Regulation No. 2017-04 - Coordination Provisions to Regulation 2016-02 and Revision to Circular No. 2015-02

VICE DIRECTOR GENERAL
OF THE CENTRAL BANK OF THE REPUBLIC OF SAN MARINO

HAVING REGARD to Law No. 165 of 17 November 2005 (Law on Banking, Financial and Insurance Enterprises and Services), and in particular Article 39, which grants the Central Bank of the Republic of San Marino the power to issue measures containing binding and general provisions;

HAVING REGARD to the Statute of the Central Bank of the Republic of San Marino approved by Law No. 96 of 29 June 2005, and in particular Article 30, paragraph 3, according to which acts of the Central Bank in the matter of supervision, deliberated by the Supervisory Coordination, are issued by the Director General, and Article 14, paragraph 5, which regulates the case of absence or impediment of the Director General;

CONSIDERING the need to update certain supervisory provisions due to subsequent modifications to the reference regulatory framework;

HAVING REGARD to the resolutions of the Supervisory Coordination and the Board of Directors by which the text of Regulation No. 2017-04, named "Coordination Provisions to Regulation 2016-02 and Revision to Circular No. 2015-02", was approved;

ISSUES the attached Regulation No. 2017-04 which enters into force on 30 September 2017.

San Marino, 28 September 2017
Signed: THE VICE DIRECTOR GENERAL
Dr. Daniele Bernardi

COORDINATION PROVISIONS TO
REGULATION 2016-02
AND REVISION
TO CIRCULAR 2015-02
Year 2017 / Number 04

Central Bank of the Republic of San Marino
Regulation No. 2017-04 - Coordination Provisions to Regulation 2016-02 and Revision to Circular No. 2015-02

Article 1 - Amendments to Regulation No. 2015-01

1. The name of Regulation No. 2015-01 is replaced as follows:
Regulation on Informational Supervision.

2. Article I.I.1, paragraph 1 is modified as follows:
1. This Regulation falls within the list of implementing measures of Law No. 165 of 17 November 2005 provided for by Article 41, first paragraph, and, for credit institutions, implements the reference to Art. VIII.II.3 of Regulation BCSM 2007-07.

3. In Article I.I.2, the definition of "supervisory reports" is replaced as follows:

• "supervisory reports": periodic and non-periodic collections of information drawn up in accordance with accounting data and/or management information systems, which, within the scope of informational supervisory powers under Article 41, paragraph 1, of LISF, are transmitted to the Supervision Department;

4. In Article I.I.2, the definition of "reporting entities" is replaced as follows:

• "reporting entities": entities authorized to exercise one or more of the reserved activities indicated in Annex 1 of LISF, excluding those indicated in letters G) and H); in this Regulation, they are also defined as "intermediaries/reporting entities";

5. Article I.I.2, paragraph 3 is replaced as follows:
3. For terms not listed in this glossary, reference is made to the definitions reported in Regulations BCSM No. 2007-07, 2011-03, 2006-03, 2014-04 and No. 2016-02 and, more generally, in LISF.

6. Article I.II.1, paragraph 1 is replaced as follows:
1. This Regulation consolidates into a single organic measure the general supervisory rules applicable to REPORTS prepared and sent to BCSM by REPORTING ENTITIES, regarding the informational obligations established by the individual REFERENCE REGULATIONS.

7. Paragraph 3 of Article II.III.1 is deleted.

8. Article II.III.2, paragraph 5 is replaced as follows:
5. If the electronic transmission procedure for supervisory reports is not functioning, or if REPORTING ENTITIES cannot, for technical reasons, use this procedure, they must contact the Supervision Department of the CENTRAL BANK to receive instructions regarding possible alternative methods of transmitting REPORTS1.
1 Manual delivery or shipment by registered mail to the Supervisory Authority of an optical support (cd/dvd) or USB key containing the REPORT. In this case, the optical support or USB key must be accompanied by a certificate of conformity of the transmitted data to the accounting data and management information of the REPORTING ENTITY, according to the model prepared in Annex 5.

9. Article II.III.2, paragraph 7, second line is replaced as follows:

• request the credentials (username and password) with which to access the reserved area of the website and use the electronic transmission procedure. The related model (Annex 2 of this Regulation) is signed by the Head of the executive structure of the REPORTING ENTITY.

10. Article II.III.2, paragraph 8 is deleted.

11. Article II.III.2, paragraph 9 is replaced as follows:
8. Questions regarding REPORTS may be submitted to the CENTRAL BANK according to the methods provided by Art. VIII.II.5 of Regulations No. 2007-07, 2011-03 and 2014-04. Questions of general interest for all REPORTING ENTITIES may receive a response through an update of the specific REFERENCE REGULATION, MANUALS and MODELS regarding the subject of the question.

12. Article II.III.3, paragraph 2 is replaced as follows:
2. The exemption from compiling REPORTS, for financial enterprises removed from the REGISTER pursuant to Article 8, paragraph 1 of Regulation BCSM 2006-01, begins from the date of removal and concerns all REPORTS with a REFERENCE DATE subsequent to the BCSM measure.

13. Article II.III.3, paragraph 3, letter b) is replaced as follows:
b) by 31 January of each year, a situation of accounts referred to 31 December of each year, compiled based on the balance sheet and income statement forms of the reporting model related to the "Accounting Situation" of each REPORTING ENTITY; the aforementioned forms must be compiled with only accounting data, without reclassification for residence or economic activity sector.

14. Article II.III.4, paragraphs 1, 2, 3 and 4 are replaced as follows:
1. If required for the fulfillment of informational obligations provided in the REFERENCE REGULATION, the indication of the predominant economic activity carried out by the clientele (SEGMENTATION) and the geographical area relevant to the subject in individual REPORTS must be carried out according to the methods described in the following paragraphs.

2. With reference to SEGMENTATION, the categories present in REPORTS are:
a) Public Administrations; b) Financial Companies:
i. Monetary Financial Institutions;
ii. Investment Funds other than money market funds;
iii. Other Financial Institutions;
iv. Insurance Companies;
v. Pension Funds;
c) Non-Financial Companies; d) Households and Non-Profit Institutions Serving Households; e) Others.

3. For the correct use of the categories in this article, reference is made to Annex G of Circular 2015-02 "Informational Obligations in the Matter of Credit Register" and it is specified that, regardless of residence and unless otherwise indicated in specific REFERENCE REGULATIONS:

• the sector "Public Administrations" includes central administrations, local administrations and social security and assistance bodies2;
• the sector "Financial Companies" includes institutional units that carry out financial intermediation and/or auxiliary financial activities. Financial intermediaries are considered those who, with risk borne by themselves, channel funds from sectors with resource surpluses to deficit sectors or transform individual risks into collective risks. Financial auxiliaries carry out their activity without assuming risk;
• the item "Monetary Financial Institutions" includes central banking authorities and other monetary financial institutions (banks, money market investment funds, electronic money institutes and other financial institutions that perform financial intermediation functions and whose activity consists of receiving deposits from the public and/or financial instruments strictly assimilated to them and granting credits and/or making investments in securities for their own account)3;
• postal administrations providing financial services are to be included among "Monetary Financial Institutions";
• the sub-sector "Investment Funds other than money market funds" includes all common investment funds that perform as their main activity the function of financial intermediation, except those classified in the money market funds sector4;
• the item "Other Financial Institutions" includes the sub-sectors: Other Financial Intermediaries, Financial Auxiliaries and Lenders and Captive Financial Institutions5;
• the sub-sector "Insurance Companies" includes financial enterprises that carry out the activity referred to in letter G) of Annex 1 to Law 165/20056;
• the sub-sector "Pension Funds" includes institutional units that perform as their main activity the function of financial intermediation as a consequence of the pooling of risks and needs of insured persons (social insurance). Pension funds, like social insurance systems, provide income to pensioners and often benefits in case of death or disability7;
• the sector "Non-Financial Companies" includes institutional units that produce non-financial goods and services intended for sale. Their activity is distinct from that of the owners8;
• the item "Households and Non-Profit Institutions Serving Households" includes the sectors Households (consumers and producers) and Non-Profit Institutions Serving Households9;
• the residual item "Others" is to be used for subjects not falling into the previous categories or belonging to the sector "Unclassifiable and Unclassified Units"10;
• the collection of enterprises in categories related to authorized subjects must be carried out only during the phase of actual registration in the Register of Authorized Subjects pursuant to Regulation No. 2006-01, consequently enterprises not yet registered or already removed must be conventionally classified in the category "Non-Financial Companies", solely for the purposes of this paragraph.

Further informational details may be requested in REFERENCE REGULATIONS if deemed necessary for supervisory purposes.

4. With reference to residence, the possible categories present in REPORTS are:
   a) Residents – San Marino; b) Non-residents – Italy; c) Non-residents – Euro Area EU Countries; d) Non-residents – Non-Euro Area EU Countries; e) Non-residents – Rest of the World.

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2 Ref. Annex G of Circular 2015-02. In the case of non-residents, the sub-sector "Public Administrations" of the sector "Rest of the World" must be considered.
3 Ref. Annex G of Circular 2015-02. In the case of non-residents, the sub-sector "Monetary Financial Institutions" of the sector "Rest of the World" must be considered.
4 Ref. Annex G of Circular 2015-02. In the case of non-residents, the subgroup "Non-Money Market Funds" of the sub-sector "Other Financial Companies" of the sector "Rest of the World" must be considered.
5 Ref. Annex G of Circular 2015-02. In the case of non-residents, the subgroups "Vehicle Companies", "Other Financial Intermediaries", "Financial Auxiliaries" and "Other Financial Companies" of the sub-sector "Other Financial Companies" of the sector "Rest of the World" must be considered. 6 Ref. Annex G of Circular 2015-02. In the case of non-residents, the subgroup "Insurance Companies" of the sub-sector "Other Financial Companies" of the sector "Rest of the World" must be considered. 7 Ref. Annex G of Circular 2015-02. In the case of non-residents, the subgroup "Pension Funds" of the sub-sector "Other Financial Companies" of the sector "Rest of the World" must be considered. 8 Ref. Annex G of Circular 2015-02. In the case of non-residents, the sub-sector "Non-Financial Companies" of the sector "Rest of the World" must be considered. 9 Ref. Annex G of Circular 2015-02. In the case of non-residents, the sub-sectors "Households" and "Non-Profit Institutions Serving Households" of the sector "Rest of the World" must be considered. 10 Ref. Annex G of Circular 2015-02. This item also includes the sub-sector "International Bodies and Other Institutions" of the sector "Rest of the World".

15. Article II.IV.1, paragraph 1 is replaced as follows:
1. REPORTING ENTITIES must compile and transmit to the CENTRAL BANK, signed by the Chairman of the Board of Directors, a semi-annual attestation regarding the conformity of the transmitted information to the accounting data and management information (Annex 6).

16. Article III.I.1, paragraph 1 is replaced as follows:
1. In implementation of what is provided by Art. 33 of LISF and taking into account also what is provided by Article 68 of Law No. 47 of 23 February 2006 and subsequent amendments and integrations, Article VI.II.3 of Regulations No. 2007-07, 2011-03, 2014-04 and Article 154 paragraph 2 of Regulation No. 2006-03, auditing firms carry out the activities referred to in this Title with reference to SUPERVISORY REPORTS.

17. Article III.I.2 is replaced as follows:
Article III.I.2 – Methods and Times for Execution of Controls

1. REPORTING ENTITIES must transmit to the CENTRAL BANK the reports of the auditing firm attesting to the performance of the controls described below:
a) verification of the correspondence between the data reported in REPORTS and the results of accounting; b) correct application of classification and valuation criteria for the various items and their conformity to those fixed by the Supervisory Authority.

2. The controls referred to in the previous paragraph are carried out by auditing firms also through sample checks of REPORT data, analysis of reporting data trends to identify any anomalous variations requiring documentary examinations, and discussion of the elements emerged in supervisory settings with the operational structures and the management of REPORTING ENTITIES.

3. The obligations incumbent on auditing firms for the controls described above concern the following REPORTS:
a) "Accounting Situation", FORMS referred to the end of each solar quarter relating to Balance Sheet and Income Statement, limited to accounting data only, without reclassification for residence or economic activity sector;

b) Supervisory Capital, Risk-Weighted Assets for Credit Risk, Capital Adequacy, checks on all REPORTS with quarterly periodicity; c) First Semester Balance Sheet Data.

4. In particular, the minimal verification procedures to be carried out by auditing firms limited to the REPORT referred to in letter a) of the previous paragraph, for REPORTING ENTITIES, are:

• verification of the correspondence of REPORT data with the results of accounting and (where necessary) extra-accounting entries of REPORTING ENTITIES;
• discussion and update of the main changes occurred in accounting procedures and the internal control system.

With regard to credit institutions and financial companies, the minimal verification procedures to be carried out by auditing firms limited to the REPORT referred to in letter a) also include:

• analysis through discussion and limited documentary checks of the correct classification of overdue credits over 180 days;
• analysis through discussion of the appropriateness of value adjustments on doubtful credits.

5. The minimal verification procedures to be carried out by auditing firms limited to the REPORT referred to in letter b) of paragraph 3 are:

For credit institutions and financial companies:

• verification, through discussion, of the conformity of the criteria adopted for risk weighting indicated in FORMS 3, 4 and 5 with what is provided by Regulations No. 2007-07 and 2011-03 and implementing circulars in the matter of prudential supervision;
• check on a significant and rotating sample of operations indicated in FORMS 3, 4 and 5, of the correspondence with accounting data and available management information;
• sample check of the mathematical accuracy of the weighted values indicated in FORMS 3, 4 and 5.

For management companies, the minimal verification procedures concern all forms of the REPORT "Supervisory Capital and Capital Adequacy".

For payment institutions, the aforementioned minimal verification procedures concern the forms containing information on supervisory capital and capital requirements, referred to in Part VII, Titles II and III of Regulation BCSM No. 2014-04.

6. The minimal verification procedures to be carried out by auditing firms limited to the REPORT referred to in letter c) of paragraph 3, with regard to credit institutions, are:

• verification of the correspondence of the REPORT with the results of accounting and extra-accounting entries of the REPORTING ENTITY;
• analysis through discussion of the uniform application of accounting principles compared to those applied on 31 December of the previous year;
• discussion and update of the major changes occurred in accounting procedures and the internal control system;
• verification of the completeness and correctness of accrued income and expenses relating to active and passive interests (loans, collections, securities, correspondent banks) by obtaining the detail of all accrued income and expenses and:
  • ascertaining the completeness of the lists of accrued income and expenses by verifying, on a sample basis, the concordance between the data on which accrued income and expenses are calculated with the respective balance sheet items;
  • recalculation for a limited sample, of accrued income and expenses;
• verification through limited documentary checks of the correct determination of capital gains/losses from valuation and the trading result in securities and financial derivative instruments;
• analysis through discussion and limited documentary checks of the appropriateness of value adjustments on doubtful credits and provisions for credit risks and taxes, as well as the correct accounting of their usage;
• obtaining the list of participations held by the bank with the indication for each of the percentage of ownership. Verification of the conformity of the valuation to the criteria provided by current legislation and, on a sample basis, the changes intervened in the participation account;
• analysis through discussion of REPORT items, in order to identify unusual trends requiring documentary examinations;
• comparison of balance sheets at 31 December and 30 June and analysis through interviews of the most significant discrepancies;
• reading of the company books and analysis of subsequent events (up to the date of the report).

7. If the semi-annual balance sheet drawn up for supervisory purposes provides for a profit for the period, auditing firms must attach to the report the reconciliation form between the net profit at 30 June and the distributable profit of the same period for the purposes of supervisory capital (Annex 3).

8. The verification activities of external auditors, recorded in the account book of auditors provided for by Art. 72 Law No. 47/2006, are described in a specific report to be sent in electronic format to the CENTRAL BANK by the REPORTING ENTITY, using the same transmission procedure for REPORTS, within the fifteenth working day following the deadline for the REPORT to which the activity in question refers.

9. The aforementioned reports must report, for each REPORT subject to the attestations and controls of the auditing firm, the references to the information flows transmitted electronically. In particular, in the reports of the auditing firm, for each REPORT subject to control, the number, date and control code of the transmission must be cited.

10. In the event of new sending of REPORTS by REPORTING ENTITIES, for example following reporting corrections requested by BCSM or autonomously decided by the same REPORTING ENTITY, the auditing firm must proceed to verify the FORMS subject to modifications for the parts of its own competence and report it in the sending to BCSM of verification reports relating to the same REPORT, if not yet sent or that relating to the subsequent REFERENCE DATE.

11. Auditing firms exchange with the Board of Statutory Auditors – also pursuant to Art. VII.IX.9, paragraph 1, letter e) of Regulations BCSM 2007-07 and 2011-03, Art. VII.IV.9, paragraph 1, letter e) of Regulation BCSM 2014-04 and Art. 47, paragraph 3 of Regulation BCSM 2006-03 – information relevant for the performance of activities of respective competence, including the analyses carried out on the classification and valuation methods of credits adopted by the REPORTING ENTITY. Any observations emerged during the control are brought without delay to the attention of the Board of Statutory Auditors.

12. The competences and responsibilities of auditing firms in the matter of balance sheet certification remain unchanged, pursuant to what is provided by Art. 68 of Law 47 of 23 February 2006 and subsequent updates and integrations.

18. In Article III.II.1, paragraph 1, the following wording is deleted: ", pursuant to Art. III.III.1, paragraph 2, letter f) of Regulation BCSM No. 2007/07".

19. Paragraph 2 of Article III.II.1 is modified as follows:
2. In the case of SUPERVISORY REPORTS that are transmitted both with monthly and quarterly periodicity (such as the periodic detection on the use of payment instruments transmitted by credit institutions), the provision of the previous paragraph applies to REPORTS...