On 18 January 2018, the Parliament of Mongolia approved comprehensive amendments (“Amendments”) to the Banking Law of Mongolia of 28 January 2010 (hereafter the “Amended Banking Law”). The Amendments will take effect from 1 April 2018. Commercial banks will be given a grace period until 1 January 2019 to comply with provisions of the Amended Banking Law.
The key features of the Amendments are as follows:
introduction of the concept of “beneficial owner” (or “ultimate owner” in literal translation) and disclosure requirements for the beneficial owners of Mongolian commercial banks;
introduction of new restrictions on banking activities, including a prohibition on establishing subsidiaries or affiliates;
clarifications on corporate governance rules; and
a comprehensive set of measures for preventing bank failures and solutions to rescue troubled banks.
Following the entry into force of the Amendments, the Bank of Mongolia, which is the country’s central bank, will have a wider range of regulatory powers over banks, especially in respect of solutions for the rescue of troubled banks.
The following sets out the key features in more detail:
1. Disclosure of beneficial owners
The Amendments introduce the concept of beneficial ownership and impose an obligation on banks to disclose the identity of their beneficial owners to the Bank of Mongolia. The Amended Banking Law defines a beneficial owner as an owner entity that (i) directs and manages the operations of the relevant bank, (ii) implements such powers through a representative, or (iii) indirectly holds shares in the bank through one or more related entities with rights to benefit from the shares or operations of the bank.
A commercial bank must notify the Bank of Mongolia when there is any change in the beneficial owner of the relevant bank.
2. Restrictions on bank activities
From 1 April 2018, commercial banks can no longer establish subsidiaries or affiliate companies. Previously, banks were able to establish subsidiaries or affiliate companies to engage in certain financial service activities. Banks are now obliged to conduct their operations in compliance with these restrictions before 1 January 2019. Banks can no longer engage in activities of investment transactions and services executed on behalf of customers. Further, the Amendments introduce other restrictions on related party transactions by banks and clarify consequences for breaches of said restrictions.
3. Corporate governance rules
The Amendments provide revised provisions for criteria for a bank’s governing persons such as its board members and the executive director. The executive director of a bank is prohibited to be a member of bank’s board committees in charge of audits, remuneration, or nomination. Further, the Amendments introduce criteria for bank’s influential shareholders and expand the definition of influential shareholders. Under the Amended Banking Law, an influential shareholder is defined as (i) the entity that owns 5 or more percent of the bank shares on its own and/or jointly with a related party or (ii) the shareholder who is able to influence the bank’s policies and decisions or bank’s management.
4. Bank resolution and restructuring
The Amendments introduce a comprehensive set of measures that ensures (i) preparation and prevention, (ii) early intervention, (iii) resolution of a failed bank; and (iv) financial viability in relation to failed banks, as discussed below.
(a) Preparation and prevention: stabilization and restructuring plans
Under the Amended Banking Law, banks will be required to prepare and submit to the Bank of Mongolia stabilization plans (known as “living wills”) that set out risk assessments by taking into account their activities (including other entities in the bank holding group) and economic conditions and specify response plans aimed at maintaining the solvency and liquidity of a relevant bank. A stabilization plan must be approved by the bank’s board of directors. If the Bank of Mongolia does not find the stabilization plan to be in compliance with its requirements or feasible to implement, a bank may be required to:
(a) reduce its general risk levels;
(b) take measures to improve the liquidity of the bank and change its business plans or strategy;
(c) change the organizational structure or the management of the bank; or
(d) take such other measures that the Bank of Mongolia may consider appropriate.
Further, the Bank of Mongolia is also tasked with preparing a restructuring plan for banks in distress.
The Bank of Mongolia is expected to issue detailed regulations on deadlines and requirements for the submission of such stabilization plans by banks and preparing restructuring plans.
(b) Early intervention: preventive measures
Under the Amended Banking Law, the Bank of Mongolia will have the power to take a wide range of measures if a bank breaches or is likely to breach laws and regulations on banking or decisions issued by the Bank of Mongolia, fails to comply with conditions attached to its banking license, or carries out unreliable, abnormal activities. These measures include, among others, a warning, the imposition of a demand, the issuance of instructions, implementation of stabilization plans, and the suspension or termination of authority of board of directors or executive management. Such preventive measures are aimed at intervening in a bank’s operations in a timely manner if there is a sign of distress or non-compliance.
(c) Bank resolution
The Amendments revise provisions related to restructuring of failed banks.
Under the Amended Banking Law, the following tools may be utilized to restructure a failed bank:
(a) transfer of assets and liabilities;
(b) establishment of a special purpose bank (i.e. bridge bank);
(c) change the structure and size of the share capital; and
(d) conversion of debt into equity.
A special representative appointed by the Bank of Mongolia will implement the bank restructuring tools. A restructuring tool should be implemented for a period of 90 days (renewable twice for the same period). The Amended Banking Law provides for detailed regulations on the above tools.
(d) Financing of bank resolution: Stabilization Fund
The Amended Banking Law provides that the Bank of Mongolia establishes and manages the Stabilization Fund for the purpose of improving financial conditions of a bank, stabilizing its operations, and implementing restructuring tools. Funds of the Stablization Fund consist of fees payable by commercial banks and will be equal to 1.3 percent of the total deposits of the banking system as a whole. The Bank of Mongolia will determine the amount of fees payable and deadlines for payment. Provisions on the Stabilization Fund will come into force from 1 January 2019. The Stabilization Fund could enable the implementation of restructuring tools without having to resort to state funds.
(e) Liquidation of a bank
The Bank of Mongolia may decide to liquidate a failed bank and appoint a receiver based on the following grounds:
(a) A banking license is terminated due to the measures taken under the Amended Banking Law; or
(b) The Bank of Mongolia determines that it is not feasible to take any of the restructuring tools set out in the Banking Law.
The Bank of Mongolia has the sole authority to initiate insolvency or liquidation proceedings for banks. A receiver appointed by the Bank of Mongolia has a range of powers in relation to bank’s assets, contracts, and operations. The Amended Banking Law provides detailed regulations on the liquidation procedure, the order of payments to be made from a failed bank’s assets, and criteria for voiding certain transactions entered into by a failed bank.
(f) Remedies for shareholders
Those affected by administrative decisions taken by the Bank of Mongolia for the purpose of rescuing troubled banks or initiating liquidation proceedings may file claims to a competent court. However, the submission of claims will not serve grounds for suspending actions taken by the Bank of Mongolia or its representative. Further, remedies for wrongful decisions are limited to compensation for actual damages suffered and do not affect any decisions or actions taken by the Bank of Mongolia or its representative.
The Amendments are expected to further strengthen Mongolia’s banking sector and its resilience. Revised provisions on a bank’s shareholding structure and disclosure requirements as well as corporate governance related matters are also expected to bring more transparency and accountability. The Amended Banking Law introduces a comprehensive set of regulations and measures aimed at preventing bank failures and resolving failed banks in a timely manner. The Amendments follow global trends in relation to bank resolution and restructuring. It is yet to be seen how effectively these new regulations will be implemented in practice.
Solongoo Bayarsaikhan, Partner
Avinex Partners LLP
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