by Antonio Jose Felix Pontes, Member of the Coucil of AMCM of Macao

The local financial legislation is already adapted to the more modern standards with the orientation prevailing in the international community. In fact, the current legal framework incorporates the best practices issued by the Basle Committee and also the conclusions derived from the discussions held within other organised groups of supervisors, namely in the Seanza, and the lessons learned from the experiences of similar authorities.

The said legislation was approved by the Decree-Law 32/93/M, of 5^th July 1993, from which we can highlight the provisions relating to the capital adequacy ratio, the control of qualified shareholding and of the management, the co-operation with supervisory authorities of other countries and territories and the definition of new limits of risk exposure. The new concept of consolidated supervision was also adopted.

In particular, the changes incorporated relate to the introduction of the model of universal bank, under the terms of the 2^nd directive of the EEC, the increase of the minimum capital for incorporating a bank in Macao to one hundred million patacas (12.5 million US$), the abolition of the capital requirements for branches of overseas financial institutions and the compulsory disclosure of details in respect of shareholders with qualified participation in the license application.

Additionally, more stringent requirements have been introduced in terms of internal control, powers of intervention in credit institutions in case of serious crisis, criminalization of the acceptance of deposits by unauthorised entities and, in line with the recommendations on the prevention and fight against money laundering, obligatory identification of clients.

The Financial System Act of Macao ("FSAM") defines the legal framework relating to the financial activity in Macao, with the exclusion of the activity conducted by the Government of Macao, the activity of insurance companies and the management of private pension funds, the activity of pawnbrokers, and the financial activity within the territory of Macao conducted by international organizations of which Macao is a member or with whom Macao is otherwise associated.

Only financial institutions that have been constituted and authorized under the FSAM or special legislation may carry on the activities expressly established in the respective law.

A financial institution is defined as an undertaking whose principal activity is to grant credit facilities, to acquire holdings, to engage in investment activities or to act as intermediary in the money, financial or foreign exchange markets. As such, the main financial institutions are credit institutions and financial intermediaries.

According with FSAM, banks, the Post Office Savings Department, financial leasing companies and other companies whose business is to receive deposits or other repayable funds from the public and to grant credit on its own account and risk are considered credit institutions.

Banks are authorised to carry out a wide range of activities, such as accepting deposits and other repayable funds from the public, lending, securing guarantees and other commitments, financial leasing and factoring, money transmission services, issuing and administering means of payment, trading on their own account or for account of customers in money, financial and foreign exchange markets instruments, financial futures and options, operating in the inter-bank market, safe custody services, and sale of insurance contracts.

However, certain operations may be temporarily suspended in relation to a specific institution or be subject to prior authorisation by AMCM which shall take into account the existence of sufficient own funds and proof of adequate experience and technical ability of the relevant institution.

Under FSAM, credit institutions can be authorised as:

A locally incorporated institution, including a subsidiary formed by a credit institution incorporated overseas;

A branch with its head office overseas; and

A representative office.

The latter only represents a credit institution and, under its strict dependence, looks after its interests and reports on any operations in which the institution intends to participate.

Credit institutions with the head office in Macao shall be constituted under the form of a joint-stock company with limited liability and the respective shares shall be nominative or registered to the bearer. The minimum paid-up share capital is one hundred million patacas, in the case of a bank, or the amount set for the remaining credit institutions by special legal provisions or as stipulated in the respective authorisation.

A credit institution incorporated overseas can be authorised to operate in Macao through a branch or a representative office. In the first case, the credit institution should maintain at all times in the Territory, in certain categories of assets, an amount equal to at least 50% of the minimum capital required for constituting institutions of the same type. However, in relation to the opening of a representative office, no financial commitment is necessary.

Credit institutions shall maintain well-organised accounting records, a sound administrative structure and an adequate internal control system.

They are required to publish, on a quarterly basis, their trial balances in the Official Gazette. Annual accounts, on the other hand, are subject to audit by independent auditing firms approved in advance by AMCM, and by the 31^st of May of each year it is necessary to publish in the Official Gazette and in two local newspapers, one in the Portuguese language and the other in the Chinese language, the balance sheet, the profit and loss accounts, a list of the shareholders with qualified shareholding, the report from the supervisory board, and other information required by law.

Authorised credit institutions should comply with various requirements set out in FSAM, such as:

The amount of own funds cannot fall below the respective minimum share capital established in FSAM or in the respective regulations;

Institutions incorporated in Macao are required to transfer at least 20% of their net annual profits to a legal reserve account until the amount of the fund equals one half of the share capital, and thereafter at least 10% of such profits until the amount of the said fund is equal to the share capital;

Maintaining a minimum amount of cash in hand and meeting the minimum liquidity requirements and general or specific provisions, according to the notices of AMCM, published in the Official Gazette;

Maintaining the solvency ratios;

Not incurring an exposure to any person, individual or corporate entity, which holds, directly or indirectly, a qualified shareholding in its capital, or to companies in which this person has direct or indirect control, which at any time in the aggregate exceeds 20% of its own funds; the aggregate exposure relating to all qualified shareholders and companies that they control cannot exceed at any time 40% of the credit institution’s own funds;

Not incurring any exposure: (a) against the security of its own shares; (b) to the members of the board of directors and their relatives or companies that such persons control or to whose board of directors or supervisory board they belong, of an aggregate amount exceeding 10% of own funds, subject to a maximum limit of 1% of the credit institution’s own funds in relation to each of those entities; and (c) to each employee, for an amount which exceeds his or her total net annual income;

Not having a shareholding in another company which exceeds, either directly or indirectly, 15% of its own funds, with the aggregate amount of such holdings limited to a maximum of 60% of the credit institution’s own funds;

Not having, directly or indirectly, a holding of more than 25% of the voting rights attributed by the share capital of the relevant company; and

The net aggregate value of the real estate, financial holding and other tangible and intangible assets of a credit institution shall not exceed the value of its own funds.

Where a credit institution is deemed to be functioning irregularly, in particular with regard to liquidity or solvency or the normal running of the financial, money and foreign exchange markets, certain emergency measures may be adopted, such as carrying out investigations to clarify the activity of the credit institution, temporary restrictions on its activity, appointment of advisers, suspension of one or more of the directors from their office as a preventive measure, granting of adequate monetary or financial support, exemption from fulfilling certain obligations, revocation or suspension of the licence, implementation of the intervention status and commencement of extra-judicial winding-up procedures or requesting the Attorney General to file a petition with the competent court to declare the bankruptcy of the credit institution.

Financial intermediaries are individuals or corporate entities that are authorised solely to buy and sell, on behalf of third parties, in a habitual form and with a view to profit, securities or other negotiable instruments transacted in the money, financial or foreign exchange markets, or to merely accept investors’ orders relating to the disposal of these instruments.

The remaining financial institutions may only carry out the operations allowed by the legislation governing the respective activity.

Financial intermediaries and other financial institutions shall not be incorporated in Macao with a share capital of less than the minimum specified by special law or in the executive order granting the authorisation.

The majority of the provisions relating to credit institutions apply to the intermediaries and other financial institutions.

Financial institutions committing infringements of the provisions of the FSAM shall be subject to sanctions, such as:

Fine, from ten thousand patacas up to five million patacas;

Suspension of the voting rights of any shareholder for a period of one to five years;

Prohibition from holding any board position or carrying out management or directorship duties in any institution under AMCM’s supervision for a period of six months to five years.

The unauthorised acceptance of deposits or other repayable funds shall be subject to imprisonment for a term of up to two years.

The insurance activity is regulated by the Decree-Law 27/97/M of 30^th June 1997, which replaced the earlier legislation, Decree-Law 6/89/M of 20^th February 1989.

The main reasons for the revision in 1997 of the legislation regulating the local insurance activity can be attributed to:

The rapid expansion recorded by the insurance sector since 1989, especially the huge upsurge in the underwriting of larger and more complex risks;

The legislative changes introduced by other countries and territories, including their experiences in implementing such changes, with necessary adaptation to the dimension and characteristics of the local market;

The revision of the legal framework of the local financial system, in line with the directives of the Basle Committee; and

As for the sources of the new Macao Insurance Ordinance, it should be mentioned that the former legislation regulating the insurance activity, the Portuguese insurance law, the Hong Kong regulations relating to solvency margin and the schedule of classes of insurance and the new legal framework of the local financial system have played a vital role.

In general the actual legislation governing the insurance sector aims to reinforce prudential supervision and to render appropriate the principal operators for the emergent needs of the market. Moreover, the requirement of that law also widens the financial capacity for the underwriting of risks, thereby protecting the legitimate interests of the policyholders and creating conditions conducive for the continued modernization of the insurance sector, its development and its efficacy.

As a matter of fact, in terms of prudential supervision, the law gives due regard to qualified shareholding, fitness of shareholders with such participation and of the members of the governing bodies, as well as the professional experience of managers and the supervision of financial holdings on a consolidated basis.

In relation to the new solutions adopted, it is necessary to highlight the regulations on incorporation and establishment of reinsurance companies in the Territory, the rules on preservation and microfilming of documentation and the setting up of suboffices and representative offices with the scope of activity well defined.

The insurance companies in Macao are prohibited to transact both life and non-life concurrently. The following table shows the classes of insurance that insurers are allowed to transact in Macao:

Life insurance companies Non-life insurance companies

-Life and annuity -Accident

-Marriage and birth -Sickness (short-term insurance)

-Linked long term -Land vehicles

-Sickness (long term insurance -Railway rolling stock

or short term insurance) -Aircraft

-Tontines -Ships

-Capital redemption -Goods in transit

-Pension fund management -Fire and natural forces

-Damages to property

-Motor vehicle liability

-Aircraft liability

-Liability for ships

-General liability

-Credit (commercial risks)

-Suretyship

-Miscellaneous (financial loss)

-Legal expenses

Only licensed insurance companies or reinsurers are permitted to operate in Macao.

However, insurance companies authorised to carry on insurance business in the Territory may freely accept reinsurance contracts in the classes of insurance so authorised and also reinsure their contracts with entities authorised for such purposes, even if the said entities have not been formed or established in Macao.

Under the Macao Insurance Ordinance, insurance companies can be authorised as:

A locally incorporated company;

A branch with head office overseas; and

A representative office.

While a locally incorporated company or a branch of a foreign insurance company can conduct insurance business in Macao, a representative office of a foreign insurance company, on the other hand, is prohibited from transacting insurance business.

To enter the local insurance market, the applicant will have to meet the following capital and establishment fund requirements:

For an insurer incorporated in Macao, the required capital is 30 million patacas (3.75 million US$) to transact life insurance and 15 million patacas (1.875 million US$) to transact non-life insurance;

For a reinsurer incorporated in Macao, the required capital is 150 million patacas (18.75 million US$) and 100 million patacas (12.5 million US$) to transact non-life insurance;

For a foreign insurer to establish a branch in Macao the required establishment fund is 7.5 million patacas (0.9375 million US$) to transact life business and 5 million patacas (0.625 million US$) to transact non-life business. In addition, the share capital of the head office of such insurer should not be less than the minimum capital required for a domestic insurer, life or non-life, as the case may be;

There is no establishment fund requirement for a representative office of a foreign insurer or reinsurer. However, the share capital of the respective head office should not be less than the required capital for domestic insurer or reinsurer, as the case may be.

In addition to the share capital or establishment fund, insurers and reinsurers have to meet the following requirements to obtain the necessary license:

Legal requirements, i.e. in particular, conformity of the form of business organization adopted by the company, filing of bylaws and general terms and conditions of policies, insurance specialization, etc.;

Accounting requirements, i.e. filing of prior years accounts, business plan and budget for the first three years of activity and indication of financial resources;

Technical requirements, i.e. filing of technical bases of tariff and details of reinsurance programmes;

Managerial requirements, i.e. demonstration that officers are fit and proper and that the shareholders are of good repute.

Once authorised, insurance and reinsurance companies have to comply with various requirements of the Ordinance, such as:

Submission of quarterly and yearly accounts, namely trial balance, profit and loss accounts, balance sheet and other statistical information. The annual accounts are subject to external audit by auditing firms and insurance and reinsurance companies are obliged to publish in the Official Gazette and in two newspapers of the Territory, one in the Portuguese language and the other in the Chinese language, the approved balance sheet, the revenue account and the profit and loss accounts;

Setting up of technical reserves (mathematical reserves, unearned premium reserves and claims reserves) that have to be guaranteed with assets, according to the type and composition determined by AMCM—the supervisory authority—by way of notices published in the Official Gazette. In case of securities and deposits those have to be endorsed in favour of AMCM and deposited either with the said entity or with any credit institutions; in the latter case, the respective credit institution is required to furnish a duly notarised detailed declaration assuming liability for the safekeeping of the mentioned assets;

Maintaining a margin of solvency as laid down in the Ordinance to meet the liabilities arising from its activities in Macao. The solvency margin is calculated based on the state of affairs of the insurance or reinsurance company on the last day of each calendar year and has to correspond to: (a) The company’s equity (for insurance or reinsurance company incorporated in Macao); (b) The net assets (for insurance or reinsurance company with head office overseas). While the solvency margin for life business is determined on the basis of the amount of mathematical reserves and/or capital at risk, in the case of non-life business, it is based on the annual gross premium income recorded during the preceding year, net of returns and cancellations. The following table shows the calculation of the required margin for non-life business:

Setting up of legal reserves by insurance and reinsurance companies incorporated in Macao based on the following percentages of net profits computed for each financial year: (a) 20%, until the total of this reserve equals one half of the minimum insurance share capital, as the case may be, established in the Ordinance; (b) 10%, until the total of this reserve equals such minimum share capital, as the case may be;

Annual filing of details of qualified shareholding with AMCM by insurance or reinsurance companies incorporated in Macao. Prior authorisation of the supervisory authority is necessary for any acquisition of a qualified shareholding, i.e. a minimum of 10% of the share capital or of vote rights, or any increase of such shareholding in a proportion equal to or higher than 5% of the capital or of the voting rights. However, where prior authorisation cannot be obtained due to unavoidable circumstances, the respective acquisition or increase has to be communicated to AMCM within a period of 30 days from the date of such acquisition or increase.

The violation of the provisions of the Macao Insurance Ordinance shall be subject to penalties, which may be applied cumulatively, such as:

Fine;

Suspension of the administrative body or of other body with similar functions for a period of from 6 months to 5 years;

Temporary suspension, partial or total, of the authorisation granted for the carrying on of insurance activity;

Revocation of the authorisation granted for the carrying on of insurance activity.

On the other hand, the unlawful transaction of insurance business shall constitute a crime punished by imprisonment of up to 2 years, for individuals, or a fine of up to 360 days, for corporate entities.

Annotations:

1. Trend in relation to the structural change in insurance activity:

Deregulation and liberalization will have more influence on the market;

Innovations (new policies of traditional products and development of new products).

2. Keen competition;