Core Principles

Table 1.3

Recommended Action Plan to Improve Compliance of the Basel Core Principles

Reference Principle	Recommended Action
Independence and resources (CP 1–2)	Recruit experienced staff and/or train new staff
Information sharing (CP 1–6)	Delimit banking secrecy with regard to supervisory concerns
Other risks (CP 13)	Determine applicable norms
Onsite and offsite supervision (CP 16)	Add resources for effective and comprehensive analysis of audit reports and bank reporting
Bank management contact (CP 17)	Add resources for effective and comprehensive understanding of banks’ operations
Offsite supervision (CP 18)	Add resources for effective and comprehensive understanding and analysis of audit and bank reports

View Table

Table 1.3

Recommended Action Plan to Improve Compliance of the Basel Core Principles

Reference Principle	Recommended Action
Independence and resources (CP 1–2)	Recruit experienced staff and/or train new staff
Information sharing (CP 1–6)	Delimit banking secrecy with regard to supervisory concerns
Other risks (CP 13)	Determine applicable norms
Onsite and offsite supervision (CP 16)	Add resources for effective and comprehensive analysis of audit reports and bank reporting
Bank management contact (CP 17)	Add resources for effective and comprehensive understanding of banks’ operations
Offsite supervision (CP 18)	Add resources for effective and comprehensive understanding and analysis of audit and bank reports

Authorities’ response to the assessment

Information and methodology used for assessment

31. The assessment relied on the Fund/Bank Guidance Note for Assessing Implementation of IOSCO’s Objectives and Principles of Securities Regulation. The limited nature of permitted securities activity in Liechtenstein was an important factor in assessing the IOSCO Principles. The financial sector is focused on private banking, and this is mirrored in the activity of market intermediaries which is limited to portfolio management, investment advice, management of collective investment schemes, and some brokerage activity. There are no active secondary markets, no underwriting activities, very few issuances of securities, and no direct trading on secondary markets.

32. The assessment was based on a review of the relevant legislation, questionnaires prepared by the authorities prior to the mission, detailed discussions with staff of the Financial Services Authority (FSA), the Due Diligence Unit (DDU), and presentations by and discussions with members of industry and industry associations. Staff of the FSA and DDU were very generous in making themselves available for discussions which were helpful, frank, and forthcoming. Assistance from industry representatives was also extremely helpful. The relevant laws, as well as sample disclosure and account documentation, were made available in English.

Institutional and macroprudential setting, market structure

33. Securities related activity in Liechtenstein is carried out by universal banks, licensed under the Law on Banking, investment undertakings (collective investment schemes) licensed under the Law on Investment Undertakings, and trustees acting as asset managers, licensed under the Law on Trustees. Banks are focused on private banking and asset management primarily for high net worth clients, the majority of whom are located outside of Liechtenstein (the largest number are in Switzerland, followed by other European jurisdictions). Two large banks also offer brokerage services—including the sale of mutual funds and securities—to small retail investors. Only banks can open customer accounts in this manner. Asset management is also carried out by trustees who manage customer assets and provide investment advice—customer assets must be in custody at a third-party bank (located in Liechtenstein or elsewhere). Investment undertakings are those entities that operate collective investment schemes—they may operate collective investment schemes organized as trusts or as limited liability companies and may not directly distribute funds. Many collective investment schemes are eligible under the UCITS directive for sale in other European jurisdictions.

34. There are 17 banks licensed and operating in Liechtenstein, all of which carry out securities activities. There are 81 licensed investment undertakings with a total of CHF 5.2 billion assets under management. There are 355 licenses granted, but many entities operate with more than one license in Liechtenstein—the number of trustees carry on business as asset managers is unknown, although it is thought to be almost 35).

35. There are few public issuers in Liechtenstein. The Law on Prospectuses came into effect in 1997, and during the past two years only six prospectus filings have been made—all from the same issuer (a Liechtenstein bank) and mostly for the purpose of making amendments to the original offering prospectus.

Description of regulatory structure and practices

36. Responsibility for oversight of banks and investment undertakings rests with the FSA, which is responsible for screening licensing applications, reviewing and approving prospectuses and disclosure documents, and carrying out supervision. Licenses are granted by the government (Cabinet); withdrawal of licenses and imposition of fines are also carried out by the government. The public prosecutor is responsible for enforcement activity. The Court of Justice can also issue fines or terms of imprisonment. The DDU is responsible for enforcement of compliance with anti money-laundering regulations for banks, investment undertakings and trustees; the details of the DDU’s supervision are discussed under the AML/CFT Methodology. In the case of trustees, the FSA grants licenses to trustees but has only a limited on-going supervision responsibility. FSA decisions can be appealed to the government.

37. Relevant laws include the Law on Banking, the Law on Investment Undertakings, the Law on Trustees, and the Law on Prospectuses, as well as subordinate legislation under each law. The FSA also issues administrative guidelines. As a member of the EEA, Liechtenstein is obliged to implement the EU Directives. It has implemented the Investment Services Directive, the UCITS directive, and the prospectus directive.

38. The Liechtenstein system is a “dualistic” system of oversight which means that it relies to a large extent on the use of independent third party auditors to supervise regulated entities. These auditors are accounting and auditing firms that carry out both, the regular annual audit of a company and report to the FSA on compliance with relevant regulation. The FSA has a very small staff, with two permanent staff engaged in banking supervision (one of whom is the head of the authority), a consultant for banking supervision and two permanent and one temporary staff for oversight of collective investment schemes. One staff member is responsible for licensing of trustees, including those that act as asset managers. There are two staff members in the legal department responsible for legal support and implementation of EU Directives.

39. Industry associations in Liechtenstein do not have a formal role in regulation but are nonetheless an integral part of the regulatory environment. All three associations—the Banker’s Association, the Funds Association, and the Trustees Association appear to be very professional and quite proactive in their approach to regulation. The Funds Association, for example, has developed a system for publication of net asset valuations which allows members to fulfill publication requirements by electronically entering net asset value information daily, which is then posted on the website and forwarded to the Liechtenstein press for publication. The investor is therefore able to see, at a glance, the current value of every Liechtenstein fund, its performance over the last several years and any disclosure information that has been published. Those trustees that act as portfolio managers (only a small portion of the trustee population) have recently formed a separate industry association to deal with common interests. The industry associations are very active in the process formulation of policies and the development of codes of conduct, and they work closely with the FSA.

General preconditions for effective securities regulation

40. The preconditions for effective securities regulation, including a sound legal, accounting and tax framework, appear to be in place in Liechtenstein.

Principle-by-principle assessment

41. The IOSCO Principles were assessed in accordance with the criteria set out in the Guidance Note, taking into account the particular context of the Liechtenstein market. A summary of findings and recommendations is below, followed by a detailed table enumerating each Principle.

42. A Principle will be considered implemented whenever all assessment criteria are generally met without any material deficiencies. The Principles acknowledge that there are often several ways for countries to implement the Principles. A Principle will be considered to be broadly implemented whenever only minor shortcomings are found, which do not raise major concerns and when corrective actions to achieve full implementation with the Principle are schedules and are realistically achievable within a short period of time. A Principle will be considered partly implemented whenever significant shortcomings are found, and the authorities have not implemented one or more assessment criteria. A Principle will be considered not implemented whenever major and material shortcomings are found in adhering with the assessment criteria. A Principle will be considered not applicable whenever it does not apply given the structural and institutional conditions.

43. Regulator (Principles 1–5)—The FSA’s mandate should be set out more clearly in the law—current provisions are sometimes vague, and there is no clear constitution of the agency itself. The FSA should operate more independently and should be granted authority to license and withdraw licenses (authority it has only with respect to trustees, lawyers, and auditors), levy penalties and other sanctions against regulated entities without approval from government. The FSA should have the ability to make legally binding rules. The FSA issues a complete annual report available to the public upon request. Furthermore, an annual code of administrative practice is issued and available to the public. Additional transparencies should be introduced by setting up a website. This would assist the public in understanding its function and create a more accountable regulatory process.

44. Self-regulatory organizations (Principles 6–7)—The regulatory system in Liechtenstein incorporates the activities of industry associations. These resources are a complement to the stretched resources of the FSA. The FSA must be vigilant in maintaining resources and experience sufficient to benefit from the association’s work in the policy-making process but not be dominated by it. One industry association—the Trustees Association acts as a self-regulatory body since membership in the association, and compliance with its code of conduct is mandatory. The Trustee Association is unsupervised. The FSA should have a formal role in the association’s formulation of rules for asset management activities. The supervision of trustees is discussed in detail under market intermediaries (Principles 21–24).

45. Inspections, investigations, and enforcement (Principles 8–10)—The FSA has full inspection and investigations authority other than over trustees. The public prosecutor, responsible for enforcement, has sufficient authority over regulated entities. While the FSA has a licensing authority over trustees; it does not have inspection authority (although, these entities are subject to a DDU audit). Under the dualistic system, regular inspections of most regulated entities are carried out by third party auditors. These audits could be extended to trustees acting as asset managers. The FSA does not have sufficient resources to make credible use of the inspection system, however, and must be in a position to communicate specific instructions to the auditors and to properly analyze inspection results.

46. Information sharing and cooperation (Principles 11–13)—The FSA has the ability to share information with all domestic counterparts and does so in practice, particularly with the DDU. The Law on Banking grants the FSA the ability to share information with foreign regulators on banks and investment undertakings under certain conditions. There has been considerable debate regarding the scope of this ability—the FSA’s interpretation of the law was recently upheld by a court decision. On the strength of its support from the court, the FSA must now enhance its practice of sharing client information with foreign authorities. In the case of trustees, the FSA has no authority to share non-public information with foreign counterparts and is limited by its lack of ability to obtain information through inspections and lack of responsibility for on-going oversight.

47. The FSA is not a party to any information-sharing agreements with foreign counterparts. Although a lack of formal agreement is not necessarily an impediment to sharing information; it would create consistency and efficiency if such arrangements were in place since each request would not have to be evaluated individually. The FSA should consider such an arrangement with important jurisdictions, particularly with the Swiss authorities. The FSA should also consider appointing a designated person for the handling of all information requests, again to provide some consistency and efficiency.

48. Issuers (Principles 14–16)—The issuance of securities is subject to the Law on Prospectuses which implements the EU Prospectus Directive. Under the Law on Disclosure on Major Participation in Companies, those with 10 percent or greater of voting shares are required to disclose transactions. There are no other continuous disclosure requirements, corporate governance or take-over bid rules—however, an issuer must be listed on an exchange which would have such rules in place. There are very few issuers in Liechtenstein, and the six prospectuses that have been reviewed and approved during the past two years, all have been from the same issuer (mostly in the form of amendments). Accounting standards are a mixture of EU and Swiss accounting standards and, for banks, IAS standards. Auditors are held to EU standards.

49. Collective investment schemes (Principles 17–20)—A legislative framework governing collective investment funds (known as investment undertakings) is largely in place in Liechtenstein, which has implemented the EU UCITs directive. Investment undertakings are subject to detailed licensing requirements, are audited annually by third-party auditors with reports made to the FSA, and must publish disclosure documents in accordance with detailed rules. There is a need for conflicts-of-interest rules for collective investment schemes—these rules should, among other things, address related party transactions, borrowing and lending with affiliates, trading using a related party brokerage, employee conduct, and disclosure of conflicts of interest to clients. The FSA should not rely entirely on the Funds Association for development of these rules. Net-asset-valuation rules should be developed in more detail with a clearer definition of transferable security that imports an element of liquidity and detailed requirements for the valuation of illiquid securities.

50. Market intermediaries (Principles 21–24)—Market intermediaries in Liechtenstein are banks which offer brokerage and asset management services and trustees who may act as asset managers. Regulation of banks is discussed in detail under the Basel Core Principles assessment. Trustees acting as asset managers are largely unsupervised; although, they are subject to a licensing process and are inspected by the DDU. The extent of the asset management business carried on by trustees is unknown, and because they operate under a general license, there is no transparency to the public. The authorities should consider licensing these entities separately from other trustees and must implement periodic audits in order to monitor compliance with existing requirements. The need for more detailed rules (some of which should apply to trustees also) should be addressed in a global fashion with rules governing account documentation, representations made to clients, disclosure to clients (both risk and conflicts of interest), rules regarding related party transactions, and employee conduct. The new EU Directives on UCITS and market abuse will also necessitate work in this area.

Comments

51. The weaknesses that pervade the Principles assessment are mostly related to the low level of staffing and resources at the regulator—particularly for the supervision of banks. Immediate attention should be given to increased staffing in order to use the existing inspection system effectively and improve the FSA’s ability to actively develop policy. Staff time is currently devoted to licensing and implementation of EU Directives, leaving little time for supervision. Staff currently employed in supervision are highly qualified and diligent but are lacking in regulatory experience. Because the opportunities for training within Liechtenstein are limited, the authorities could consider working with outside authorities to provide additional training—either by employing experienced staff from other regulators on a short-term basis in Liechtenstein or by placing FSA staff with other regulators for short training periods.

52. The FSA should have its role in supervision set out more clearly in law, ideally in a single document. The planned restructuring of the regulator should address many of the issues related to independence, including lack of licensing authority, ability to levy fines or make legally enforceable rules represent some weakness in the system. Creation of a website and a more detailed annual report would improve transparency.

53. Trustees that act as asset managers are effectively investment advisors operating outside of securities regulatory rules (but they can only act through licensed banks, which are, however, subject to securities regulations). These asset managers should be licensed separately, subject to rules governing sales and business conduct and supervised through inspections.

54. While the authorities have worked very hard over the past few years to implement EU Directives and bring Liechtenstein law up to contemporary standards, some gaps remain, including an absence of rules addressing conflicts of interest for mutual funds and asset managers.

Recommended actions

Table 2.3

Recommended Plan of Actions to Improve Implementation of the IOSCO Objectives and Principles of Securities Regulation

Table 2.3

Recommended Plan of Actions to Improve Implementation of the IOSCO Objectives and Principles of Securities Regulation

Reference Principle	Recommended Action
Principles Concerning the Regulator (P1-5)	Increased staffing resources are urgently needed. Training of staff should be a priority, consider working with other jurisdictions. The FSA mandate should be clearer in law. The FSA should have authority to grant, refuse, and withdraw licenses for banks, investment undertakings, and asset managers. Criteria for selection and dismissal of the FSA head should be set out in a manner that is transparent and legally binding on the government. Greater transparency through a website should be introduced. The FSA should have the authority to make legally binding rules.
Principles for the Enforcement of Securities Regulation (P 8–10)	FSA should have the ability to withdraw licenses and levy fines. FSA should have authority to inspect and supervise trustees.
Principles for Cooperation in Regulation (P 11–13)	The FSA should adopt new policies and procedures to implement their authority to share client account information. FSA should enter into information sharing arrangements with key counterparts, specifically the Swiss.
Principles for Collective Investment Schemes (P 17–20)	FSA should develop more detailed net-asset-valuation rules. FSA should develop conflicts of interest rules for investment undertakings. FSA should consider more detailed rules for duties of custodians. FSA requires more resources/more experience for review of audits and prospectuses.
Principles for Market Intermediaries (P 21–24)	Asset managers organized as trustees should be subject to a separate licensing procedure, which sets terms of their ability to carry out asset management business and makes this transparent to the public. FSA should have licensing-, supervision-, and rule-making authority regarding asset managers. Asset managers should be subject to an annual FSA audit. FSA should develop more detailed rules regarding sales and business conduct of market intermediaries.

View Table

Table 2.3

Recommended Plan of Actions to Improve Implementation of the IOSCO Objectives and Principles of Securities Regulation

Reference Principle	Recommended Action
Principles Concerning the Regulator (P1-5)	Increased staffing resources are urgently needed. Training of staff should be a priority, consider working with other jurisdictions. The FSA mandate should be clearer in law. The FSA should have authority to grant, refuse, and withdraw licenses for banks, investment undertakings, and asset managers. Criteria for selection and dismissal of the FSA head should be set out in a manner that is transparent and legally binding on the government. Greater transparency through a website should be introduced. The FSA should have the authority to make legally binding rules.
Principles for the Enforcement of Securities Regulation (P 8–10)	FSA should have the ability to withdraw licenses and levy fines. FSA should have authority to inspect and supervise trustees.
Principles for Cooperation in Regulation (P 11–13)	The FSA should adopt new policies and procedures to implement their authority to share client account information. FSA should enter into information sharing arrangements with key counterparts, specifically the Swiss.
Principles for Collective Investment Schemes (P 17–20)	FSA should develop more detailed net-asset-valuation rules. FSA should develop conflicts of interest rules for investment undertakings. FSA should consider more detailed rules for duties of custodians. FSA requires more resources/more experience for review of audits and prospectuses.
Principles for Market Intermediaries (P 21–24)	Asset managers organized as trustees should be subject to a separate licensing procedure, which sets terms of their ability to carry out asset management business and makes this transparent to the public. FSA should have licensing-, supervision-, and rule-making authority regarding asset managers. Asset managers should be subject to an annual FSA audit. FSA should develop more detailed rules regarding sales and business conduct of market intermediaries.

Authorities’ response to the assessment

Financial Services Authority

55. The Authority appreciates the helpful suggestions made within the context of the assessment of Observance of the IOSCO Objectives and Principles. It will be the Authority’s aim to be responsive to the proposed recommendations as best as possible. Especially within the framework of the activities for the restructuring of financial supervision in the Principality of Liechtenstein it will comply with these suggestions. We want to point out particularly that the recommendation for a separate license for asset managers instead of the present general license as a trustee will be considered strongly.

56. We further want to refer to our statement in the Authority’s Response to the Assessment of the Basle Core Principles:

FSA’s human resources and organization

57. It has to be stressed that the FSA was in a transitional situation at the time of the assessment. Now the recruitment of two additional banking staff members has been assured to the FSA by governmental decision of December 3, 2002. The FSA has recently been in the process of recruiting two highly qualified auditors/financial analysts according to the job descriptions assigned by the government. One of these two vacancies was filled in June 2003. Furthermore, the organization of the Financial Services Authority has been streamlined, and the responsibility of each staff member has been defined as per attached organization chart and the respective job descriptions. In the meantime, a short- and long-term (permanent) training and education program has been installed to develop the potential of the staff in the direction of top professional qualification.

FSA’s mandate

58. The FSA’s mandate is clearly set out in the respective legal provisions (Art 35 BA, Art 53 IUG, Ordinances delegating responsibilities regarding Trustees and Lawyers to the FSA, Art 9 Law on Prospectuses, etc.), which guarantees a transparent and fully accountable regulatory process.

Information sharing

59. In its decision of May 7, 2003, the supreme administrative court reconfirmed in a ruling the decision of the government that banking secrecy provisions referred to in Article 36 banking act do not limit the FSA’s ability to share client account information with foreign counterparts.

60. The supreme administrative court confirmed the legal view of the lower instances whereupon information can be shared with foreign regulators while the information provided is only used within the scope of supervisory duties as described in the request of the foreign authority. Within the foreign authority, access to the information provided has only to be granted to persons who are subject to official secrecy provisions. The information has to be kept strictly confidential and may only be used in accordance with the agreed supervisory purpose. Any further disclosure of the information, whether to other national authorities or to other foreign authorities, is not allowed. In the case that according to the foreign legislation the information provided by the FSA has to be forwarded to other authorities; the regular mutual assistance procedure has to be duly complied with.

61. Information is shared by the FSA according to this decision of last resort. Nevertheless the government will evaluate whether it is advisable to amend Article 36 of the banking act accordingly.

Transparency measures

62. The FSA issues a complete annual report available to the public upon request. Furthermore an annual code of administrative practice is issued and available to the public.

63. Within the implementation of UCITS III (i.e., directives 2001/107/EC an 2001/108/EC) the FSA will apply for additional staff for the division of investment undertakings. As a result of this new legislation, investment undertakings will be committed to disclose information on suitability of funds for investors, initial and ongoing capital, proper risk-management, specific rules preventing conflict of interests, and there will be developed a Code of Conduct, which will be approved by the authority.

Information and methodology used for the assessment

66. This assessment of Liechtenstein’s compliance with the IAIS Core Principles was conducted using the Core Principles methodology report adopted by the IAIS in October 2000. The assessment was based on discussions with the supervisory authority and cross checking of different sources of information from the supervisory authority, as well as neighboring supervisory authorities in the field of financial services and the opinion of some of the supervised companies, and the review of applicable legislation, rules, policies, guidelines, and other documentation.

Institutional and macroprudential setting, overview

67. Liechtenstein insurance companies did not exist until 1995, as insurance services were previously provided by branches of Swiss companies. In 1995, Liechtenstein joined the EEA and implemented the third generation EU directives, which allowed Liechtenstein firms to market insurance products throughout the EEA under the provisions of freedom of services. In addition, based on a 1996 agreement, Liechtenstein companies are able to market insurance products in Switzerland.

68. Supervision of insurance activity in Liechtenstein is based on the Insurance Supervision Law of 1995, which formed the corner stone of the insurance regulatory system following Liechtenstein’s membership in the EEA.⁸ With a legal framework in place, the authorities established an institutional framework for insurance regulation. New companies were licensed starting in 1996; at end-2002, there were 12 life insurance companies, 4 nonlife companies and 5 reinsurance companies.

69. Although there is a local market for life insurance products, to a greater extent Liechtenstein companies market insurance products to the broader European Union and to Switzerland.

70. Reinsurance captive companies have grown for different reasons that include stability, geographic advantages, and the tax and legal framework for captives. Five reinsurers are licensed in Liechtenstein, with their basic activities comprised of captive reinsurance for foreign operators.

71. The Liechtenstein market consists of two basic parts. The first part is the local market, which is dominated by the branches of Swiss insurance companies with a premium income of about 197 million euros at end-2001. The second part is the life and reinsurance market, which have incorporated in Liechtenstein and carry out activities in the European Union, Switzerland, and other non EU countries. It amounted to as much as 319 million euros in 2001. As a consequence of Liechtenstein’s EEA membership and its arrangement with Switzerland, the ISA is charged with the protection of predominantly non Liechtenstein residents, whereas the Swiss Supervisory Authority has responsibility for the protection of Liechtenstein policyholders.

72. The assets held by the Liechtenstein companies amount to CHF 1.1 billion in the field of direct insurance (nearly all of it is made of assets-matching life-technical reserves) and CHF 0.78 billion for the reinsurance business, basically assets matching captives technical reserves.

73. As for the life business, it is increasingly made of unit linked policies (and to a certain extent, capital redemption operations) that amount to a large part of new business and approximately 65 percent of the total technical reserves of life insurance companies. From a systemic risk point of view, the asset risk in these products is borne by the policyholder, which should make the situation of the Liechtenstein companies less fragile in the case of a long lasting depression of asset values. Yet, some rules dealing with surrender values might make the situation slightly more difficult than expected.

74. As for captive insurance activity, a similar situation exists, whereby the substantial majority of the risk is borne by the captive parent companies, and the risk in the Liechtenstein market is very limited.

75. For the time being, little global market data is available. In the field of solvency, there is no aggregate data, which makes it difficult to have an accurate view of the market all the more, so as there is no annual report from the Insurance Supervisory Authority or the Insurance Association.

76. While some strengthening of supervision function over insurance firms is appropriate, the risks in the market appear small due to the lower risk profile of products sold. Moreover, a number of new legislative changes and improvements to the supervision process are to be implemented in 2003/2004. Some have already been adopted by the parliament and will come into force in 2003 (exchange of information with other supervisory authorities); others are to be implemented shortly (new financial statement files to be sent to the supervisory authority). The changes will allow for better monitoring of insurance-market risks, asset-liability management, and exchange of information, which are welcome changes given the expanding market.

77. Planning is underway to establish an integrated financial services supervisory authority that would bring together the oversight of banking, securities, and insurance activities. The creation of the new agency is now planned for early 2005, with legislative changes to be completed in mid 2004. This would be a major change that should create tighter links between the insurance supervisory authority and its banking and funds management counterparts.

Conditions for effective supervision

78. The legislative framework for insurance supervision has been created over the last five to eight years and follows EU requirements consistent with Liechtenstein’s status within the EEA. The legal framework is influenced by the EU directives, and also the Swiss legal system and, consequently, has much in common with the legal systems of other continental European countries. A general difference for Liechtenstein’s system relative to other continental European countries is that legislation permits the presence of Trusts.

79. Since the creation of a Liechtenstein insurance market in 1995, insurance has been supervised by the Insurance Supervisory Authority, which is a department of the office of national economy. The ISA relies upon the activity of six trained people to achieve its tasks.

80. The Due Diligence Unit oversees anti-money laundering requirements in the insurance sector. The supervision of the insurance industry will significantly evolve in 2003; the ISA has the intention to carry out more frequent onsite inspections once the licensing process of the Liechtenstein incorporated companies has been finished.

81. Additionally, and due to the evolution of the EU as well as the enforcement of new legislation in Liechtenstein and the growing maturity of the market, a significant part of the existing legislation of Liechtenstein will be modified in the months ahead. After the setting up of the legal foundations of the market, the supervisory authority has considered and started improving the regular on-going supervision scheme. A new set of reforms is to change drastically the practical features of the supervision system. It should enhance the existing system and give a stronger hand to the insurance supervisory authority to have a clear control over the sector.