I. Introduction

1.1.This Supervisory Policy Statement (SPS) expands on the approach of the Astana Financial Services Authority (AFSA) to the supervision of firms proposing to operate in the AIFC through a branch office, whether it is a bank, an insurer, or an investment firm.

1.2.This SPS sets out the AFSA’s expectations for receiving information concerning the risks in a firm’s wider group and the level of co-operation available from other supervisory authorities concerned with the firm or its wider group. This is necessary for the AFSA to be satisfied that the international firm or non-AIFC incorporated entity firm is meeting threshold conditions, particularly the threshold condition concerning the effective supervision of the firm. This SPS also sets out expectations of such international firms in meeting the threshold condition on the prudent conduct of business, including their systems and controls and risk management. While this SPS draws out and elaborates on matters discussed in other SPS that are particularly relevant for international or non-AIFC incorporated firms, it is to be read with, and does not replace, such international firms’ obligations under applicable AIFC legislation, the AFSA’s rules, and the expectations set out in its policy publications.

1.3.The AFSA may also follow the approach of this SPS in making decisions on recognition of overseas brokers (RNAMs), exchanges (RNAMIs), Equivalent Recognised Exchanges (for issuer prospectus purposes), Foreign Fund Managers (for managing Domestic Funds domiciled in the AIFC), and any other entity for which AIFC rules require some form of recognition.

II. General Expectations for Effective Branch Supervision

2.1.The AFSA has general expectations that underpin its ability to effectively supervise firms operating through branch offices in the AIFC, which are part of international groups or headquartered overseas. Subject to these, the AFSA’s expectations then vary according to the nature, size and scale of a firm’s activities. This, coupled with the degree of information available, the effectiveness of co-operation with the home state supervisor, and the controls that are in place, influences the degree of separation or integration that is acceptable to the AFSA as an operational outcome.

2.2.For firms that are part of international groups carrying on (or proposing to carry on) business in the AIFC, the AFSA first assesses the general factors that must be in place for effective supervision to be possible, and then assesses the factors specific to each international firm and any group of which it is a member.

2.3.The general factors the AFSA considers are:

(a)  whether the whole firm meets the AFSA’s threshold conditions;

(b)  whether the home jurisdiction’s prudential supervision regime is sufficiently equivalent to the AIFC regime; and

(c)  whether there is sufficient supervisory co-operation with the home state supervisor.

AFSA’s general considerations for branch authorisation and supervision are summarised in Figure 1.

Threshold Conditions

2.4.For a branch, the threshold conditions - which are the minimum conditions for authorisation - apply to the international firm as a whole and not just the AIFC branch, since a branch office is not a separate legal entity in its own right but an extension of a firm incorporated outside of the AIFC. In broad terms, the AFSA requires firms to have an appropriate amount and quality of liquidity, to have appropriate resources to monitor, measure, and manage the risks to which it is or may be exposed, to be fit and proper, to conduct their business prudently and to be capable of being effectively supervised by the AFSA.

2.5.In determining whether threshold conditions are met, the AFSA has scope, at its own discretion, to rely on a firm’s home state supervisor where it can satisfy itself that there are reasonable grounds for such reliance. The AFSA will also take into account the opinion of the home state supervisor on a firm’s compliance with the AFSA’s threshold conditions when forming its opinion.

Equivalence

2.6.The AFSA assesses the degree to which an entity’s home jurisdiction’s prudential supervision regime is equivalent, or broadly or sufficiently equivalent, taking into account the following non-exhaustive characteristics of the home state supervisor in terms of its:

-prudential framework and its compliance with international standards;

-powers;

-     approach to the supervision of individual firms and their consolidated group, where relevant;

-     information sharing; and

-     confidentiality.

2.7.The AFSA will make an overall assessment of whether the home state supervisor is sufficiently equivalent, and whether its regime is acceptably consistent with the AFSA’s regulatory framework in delivering appropriate outcomes that meet the AFSA’s objectives. The AFSA assesses these factors in their totality and will also consider the extent and quality of co-operation with the home state supervisor. The AFSA will also take into account the supervision of individual firms (including branches) and their consolidated group, as well as consider the nature and scale of a firm’s activities in the AIFC.

2.8.Equivalence assessments are reviewed periodically. The frequency of review is determined by the number, size, and systemic importance of the firms from a particular jurisdiction or home state. Assessments of home state supervisors will focus on the degree to which the home state supervisor’s regime is compliant with, in the case of banks, the Basel principles in terms of supervisory approach, tools, and practices. Similarly, international standards set by bodies such as IOSCO and the IAIS will inform the AFSA’s decision-making in relation to securities firms and insurers respectively. In performing such assessments, the AFSA will base its analysis on these international standards, including but not limited to, for example, the Basel capital and group supervision standards, the Basel Committee’s Regulatory Consistency Assessment Programme reviews, the International Monetary Fund’s Financial Sector Assessment Programme reviews or updates and, where appropriate, supplement such information by other means and resources as necessary. The AFSA will also take account of its own experiences in its interactions with home state supervisors.

2.9.Where a home state supervisor is considered by the AFSA to be sufficiently equivalent but notes that there may be some weaknesses in the way a firm operates, the AFSA may consider imposing conditions or limitations to the nature and scale of any activities performed in the AIFC. It will also not be uncommon for the AFSA to take the view that another jurisdiction does not deliver an equivalent outcome and, accordingly, that a branch office from that jurisdiction may not establish itself in the AIFC. However, in such cases, the typical outcome of this is that a subsidiary will be formed within the AIFC instead through which regulated business will be conducted.

Supervisory Cooperation

2.10.In considering whether there is sufficient supervisory co-operation with the lead home state supervisor and any other relevant supervisors, supervisory co-operation is usually underpinned by the AFSA entering a Memorandum of Understanding (“MoU”) with the relevant home state supervisory authority (or authorities). These establish a formal basis for co-operation, including the exchange of information and investigative assistance, the facilitation of timely and effective supervision, and for the identification of risks or emerging risks to the financial system, including any emergency situations.

2.11.In developing this co-operation framework, the AFSA has taken account of, in relation to banks for example, publications by the Bank for International Settlements such as “High-level principles for the cross-border implementation of the New Accord”, “Principles for effective supervisory colleges” and “Principle 13: Home-host relationships” within the “Core Principles for Effective Banking Supervision”.

2.12.The AFSA considers not just whether such arrangements have been agreed, but how well in practice their aims are achieved. The high-level outcomes the AFSA expects to see include, for example, transparency over the financial and operational resilience of a firm and its group (if any), the group’s capacity to support the international firm; appropriate equivalence of home state supervisory practices, and transparency over when and how the home state regulator might intervene to remedy cases of non-compliance with prudential standards along with any triggers for pre-emptive action that might be taken. To achieve this, the AFSA expects there to be regular structured engagement with the home state supervisor, either through regulatory college or regulatory bilateral meetings (or both), as appropriate, which should facilitate a technical discussion of the material risks and risk management practices at the firm.

2.13.The degree of co-operation with the home state supervisor that the AFSA expects is also likely to be commensurate with the size of the firm, the degree of cross-border integration of its business, and the systemic importance of any branch offices’ business within or from the AIFC.

Figure 1: AFSA considerations for branch authorisation and supervision

Please, see this section in the pdf

Introduction

1.1.     This Policy Statement is designed to clarify the approach of the Astana Financial Services Authority (AFSA) to a start-up entity applying for the authorisation to become a Bank, as defined in Rule 1.5 of the AIFC Banking Business Prudential Rules (BBR), in the AIFC.

1.2.     This approach does not apply to a start-up entity applying for the authorisation to become an Islamic Bank as defined in Rule 1.5 of the AIFC Islamic Banking Business Prudential Rules.

What are “start-up” entities?

2.1.     The AFSA considers a start-up entity to be either:

1. (a)     a newly formed business entity that is not owned by, or is not a branch of, an existing regulated financial institution; or
2. (b)     an entity (whether newly formed or not) that is part of a Group that does not contain any entities within the Group that are subject to financial services regulation broadly equivalent to the AFSA’s regulatory regime.

The AFSA’s approach to start-up Banks

3.1.     Generally, the AFSA takes a risk-based approach in considering any authorisation applications to carry on any proposed Regulated or Market Activities by an applicant. However, the AFSA considers that the nature of the risks posed by start-up Banks are unique and broader compared to related entities of pre-existing banks, for example a branch of a bank operating in multiple jurisdictions. The AFSA considers that start-up Banks present additional potential risks including, but not limited to, the lack of an adequate or established level of systems and controls, the absence of a previous regulatory history or track-record from which the AFSA may take some assurance, and the ability of the shareholders to maintain the financial soundness to comply with regulatory requirements and be a source of financial support.

3.2.     Considering the risks associated with the establishment of start-up Banks listed above, the AFSA considers that generally an applicant for authorisation to become a Bank must be:

1. (a)       a branch or a Subsidiary of an existing bank; or
2. (b)       a newly incorporated entity that is part of a Group that contains a regulated bank or similar comparable financial institution.

3.3.     An entity that does not fall under 3.2 (a) or (b) above shall not generally be considered by the AFSA to be suitable for authorisation as a Bank, and only in the most justifiably exceptional, or strategically important cases will the AFSA consider any variations to this policy.   

3.4.     In considering relevant authorisation applications, the AFSA will take into account factors including the applicant’s or their Group’s financial position, systems and controls and whether the bank is managed by Persons who have the necessary experience, expertise and knowledge to conduct such activities and a proven track-record in doing so.

3.5.     Any applicant seeking authorisation in the AIFC as a Bank should consider the implications of the absence of a central bank in the AIFC as either a lender of last resort or the issuer of any currency. For example, the AFSA would expect such applicant to address how this fact would affect its:

1. (a)     business plan, including any impact on current or prospective credit ratings;
2. (b)     adequacy of the capital and capital management plan;
3. (c)     plans for liquidity management; and
4. (d)     ability to deal with stressed situations, including a resolution plan.

3.6.     Even though the broad categories of risks for all applicants will be identical and that the AFSA will consider each application on its own merits, the nature of risks within a bank may be amplified for the above reasons. In this regard, the broad categories of risk and some of the unique elements of those risk categories that apply to new bank operations include financial risk, governance risk, compliance risk and business/operational risk.

Financial Risk

3.7.     Any applicant seeking authorisation in the AIFC as a Bank is required to demonstrate sufficient and available financial resources to be able to meet the relevant prudential requirements specified in the BBR, on an on-going basis. This includes holding enough capital resources to cover expenses even if expected revenues take time to materialise and ensuring that all liabilities may be met as and when they fall due and by a suitable margin above this on a constant basis. In this context, new bank operations can encounter greater financial risks as they seek to establish and grow in comparison to established bank operations.

3.8.     In addition to the risk of financial soundness of a bank, detailed scrutiny will be undertaken where the source of funds and shareholders’ wealth is concentrated with a small number of individuals who will ultimately be the source of its capital funding.

Governance Risk

3.9.     Any applicant seeking authorisation in the AIFC as a Bank must demonstrate robust governance arrangements together with the fitness and propriety of all Controllers, Directors, and senior management. Where the day-to-day management in smaller entities may lie with one or two dominant individuals who may also be amongst the shareholders of the applicant, the AFSA would expect the key business and Controlled Functions (i.e. Senior Executive Officer, Finance Officer, Compliance Officer, and any other control functions, such as internal audit) to be able to apply appropriate oversight arrangements which reflect the size and complexity of the business and are sufficiently robust and independent in their decision-making. An applicant bank must also ensure that there are adequate business continuity measures, including the mitigation of key-person risk within the entity.

Business/Operational Risk

3.10.   As part of any application, a Regulatory Business Plan should describe in detail the business proposition, containing information on how the business will be conducted, including the financial projections, which are drafted considering the business-specific risks of new bank operations.

3.11.   All applicants are required to establish appropriate systems and controls to demonstrate that the affairs of the applicant are managed and controlled effectively. The nature of the systems and controls may depend on the nature, size and complexity of the business. A proposed new bank operation may need to consider which additional systems and controls may be appropriate in the initial period of its operation in the AIFC, such as increased risk or compliance monitoring appropriate to the jurisdictions of clients it will be doing business with. 

Compliance Risk

3.12.   It is expected that new bank operations in the AIFC will be able to establish a strong compliance culture that is fully embedded within the applicant, and which demonstrates a high standard of compliance and corporate governance that is expected to already exist within the bank (if a branch) or its Group (if part of a banking group). The individuals fulfilling the Compliance Officer and MLRO roles will also be expected to demonstrate to the AFSA their competence to perform the proposed roles and have adequate knowledge of the relevant sections of the AIFC Acts and, in the case of the MLRO, the wider anti-money laundering laws.

In particular, whilst existing financial services groups may have existing AML/CFT and other compliance policies, procedures, systems and controls, all applicants must have sufficient regard to the requirements of the AIFC and Kazakhstan and apply local measures that take these into account.

3.13.   The AFSA expects that relevant applicants will in their applications comprehensively address and detail how the key risks and other factors set out in this document will be identified, monitored, and controlled. Such information may significantly assist the AFSA in reviewing applications by entities wishing to establish operations as Banks, either as branch offices or subsidiaries within a banking or financial services Group.