Banks over the years have diversified their activities from retail services to service high-net-worth customers across borders. For long an afterthought for many financial institutions, private banking has developed into a key income generator. Private banking is today one of the three pillars of the Mauritius International Financial Centre (“MIFC”); MIFC being a core part of the Mauritian economy.
The Bank of Mauritius (the “Central Bank”) has developed a framework to regulate and supervise banks offering specialised services and financial advice exclusively to high-net-worth customers. The guidelines on private banking (the “Guidelines”) recognise that private banking is an activity with different risk profiles than traditional banking. While ensuring that the activity is adequately supervised based on a risk-based approach, the Guidelines aim to lower the barriers to entry and to promote competition in the banking sector. Through the Guidelines, the Central Bank seeks to make Mauritius a more attractive jurisdiction to private banks. In a 2022 report prepared by the Central Bank and the Mauritius Bankers Association in collaboration with OliverWyman[1] (the “Report”), a new private banking business model has been identified to establish Mauritius as a global private banking destination targeting the African mass affluent segment. This is in line with the government’s vision of doubling the size of the financial sector along with MIFC’s contribution to GDP by 2030[2].
Regulating Private Banking
The Guidelines put into place a detailed framework covering licensing requirements, parameters of activities, compliance (risks and mitigation), good business practices, and internal policies and procedures. The Guidelines, updated in 2021, apply both to banks exclusively conducting private banking business (“Private Banks”) and banks offering private banking alongside traditional banking services (“Banks”). As from 1st January 2023, both Banks and Private Banks should have taken the necessary measures to be in full compliance with the Guidelines.
The licence to exclusively conduct private banking business and the definition of private banking were only codified in 2016 in Mauritius. Private banking is defined in the Banking Act 2004 of Mauritius (the “Act”) as the business of offering banking and financial services and products to high-net-worth customers. This includes, without limitation, all-inclusive money-management relationships. A high-net-worth customer may be a legal entity with investable assets of at least USD 500,000 or an individual possessing investable assets of at least USD 500,000 or with an annual income of USD 150,000.
In Mauritius, Private Banks may conduct the following activities: wealth management (investments advisory services or assets management services), distribution of financial products, custodian services and insurance agency services. These extend to the management and custody of precious metals or high value movables.
Section 7(7D) of the Act provides that the Central Bank may exempt Private Banks from certain provisions of the Act and may authorise Private Banks to hold, store or sell precious metals, as part of managing their clients’ investment portfolios and to provide safety vault services to their clients. Section 52(1) of the Act also provides that banking services may be provided by digital means. In addition to providing a regulatory and supervisory framework for private banking business, the Guidelines give effect to both sections.
Dispensations afforded to Private Banks
Private banking activities have the potential to generate higher returns with lower risks. To make Mauritius a more attractive jurisdiction for conducting private banking, the Act and the Guidelines afford certain dispensations to Private Banks. The article sets out below the various dispensations afforded to Private Banks along with the requirements to benefit from such dispensations.
The key dispensations relate to: (i) minimum capital requirement, (ii) significant ownership, (iii) guidelines on corporate governance, and (iv) operational existence.
The minimum capital requirement – when compared to corporate lending, private banking can be less risky for a Private Bank’s financial position. Therefore, Private Banks are authorised to start operations with a minimum capital requirement of MUR 200 million. The minimum capital requirement is, however, subject to the undertaking that the Private Bank will increase its minimum capital to MUR 400 million within a period of 5 years or within any shorter timeframe determined by the Central Bank. On the other hand, a Bank must hold stated capital of at least MUR 400 million to be authorised to start operations.
The significant ownership – the shareholders of Private Banks are authorised to own a significant interest of 10% or more of its capital or voting rights. Such approval is subject to four conditions, being that:
- the shareholders must undertake to the Central Bank not to influence or impede the prudent management and functioning of the Private Bank in accordance with sound banking practices;
- the board of directors must be chaired by an independent director and composed of a majority of independent directors although this restriction would not apply to subsidiaries and branches of foreign banks;
- the board members must collectively have proven experience in matters of regulatory compliance, risk management and audit; and
- the Private Bank must demonstrate at any point in time that all business transactions with shareholders are conducted at arm’s-length.
The guidelines on corporate governance – a Bank must establish (i) an audit committee, (ii) an executive-level risk management committee, (iii) a conduct review committee, and (iv) a nomination and remuneration committee. While it is not mandatory for Private Banks to establish any committee, directors still bear the responsibilities to be assumed by such committees. It is nonetheless recommended that Private Banks establish such committees to assist with the prevailing volatility and economic distress more effectively.
The operational existence – where a branch or a subsidiary of a foreign bank (“Local Bank”) applies for a private banking licence, it can make such application on its own or in joint venture with a Bank. To qualify as a Local Bank, its parent must be a duly licensed and regulated bank operating for at least 5 years. The Central Bank may consider the application of a Local Bank where its parent has been operating as a bank for less than 5 years if it is satisfied (i) of the adequate experience and track record of the Local Bank’s shareholders and controlling body and (ii) that the Local Bank and its parent are subject to the supervision of competent foreign regulatory authorities and the latter have not objected to the Local Bank’s application to carry on private banking business in Mauritius.
Concluding Note
While at first sight it may appear that a less stringent regime is imposed on Private Banks, a closer look reveal that most dispensations are safeguarded by particular risk management requirements. Private Banks must ensure that they satisfy the conditions imposed under each dispensation if they want to benefit from these. Lastly and subject to the activities conducted by Private Banks, they may be required to hold further licences from other local regulators. This will result in additional requirements imposed by these regulators.
The Guidelines is a step in making Mauritius attractive jurisdiction for Private Banking. Yet, the Report highlights the gap in availability of local private banking expertise as a key challenge. This must be addressed as the next priority to give effect to the purpose of the Guidelines, which is to establish Mauritius as a global private banking destination.
[1] Bank of Mauritius, September 2022, Future of Banking in Mauritius – Abridged report [online], Available from https://www.bom.mu/publications-statistics/publications/future-banking/future-banking-mauritius-abridged-report
[2] Financial Services Commission, June 2018, Innovating and transforming the Mauritius IFC of 2030: a blueprint for success [online], Available from https://www.fscmauritius.org/media/67408/highlights-of-blueprint.pdf
Authors:
SHANE MUNGUR – Senior Associate
LETICIA ESTHER – Associate
Should you require legal advice on the matters mentioned above, please contact chambers@blc.mu