Commission Report (2002): Latvia

Subsections

• Progress since the last Regular Report
• Overall assessment
• Conclusions

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Chapter 3: Freedom to provide services

Progress since the last Regular Report

Since last year`s Regular Report, Latvia has made good progress, particularly in the banking field .

In the field of the right of establishment and the freedom to provide services, the Commercial Law came into force in January 2002, ensuring further compliance with these basic EC Treaty principles. In the Department of Industry of the Ministry of Economy two officials have been appointed responsible for carrying out a screening of Latvian legislation with a view to identifying and eliminating potential legislative or administrative obstacles in this area. The screening has still to be carried out.

In the field of financial services, Latvia has continued the harmonisation of its legislation with the acquis. With regard to the banking sector, amendments to the Law on Natural Person Deposit Guarantees were adopted in October 2001. They provide for the extension of the Deposit Guarantee Scheme to legal persons as of January 2003, according to the same principles as for natural persons, as well as for the implementation of other requirements included in the Directive on Deposit-Guarantee Schemes. Moreover, amendments to the Law on Credit Institutions were adopted in April 2002. The new amendments clarify the definition of key terms and introduce new legal norms in a number of areas. The amendments also implement the ``single licence'' principle as from accession. Further steps have been taken to enhance the administrative capacity of the regulatory authority.

There were no particular legislative developments in the insurance sector during the period under review, except in the field of supervision.

With regard to investment services and securities markets, the Law on Investor Protection, adopted by the Parliament in November 2001, provides for the establishment of a special scheme to compensate up to 90% of losses incurred by investors resulting from irrevocable loss of financial instruments or non-executed investment services by providers of investment services. The maximum compensated amount is currently set at LVL 3 000 (EUR 1 867) and the arrangement is in line with the respective transition period provided for in the Law. Moreover, amendments to the Law on Securities entered into force in January 2002, which aim at further alignment with the requirements of the acquis relating to investment services.

Further to the transition from three separate regulatory authorities for each of the sectors (banking, insurance and securities) to the integrated supervisory body, the Financial and Capital Market Commission, in July 2001, Latvia has further improved its overall quality of supervision.

Concerning the protection of personal data and the free movement of such data, limited progress was made as regards the strengthening of the independence of the State Data Inspectorate. However, an enhancement of its operational capacity can be reported: the number of its staff has increased to 17 employees as compared to 10 in 2001, and its budget has also increased.

As regards information society regulations, some progress was made with the adoption of the Electronic Document Law, which aims at aligning with the acquis regarding legal status and digital signatures in October 2001. In addition, the Action Plan of the policy document on Electronic Commerce was adopted in December 2001.

Overall assessment

In the field of the right of establishment and freedom to provide services, Latvia has yet to carry out a systematic screening of its legislation in order to ensure that no legal or administrative barriers will exist upon accession. The entry into force of the Commercial Code should eliminate a number of existing restrictions, such as the requirement of Latvian nationality or linguistic requirements, in the context of establishing an entrepreneurial activity or where licences are required, as for gambling, lotteries, mining and security services. It will be important to ensure that during the internal transitional period provided for full transposition of the Commercial Code, the restrictions will no longer apply. Furthermore, due attention should be given to the implementation of the Language Law in full respect of the principle of proportionality, which must not create trade obstacles for EU service providers.

Concerning financial services, Latvian legislation already contains most of the acquis requirements, but amendments still need to be made.

On banking, the new competent supervisory authority, as regulator of the banking industry, has issued rules and is implementing policies and practices which are similar to the Recommendations of the Basle Committee on Banking Supervision and broadly in line with EC directives. Due attention should be given to the timely implementation of the amendments regarding the minimum requirements concerning the deposit-guarantee scheme.

As regards the insurance sector, the basic features of the EC supervisory system are covered by the current legislation. Latvia, however, must still transpose some of the core provisions of the acquis on life and non-life insurance, and align in the areas of reinsurance and insurance against civil liability in respect of the use of motor vehicles, including the structure of liability and the minimum level of third-party cover. Further alignment is also needed as regards accounting rules.

In the field of investment services and securities markets, many provisions of the acquis need to be transposed in more concrete terms and the process of alignment needs to be speeded up significantly. Notably the transposition of the Investment Services Directives still presents a number of significant omissions and weaknesses such as on the definition of ``regulated markets`. Also the Law on Investment Companies has not yet fully transposed the UCITS Directive into Latvian law. Finally, it will be important for Latvia to ensure the gradual fulfilment of the minimum requirements under the investor compensation scheme.

The overall standard of supervision in the financial services sector in Latvia is satisfactory. The Financial and Capital Market Commission (FCMC), which started its operations in July 2001, is well equipped in terms of computerisation and telecommunication devices. It has developed good co-operation with foreign financial supervisory authorities. Regarding its supervisory practice in the banking sector, the Law on Credit Institutions provides that on-site examinations must be carried out at least once a year. 25 examinations were conducted in 2001 and 7 in the first quarter of 2002. Concerning the insurance sector, in 2001, 42 examinations, including 7 audits, were carried out in insurance companies. The transfer of powers to the integrated supervisory body has not disrupted the supervision process but has strengthened co-ordination. Full financial independence will gradually be achieved by 2007.

As regards the protection of personal data and the free movement of such data, Latvia should introduce the necessary amendments in its legislation so as to be fully aligned with the acquis. Furthermore, Latvia still needs to finish setting up a fully independent national supervisory authority for data protection. Particular attention should be paid to the procedure for appointing and dismissing the head of this body.

In the field of information society services, efforts to transpose the legal provisions of the acquis in this area, in particular the acquis on electronic commerce, conditional access and the transparency mechanism, have so far remained at conceptual level. The administrative structure still needs to be established, and human resources necessary for the effective implementation and enforcement of the acquis allocated.

Conclusions

In its 1997 Opinion, the Commission concluded that in this area Latvia was well advanced and would in the coming years not have any major problems in meeting the requirements of the main EC directives. The Commission added that the most important remaining difficulty was the strengthening of the banking sector in order for it to function as a financial intermediary supporting domestic investments.

Since the Opinion, Latvia has made steady progress in most areas of the chapter, both in terms of legislation and in bolstering the administrative and regulatory infrastructure required to supervise the financial services sector. While more remains to be done in particular in the insurance and securities sectors, overall a high level of alignment has been achieved in this field.

Negotiations on this chapter have been provisionally closed. Latvia has been granted two transitional periods (both until 31 December 2007) in which it has to ensure that its legislation on the deposit-guarantee scheme and the investor compensation scheme fully complies with the acquis. Latvia is generally meeting the commitments it made in the accession negotiations in this field.

In order to complete preparations for membership, Latvia`s efforts now need to focus on completing alignment, in particular in the areas of life and non-life insurance, securities markets, investment (undertakings for collective investment in transferable securities) and information society services. It should also complete alignment with the data protection acquis, including the establishment of a fully independent data protection authority and eliminate provisions which discriminate against non-nationals as regards the right of establishment and freedom to provide services.

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