Financial sector supervision

Licensing developments

21 May 2024 marked a significant event in Latvia's finance industry: a new credit licence was issued for the first time in a prolonged period, with AS INDEXO Banka the recipient. The entry of a new market player in the credit institutions sector should strengthen competition and innovations, while offering more choice to consumers in the field of financial services. Meanwhile, Signet Bank AS finalised its purchase of LPB Bank, and LPB Bank officially changed its name to AS Magnetiq Bank on 19 April 2024.

There were also some changes in the cooperative credit unions sector. Latvijas Banka withdrew the licences of several credit unions in 2024. The licence of Pūņu cooperative credit union was withdrawn because of serious irregularities identified in its operation by Latvijas Banka. The licences of the cooperative credit union ŠĶILBĒNI, Lielvārde cooperative union, and Veselava cooperative credit union were withdrawn based on their decision to wind down their operations as credit unions.

Three insurance brokers were registered by Latvijas Banka in the insurance sector in 2024: SIA PROVECTUS, Agento SIA, and SIA Partner Broker. At the same time, the registrations of the following seven insurance brokers were withdrawn: SIA JVC Risk management & Insurance, SIA FORTS servisa grupa, limited liability company Sanfreim, limited liability company MAI Insurance brokers, limited liability company BALTIJAS MĀRKETINGA KOMPĀNIJA, UNIBROKKER SIA, and limited liability company LATEKO APDROŠINĀŠANAS

BROKERS. In most cases, insurance brokers themselves had decided to cancel their entry in the Register of Insurance and Reinsurance Brokers maintained by Latvijas Banka, as they were no longer engaged in insurance distribution. In one case, the insurance broker underwent a reorganisation through a merger with another insurance broker and, in another case, the portfolio was transferred to a different insurance broker.

In the area of payment services, two new electronic money institution licences were issued by Latvijas Banka in 2024: to SIA Paytegra, which enables a wide range of payments for catering and subscription services to schools across Latvia; and another to TigSiPay SIA, which offers payment account services, including cash withdrawals, as well as the ability to make payments, including direct debits and card payments.

As regards investment services, a new investment firm entered the market in the reporting year, as a licence was granted to Boku Securities SIA.

In response to the company's request, Latvijas Banka withdrew the licence for providing alternative investment fund management services previously granted to the investment management joint stock company INVL Asset Management, on account of the fact that it was not providing the services outlined in its licence, was not managing any alternative investment funds, and had no future business plans in this segment. At the same time, the company still maintains its licence for providing investment management services. Based on the companies' decision to wind down their operations in this segment and their request, the registration of three alternative funds managers was cancelled: limited liability company Alfa Asset Management AIFP, SIA BaltCap AIFP, and SIA AIFP Imprimatur Capital Fund Management.

One authorisation was granted in the crowdfunding service providers sector by Latvijas Banka in 2024, to SIA LANDE Platform. As a result, there were three crowdfunding service providers operating in Latvia at the end of the reporting year.

Microprudential supervision and operational compliance monitoring

Prudential supervision of the credit institutions sector

As at the end of 2024, the following institutions were operating in Latvia:

• 10 credit institutions, including 1 newly-established credit institution;
• 4 branches of credit institutions registered in other Member States;
• 25 cooperative credit unions.

Chart 1. Assets of credit institutions and cooperative credit unions (end of 2024; millions of euro)

 

Supervisory priorities for credit institutions

In line with Latvijas Banka's supervisory priorities and focus areas, in 2024, prudential supervision of credit institutions was focused on:

When setting the supervisory priorities and focus areas as well as planning the supervisory activities, Latvijas Banka factored in the persistent uncertainty caused by the impact from the geopolitical and macroeconomic environment. Supervisors also focussed on the credit institutions' preparedness to address emerging risks in the fields of sustainability, digitalisation, artificial intelligence, and other areas.

In the course of 2024, the Credit Institutions Supervision Department conducted 15 horizontal off-site activities (inspections and surveys) and several follow-up activities. The most significant were:

 

Supervisory Review and Evaluation Process (SREP)

The annual supervisory review and evaluation process (UPNP) was successfully conducted in 2024. Within its framework, the Credit Institutions Supervision Department completed a comprehensive risk assessment. Supervisors continued with improvements to the application of the proportionality approach, in order to have a stronger focus on the specific challenges and the highest risk areas of each individual credit institution.

• management quality and robustness of the internal control system, including adequacy of organisational design, quality of internal audits functions as well as integration of sustainability risks in the overall risk management framework;
• credit risk (in the context of both sovereign risk and individual portfolios) and its management, including the work conducted by the internal audit in the field of credit risk;
• ICT risk management and MLTPF and sanctions risk.

The overall results of the risk assessment suggest that credit institutions are sound and resilient to potential shocks, as their capital and liquidity ratios have remained strong. At the same time, external factors, like geopolitical risks, macroeconomic uncertainty as well as changes in the regulatory framework, for example, the implementation of the Digital Operational Resilience Act (DORA) and Markets in Crypto-Assets Regulation (MiCA), and regulation regarding sustainability, continue to pose challenges for credit institutions.

Latvijas Banka issued the following requirements to seven credit institutions, including credit institutions under the direct supervision of the ECB's Single Supervisory Mechanism (SSM):

• new quantitative requirements;
  • own funds requirements to cover the risks inherent or potentially inherent in their business;
  • recommended capital buffer requirements (P2G);
• qualitative requirements and recommendations.

The overall SREP score is assigned ranging from 1 to 4, and the following risk scores were valid for Latvia's credit institutions, including those under direct ECB SSM supervision in 2024:

Chart 2. Risk scores within the framework of 2024 SREP

Qualitative requirements and recommendations issued to credit institutions within the framework of the SREP are distributed across risks and areas as follows:

Risk/area	Requirements (number)	Recommendations (number)
Business model		3
Internal governance	2	4
Credit risk		7
MLCTF risks		1
ICT risks	2	1
Liquidity risk		1
Sustainability risks		1

These requirements and recommendations are aimed at improving compliance with the requirements of Latvian and EU legislation, the risk management processes in individual credit institutions as well as further supporting the long-term operational resilience and soundness of credit institutions.

Single supervisory mechanism

Latvijas Banka continued active participation in the ECB's SSM in 2024, ensuring a risk-based approach to credit institution supervision aimed at strengthening stability and resilience. Latvijas Banka conducted the supervision of both significant and less significant institutions in cooperation with the ECB, with a particular focus on the credit institutions' internal governance quality and their ability to adapt to the evolving economic and geopolitical environment.

Within the framework of the ECB's SSM, Latvijas Banka continued to provide significant support in the ongoing supervision of Latvia's three largest credit institutions, i.e. Swedbank AS, AS SEB banka, and AS Citadele banka. These credit institutions are directly supervised by the ECB as significant institutions, and their supervision is conducted by the joint supervisory teams consisting of supervisory experts from both the ECB and Latvijas Banka.

Latvijas Banka's experts also continued active engagement on the ECB's committees and task forces, contributing to the development of the ECB's common supervisory methodology and harmonisation of the regulatory framework within the European banking union.

Latvijas Banka's representative to the ECB's Supervisory Board participated in decision-making concerning the euro area's significant credit institutions and the supervisory methodology. Overall, 2174 supervisory decisions

were taken by the ECB's SSM in 2024. They concerned issues like own funds of credit institutions, internal models, SREP, qualifying holdings, and fit and proper assessments.

Participation in the ECB's SSM supervisory culture project

In 2024, the ECB's SSM started actively working on defining the concept of a common supervisory culture of the SSM. Latvijas Banka responded to the ECB's invitation to engage in this complicated and, at the same time, very valuable activity. Within this stream, Latvijas Banka's representatives shared the experience gained in the process of the integration of FCMC into Latvijas Banka as well as the values project of Latvijas Banka with their ECB counterparts. They also provided hands-on support to the ECB's team in its activities. In September, Latvijas Banka participated at the supervisory culture conference hosted by the ECB, where it presented its approach to other supervisory authorities of the SSM member states.

It is vital to strengthen a supervisory culture which is not just looking for someone to blame. It is a culture in which employees are confident to undertake responsibility; therefore, cultivating trust and fostering psychological security is very important. This does not mean skipping responsibility for omissions. The supervisors are still acting according to the highest professional and ethical standards, while smartly using available resources to focus on the areas where the risks are higher (risk-based approach).

 

Supervision of cooperative credit unions

In order to promote the development of the cooperative credit unions sector, Latvijas Banka drafted proposals for significant legislative amendments to the Law on Credit Unions, including provisions to allow for an opportunity to grant loans to a broader range of legal entities. In parallel, work on other initiatives supporting the growth of this financial market sector continued, including the design of the operational framework for a central cooperative credit union.

As an awareness raising measure for the credit unions sector, a briefing was organised in October 2024, where Latvijas Banka presented the latest supervisory information on the results of its horizontal review to the cooperative credit unions, namely, on the most common shortcomings, good practices, and supervisory expectations as well as the challenges related to the quality of reporting, licensing news, and changes in regulatory requirements.

Insurance supervision

As at the end of 2024, 17 insurers were operating in Latvia:

• 2 life insurance undertakings;
• 4 non-life insurance undertakings;
• 4 branches of life insurers from other member states;
• 7 branches of non-life insurers from other member states.

The register of insurance and reinsurance brokers maintained by Latvijas Banka contained entries on 77 insurance and reinsurance brokers, which is four less than at the end of 2023.

Insurance premiums and paid-out claims continued to grow in the insurance market in 2024.

In 2024, the premiums written and claims paid out in the insurance sector grew by 8.9% and 8.2% respectively compared to 2023. With the inflationary pressures on insurance services easing in 2024, the rate of increase in insurance premiums and claims was more moderate than in the previous two years.

Insurance premiums written abroad (in Lithuania, Estonia, Poland, France, and Italy) by the six insurance undertakings registered in Latvia increased by 11.3% in 2024 year-on-year. With the amount of claims paid out remaining broadly unchanged, the performance indicators of the insurance undertakings improved.

Chart 3. Gross premiums written and claims paid out by insurers (amount; millions of euro; annual growth; %) 

The four largest types of insurance – health, property, land vehicle, and compulsory civil liability insurance of motor vehicle owners (OCTA) – accounted for 74% of total premiums written in Latvia's insurance market in 2024.

Chart 4. Gross premiums written in Latvia by type of insurance (amount; millions of euro; annual growth; %)

In 2024, the most significant increase in Latvia was observed for:

Insurance premiums: health insurance – by 16.3%; life risk insurance  – by 14.2%; property insurance  – by 12.7%.

Claims paid out: travel insurance – by 18.0%; MTPL insurance  – by 14.0%; property insurance  – by 11.0%.

Chart 5. Solvency capital ratios of insurance undertakings (%)

The profits earned in 2024 by the six insurance undertakings registered in Latvia totalled 59.4 million euro. Their solvency capital ratios remained firmly above the minimum requirement and reached 151% as of the end of 2024 (the minimum limit is 100%).

Global climate change affects the well-being of the population as a whole and economic growth. Climate-related risks are becoming a serious challenge also for the insurance sector. Increasingly frequent and devastating natural disasters over the most recent years have exerted pressure on the sustainability of the insurers' business models.

 

 

Supervisory focus on climate risk impact assessment

Losses caused by natural disasters have grown significantly over the most recent years:

• In 2023, claims paid out to cover the losses caused by natural disasters across all insurance types totalled 23.8 million euro.
• In 2024, roughly 24.8 million euro was paid out in claims to cover the losses caused by a single event, a July thunderstorm with severe rainfall.

In 2024, Latvijas Banka:

• compiled data on losses caused by natural disasters and claims paid out in property insurance to assess the impact on the insurers and the insured;
• conducted a comprehensive survey to learn about the experience and perceptions of Latvia's population regarding property insurance;
• evaluated the accessibility of regulations on property insurance for individuals established by several insurers operating in Latvia, from various aspects of using plain language, including whether the insurance regulations have been drafted in a clear, plain, and easy-to-understand language and can be easily understood by the policyholders;
• organised a discussion for insurance sector professionals, during which Latvijas Banka:
  • presented the conclusions of its research;
  • discussed the role of insurance in reducing losses caused by natural disasters;
  • identified the lessons learned in relation to the flooding caused by the 2024 summer storm and severe rainfall;
  • discussed the potential solutions to address the challenges faced by the sector;
• prepared proposals for amendments to the Insurance Contract Law and the Insurance and Reinsurance Distribution Law, in order to improve policyholders' understanding of insurance contracts.

The statistics concerning losses caused by natural disasters and insurance claims, the results of the population survey, and the conclusions drawn from the discussion are significant for the entire insurance sector. They support the sector's development and improve the quality of insurance services to the population.

Accessibility, transparency, and understandability of information about insurance services provided to customers is a decisive factor in raising the level of customers' understanding of insurance services. Insurers should review the language used in their documents, simplifying the terms and conditions of insurance contracts and making them clearer and easier to understand for policyholders. The adoption and implementation of the proposed amendments to the Insurance Contract Law and the Insurance and Reinsurance Distribution Law will lead to providing clearer and easier-to-understand information to the insured at the time of purchasing insurance services.

Completeness of information provided to customers

To provide an adequate level of protection to their customers, insurers must design effective product oversight and governance processes while reinforcing the trust of their customers by offering clear and understandable information concerning the financial products and the service provider.

In 2024, Latvijas Banka:

• conducted an off-site inspection of operational compliance of ancillary insurance intermediaries registered by insurers, in order to check how carefully and responsibly the insurers assess any potential and already registered ancillary insurance intermediaries and what controls they have in place to verify that intermediaries comply with the requirements of the Insurance and Reinsurance Distribution Law;
• participated in a horizontal review coordinated by the EIOPA and conducted using the mystery shopping technique , within the framework of which the volume of information about life insurance investment products provided to customers by insurers of several European countries and its quality at the consultation stage was evaluated.

The operational compliance of ancillary insurance intermediaries registered by insurers revealed several inconsistencies in the registers maintained by the insurers. This was an indication of weaknesses in the registration process and oversight of intermediaries' operations. The identified gaps were subsequently closed. Recommendations provided by Latvijas Banka will help the insurers to gain a better understanding of important aspects in their cooperation with ancillary insurance intermediaries and improve controls over their operations. To prevent the emergence of similar shortcomings in the future, the most effective solution in Latvia would be the creation of a single register of insurance agents and ancillary insurance intermediaries, making it more user-friendly and understandable, also to the insured.

Legal acts set the requirements for information to be provided to customers prior to concluding the contract as well as the procedure for finding out the customer's demands and needs and evaluating insurance investment products to see if they are appropriate and suitable for the customer. The inspections at the consultation stage during the sales process of life insurance investment products revealed some areas requiring improvements in the information provided to customers. Latvijas Banka presented its conclusions and provided recommendations for improvements of those aspects to each market participant involved on an individual basis.

Insurance products meeting the needs of customers

Insurers are obliged to both develop products that meet the needs of their customers and regularly check that their products are still appropriate for their target market and suit the needs and demands of their customers.

In 2024, Latvijas Banka continued to evaluate the value for money that life insurance with savings offered by insurers generates to customers:

• it updated its assessment of life insurance with savings products through an analysis of the investment performance and changes in customer costs associated with the product in the previous period;
• it conducted an in-depth assessment of insurers whose products were considered to entail elevated risks by examining the implemented product design, management, and oversight measures and processes.

Insurers regularly evaluate and compare the performance of various investment options and review the proposals to their customers. Considering the above, Latvijas Banka also identified two positive tendencies:

• return on customers' investment has improved;
• overall costs to customers continue to decline.

Latvijas Banka will continue to assess the value for money of insurance products offered to customers in 2025, it will extend the scope of its analysis to include the travel insurance products on offer. The suitability of those products in the light of customers' needs and interests as well as their distribution process will be evaluated.

Supervision of second pillar pension managers

At the end of 2024, 8 state funded pension scheme asset managers were operating in Latvia, offering the second pillar pension scheme participants 33 investment plans of various risk degrees. Most of them (17) were high-risk investment plans with equities accounting for up to 75% or even 100% of their investment portfolios.

Total net state funded pension assets increased by 24% in 2024. This solid growth was supported by a favourable macroeconomic environment and expanding financial markets as well as higher wages, resulting in larger mandatory pension contributions.

Chart 5. Developments in net assets of the state funded pension scheme (millions of euro)

The overall return on investment plans was 14.9% in 2024, including 21.7% for high-risk plans, 11.0% for medium-risk plans, and 5.9% for low-risk plans. These results reflect successful asset management strategies, favourable market conditions, and sound investment portfolios.

Chart 6. Return on state funded pension plans (%)

The returns of high-risk plans can be explained by the overall favourable stock market developments in 2024. When adjusting their investment strategies, investment managers paid more attention to higher-growth regions and sectors outside the EEA.

Chart 7. Investment shares by country (31 December 2024; %)

^{* Investment funds with no particular geographical focus, investing in several regions.}

Given the high returns, most plans exceeded the excess profit threshold and received variable investment performance-related commissions. Therefore, the overall management expenses of the plans in 2024 were higher than in 2023 and amounted to 0.56% of assets.

Chart 8. Investment plan management costs (%)

On 1 July 2024, a new obligation entered into force for the managers of the state funded pension scheme assets to assess the age-appropriateness of the investment plan chosen by a participant of the funded pension scheme and to notify the participant at least once a year if the chosen investment plan is inadequate as well as suggest the most age-appropriate investment plan for the participant. This means that a manager should first identify which of its investment plans are appropriate for each age group of the state funded pension scheme participants and whether the plan for each individual participant falls into the appropriate age group. Participants who have joined pension plans inappropriate for their age should be duly informed to ensure appropriateness.

Latvijas Banka believes that a uniform approach to establishing the age groups of the state funded pension scheme and the appropriate pension plans will create equal conditions for the participants of the pension plans. In order to help asset managers to match the ages of the state funded pension scheme participants with appropriate investment plans, Latvijas Banka developed recommendations for identifying age-appropriate investment plans for state funded pension scheme participants, inviting all pension asset managers to take them into consideration.

Chart 9. State funded pension scheme participants by type of plan (31 December 2024; %)

In preparation for the implementation of the new requirements, Latvijas Banka evaluated the readiness of investment management companies to identify participants’ needs and to make sure that the participants check that their chosen plan is age-appropriate, and select a different plan if necessary.

Having evaluated the submitted information, Latvijas Banka concluded that:

• initially, the participants who can be easily reached through digital communication channels are identified;
• customers are approached via mail, but this means of communication is considered very expensive;
• there is a risk that some participants won't be approached, as not everyone can be reached at their declared residence;
• the quality of consultations will have a significant role to play, considering that the number of participants willing to change their investment plan to an age-appropriate one meeting their needs could be significant.

An important reason for a higher overall return on the state funded pension scheme as compared to 2023 was the participants' preference for investment in high-risk plans. Latvijas Banka concluded that reaching out to the participants had a positive effect, as in July 2024 over 24 000 participants joined more appropriate, high-risk plans, that generated the highest return in 2024.

Supervision of private pension funds managing third pillar pensions

Private pension funds concluded 2024 with an impressive 21.1% increase in net assets, reaching 981.9 million euro and rapidly approaching the 1 billion euro mark.

Chart 10. Developments in net assets of private pension funds (millions of euro)

Growth was supported by a 19.4% increase in participants' contributions, reaching 135.5 million in 2024, and a positive average rate of return on the pension plans (10.5%).

With contributions increasing, disbursements of the additional pension capital also grew, reaching 57 million euro at the end of 2024. The highest number of capital withdrawal applications was received towards year-end, when disbursements increased by 88% in comparison with the fourth quarter of 2023. This steep, short-lived, rise in the number of applications can be attributed to the scheduled change in the personal income tax on capital gains which was raised from 20% to 25.5% as of 1 January 2025. Although a part of pension plan participants opted early capital withdrawals due to this reason, the higher number of withdrawal applications did not affect the stability of private pension plans, as suggested by the sharp increase in total net assets and contributions.

The high rate of return across all risk category plans was an important factor behind the successful performance of pension plans. High-risk pension plans (up to 100% investment in shares) generated the highest returns, at an average of 14.5%, in 2024. They were followed by medium-risk pension plans (up to 50% investment in shares) with a capital increase of 11.6%, whereas low-risk pension plans (up to 25% investment in shares) generated a 6.7% return.

Chart 11. Annual return of private pension plans (%)

2024 saw a continuation of the tendency for plan participants to shift their accumulated assets to higher-risk pension plans. During the year, the number of participants in high-risk plans increased by 29%, and contributions to these plans grew by 45% compared to the previous year. At the same time, the number of low-risk pension plan participants declined by 1%, while contributions remained on an upward trajectory, rising by 5%.

Pension plan management costs continued to decrease, following the previous years' trend, reaching a new all-time low of 0.77% of asset value (0.78% in 2023).

Chart 12. Pension plan management costs of private pension funds (%)

Supervisory focus was on a value for money assessment of participant investment in pension funds. It covered the following main areas:

• equal and transparent approach to all participants of plans;
• proportionality of commissions and fees;
• appropriateness of pension plans in light of participants needs.

Due to the large scope of this assessment, it is scheduled for completion in the first half of 2025.

Supervision of alternative investment funds and managers thereof

There were 27 alternative investment fund (AIF) managers operating in Latvia at the end of 2024, including 24 registered AIF managers and 3 licensed AIF managers. Although no new AIF managers were registered or licensed in 2024, at the turn of the year, 3 new AIF manager registration applications were received.

By attracting investor funding and making investments, 9 new AIFs launched operations, and 16 AIFs were newly registered in 2024.

Private equity remained the dominant investment strategy, but AIFs offering investment in debt securities, including corporate bonds and loan funds also entered the market.

In order to enhance the management of AIFs and investors' trust, Latvijas Banka engaged in active cooperation with the Finance Latvia Association and Latvian Private Equity and Venture Capital Association in 2024 by organising meetings and discussions and compiling proposals on improvements to the investment environment in the context of AIFs receiving state funded pension plan assets. At the end of the project, Latvijas Banka prepared proposals for amendments to the Law on State Funded Pensions concerning the investment of the state funded pension scheme assets in AIFs and submitted them to the Ministry of Welfare and the Ministry of Finance.

Latvijas Banka also advised associations of market participants on the development of guidelines for improved AIF risk management to strengthen cooperation between AIF managers and second pillar pension managers.

Supervision of investment funds

At the end of 2024, there were two managers of undertakings for collective investment in transferable securities (funds) operating in Latvia, managing 13 funds, including 6 bond funds, 4 mixed funds, and 3 equity funds.

In 2024, funds, including actively managed funds established and registered in Latvia, were still facing the challenges associated with increasing their investor appeal. According to information collected by the ECB, fund managers continued to be dominated by the simplicity, clarity, ease of access, and cost attractiveness of the product offered by passively managed ETFs, as opposed to actively managed funds.

Although the securities market conditions in 2024 were favourable for raising capital, with buyback transactions on a rise, the net asset value of funds decreased by 7% year-on-year in the reporting year, to 154.86 million euro at the end of 2024, with bond funds maintaining their dominant position.

Chart 13. Net assets by fund type (millions of euro)

The funds' return remained positive in 2024. Equity funds generated the highest return at 21.65%, while the largest increase in comparison with 2023 was reported for bond funds, from 5.51% in 2023 to 11.06% in 2024.

Chart 14. Returns of investment funds (%)

At the end of 2024, more than half of the funds' assets (54.8%) were invested in securities issued outside the EU. Moreover, 22.1% of the Latvian funds' investments were made in securities issued by US companies. 34% of the assets were invested in EEA countries (excluding the Baltic states).

Chart 15. Geographical distribution of the funds' investments (31 December 2024; %)

Only 5.5% of the funds' total assets were invested in Latvia and 5.1% in other Baltic states.

In 2024, the off-site supervision of Latvijas Banka focused on strengthening the governance system, namely, fund managers were tasked with addressing weaknesses and making improvements in internal controls, including the management of conflicts of interest, ensuring compliance and risk management.

Supervision of payment institutions and electronic money institutions

Two new licences, to TigSiPay SIA and SIA Paytegra, were issued by Latvijas Banka in 2024 in the sector of payment institutions and electronic money institutions. That brought the number of institutions operating in the sector at the end of 2024 to 12 (8 electronic money institutions and 4 payment institutions).

Overall, the level of risk in the sector remained low. Latvijas Banka revised and improved its regular risk assessment methodology to enhance the effectiveness of supervision and accuracy of risk assessment. The sector's performance and future growth potential are affected by medium-high macroeconomic and financial services availability risks. Market and liquidity risks are assessed as medium, and there are no high risks with a critical impact on the sector as a whole. The overall level of risk for payment institutions and electronic money institutions was taken into account when setting and planning the supervisory priorities for 2024, and the intensity of supervision in specific areas was tailored to this level; the principle of proportionality was also observed in supervision.

The focus of supervision in 2024 was on:

• segregated holding of customer funds and protection thereof;
• monitoring solvency and financial stability;
• annual strategic interviews on the execution of business plans, operational performance, risk management, and cooperation with credit institutions.

The value of payments (except electronic money payments) made in the payment institutions and electronic money institutions sector declined slightly by 5.3% in 2024 as compared to 2023. This is due to a slight decrease in the value of payments reported by individual market participants. Nevertheless, the gross revenues of payment institutions and electronic money institutions related to the provision of payment services remained stable for a second year.

Chart 16. Payments made in electronic money institutions and payment institutions, except e-money payments (millions of euro)

Chart 17. Income from services of electronic money institutions and payment institutions (millions of euro)

The value of e-money payments has sharply increased over the most recent years. In 2023, payments increased by more than 13 million euro (57%) in comparison with 2022, whereas in 2024 they grew by more than 15 million euro (40.3%) in comparison with 2023. The average amount of e-money in circulation also increased by 13.8% as compared to 2023 (583 thousand euro at the end of 2024). In the non-bank segment, the value of payments was stable and followed similar trends to those of payments by credit institutions. Given the business model specifics of electronic money institutions, the total value of payments made with electronic money was consistent with the total amount of redeemed electronic money.

Chart 18. E-money circulation in electronic money institutions (millions of euro) 

Chart 19. Liquid assets and current liabilities of electronic money institutions and payment institutions (millions of euro)

The sector's liabilities to customers have been stable year from year, and there is sufficient coverage to cover customer balances in full.

Latvia's market participants comply with the regulatory requirements with regard to protecting customer funds. The most common method of protecting customer funds in Latvia's market is the segregated holding of customer funds in accounts with credit institutions, although other methods, such as investment in low-risk liquid securities are also allowed by the regulation, with one payment institution having chosen this method for protecting its customer funds. Market participants use a diversified approach for the custody of customer funds, using both the services of several credit institutions and making the above-mentioned investments in securities. In 2024, supervision was again focused on the cooperation of payment institutions and electronic money institutions with credit institutions, to monitor risks related to the availability of financial services.

Solvency ratios for this sector were overall above the regulatory requirements at the end of 2024. Own funds were in line with the individual requirements set for the institutions. The aggregate gross profit ratios of payment institutions and electronic money institutions stabilised in the post-pandemic period, reflecting the sustainability and resilience of the market participants' business models. The return on equity for this sector was also positive at the end of 2024. Nevertheless, in cases when compliance with the solvency ratios (primarily, own funds) in an institution was insufficient or when there was a negative trend, enhanced supervision was applied on an individual basis. In 2024, Latvijas Banka issued a warning to one electronic money institution for failure to meet capital requirements and continued with an enhanced supervision of that institution to stabilise its operation.

Overall, the market was characterised by development in the reporting year, as new products and services emerged, new opportunities were explored, and businesses upscaled.

Supervision of crowdfunding service providers

At the beginning of 2024, Latvijas Banka issued an authorisation to the crowdfunding service provider SIA LANDE Platform, previously operating under the transitional regime within the common EU regulatory framework. Consequently, in 2024, three authorisations for the provision of crowdfunding services were issued in Latvia.

When planning its supervisory activities for the crowdfunding service providers sector in 2024, Latvijas Banka identified investor protection issues as a priority. Therefore, the focus was on examining the information that service providers must disclose in accordance with regulatory requirements. Latvijas Banka concluded that service providers generally make the required disclosures.

Annual strategy interviews were conducted with market participants in this sector to discuss their operational strategies and the implementation of their business plans. Furthermore, discussions also focused on whether financial performance targets were met, ensuring operational continuity, the risks faced by service providers and their management. Market participants noted that in 2024 they were able to raise more funding for the projects announced or that the funding amount did not decrease. This leads to a conclusion that the sector has potential in the area of alternative financing. At the same time, crowdfunding service providers also highlighted several preferable changes to regulatory acts that would allow them to operate more efficiently.

During 2024, it was obvious that crowdfunding service providers were conquering a niche in the field of alternative financing services and were generally able to attract investors to finance the projects announced.

The total amount raised for projects financed by crowdfunding service providers in 2024 was 30.3 million euro. The amount increased by 28.2 million euro in comparison with 2023 (in 2023, 2.1 million euro was raised). This increase should be viewed in the context of a change in the number of crowdfunding service providers and the time of year when they received authorisation.

Nevertheless, the total amount raised for projects suggests the potential of this alternative financing segment.

Chart 20. Projects financed by crowdfunding service providers (millions of euro)

By the type of investor, investments made by inexperienced investors dominated in 2024, accounting for 29.1 million euro or 96.1% of total investments. Professional investors invested 0.8 million euro or 2.6% of total investments, and experienced investors invested 0.4 million euro or 1.3% of total investments.

Chart 21. Investments by type of investment (millions of euro)

When considering investor country, more than half of the investments in 2024 were made by Latvian investors, i.e. 16.1 million euro or 53.1% of total investments. They were followed by German investors with 6.7 million euro or 22%, British investors with 1.3 million euro or 4.3%, and Lithuanian investors with 1.1 million euro or 3.5% of total investments. Investors from no other country made investments reaching at least 3% of total investments, but their combined investments amounted to 5.2 million euro or 17.1% of total investments.

Chart 22. Investments by investor country (millions of euro)

Supervision of foreign exchange trading companies

There were 15 foreign exchange trading companies operating in Latvia at the end of 2024.

Strategy meetings were held during the year to discuss business development opportunities, main challenges, and risk factors in this sector. Some companies expressed interest in expanding the range of services, focusing on the implementation of automated solutions. Latvia provided both individual consultations in this process and cooperated with other state institutions in providing them. At the end of the year, one foreign exchange trading company launched an automated foreign exchange trading facility as well as commenced the development of a remote foreign exchange trading facility via an internet platform. During the reporting year, discussions were held on the availability of banking services for foreign exchange trading companies. Latvijas Banka developed a new risk analysis methodology, including an annual presentation of a sectoral risk assessment. Discussions and individual meetings of sector participants were also organised to discuss their business models, challenges, and development opportunities.

The focus of supervisory activities was on:

• risk assessment;
• management culture;
• staff qualifications;
• due diligence process.

In 2024, Latvijas Banka conducted full on-site inspections of two foreign exchange trading companies, excluding the AML/CFT area. In addition, a horizontal review was carried out in three companies, including AML/CFT aspects.

As a result of the inspections, both low-impact and significant gaps were identified, and foreign exchange trading companies worked on improving their operational processes. Regular work on company data analysis also continued during the year.

The value of foreign exchange transactions carried out by foreign exchange trading companies has been generally stable over the past three years. In 2024, it decreased slightly by 2.4%, as compared to 2023 (197.2 million euro in 2024 and 202.1 million euro in 2023) and was broadly at the same level as the value of transactions in 2022 (197.7 million euro).

Chart 23. Value of foreign exchange transactions carried out by foreign exchange trading companies (millions of euro)

Looking by currency, the US dollar dominated in 2024, as in the previous years, with exchange transactions (buying and selling) totalling 111.5 million euro and accounting for more than half, 56.6%, of all transactions. It was followed by the British pound sterling, with transactions amounting to 28 million euro or 14.2% of all transactions, and the Russian rouble, with transactions amounting to 21.5 million euro or 10.9% of all transactions. For other currencies, exchange transactions did not exceed 5% of the total transaction value.

At the same time, there was a decrease in the value of total transactions (buying and selling) in the US dollar and British pound sterling in 2024 as compared to 2023: by 4.3% for the US dollar and by 9.3% for the British pound sterling. In contrast, the value of transactions in Russian roubles increased by 27.7% in 2024 as compared to 2023.

Given the geopolitical situation and amendments to the Immigration Law, in 2023, transactions related to the sale of real estate belonging to Russian and Belarusian citizens and these persons leaving Latvia increased. As a result, the value of the US dollar and Russian rouble sales transactions rose significantly, while the value of the US dollar buying transactions decreased. In 2024, the number of such transactions declined, while the value of the US dollar and Russian rouble sales transactions continued to rise. Compared to 2023, the value of Russian rouble sales increased by 33.5%, while the value of buying transactions grew by 21%. At the same time, the value of US dollar sales increased by 21.1%, while the volume of buying transactions decreased by 26.5%.

Chart 24. Value of US dollar and Russian rouble buying and selling transactions (millions of euro)

The management of trading risks for Scandinavian currencies in Latvia and elsewhere in Europe was adjusted by reducing the cash holdings in these currencies. Foreign exchange trading companies reviewed their internal policies, and several companies stopped trading Scandinavian currencies in order to reduce risks.

Supervision of investment service providers

At the end of the reporting year, authorisation to provide investment services in Latvia was granted to 10 investment firms (IF) licensed in Latvia, 10 credit institutions registered in Latvia, and one branch of a credit institution from an EU Member State, and also to seven investment management companies registered in Latvia. In accordance with the principle of freedom to provide services, more than 600 investment service providers from EEA countries also had the right to provide investment services.

In 2024, Latvijas Banka issued one new IF license, to Boku Securities SIA.

Supervision of investment services was focused on the following issues in 2024:

• Supervisory Review and Evaluation Process in two IFs;
• in-depth inspections of three individual market participants (two IFs and one credit institution);
• licensing of a new investment service provider;
• an off-site horizontal thematic review of investment service providers on compliance with disclosure requirements for sustainability issues;
• participation in ESMA's common supervisory action on integration of sustainability aspects in market participants' operations and compliance with product management requirements regarding sustainability aspects;
• evaluation of the reports submitted by market participants and data quality control;
• addressing complaints received about investment service providers;
• conducting a sectoral risk assessment.

Supervision of the trading venues for financial instruments and the Central Securities Depository

In 2024, the focus in supervision of the regulated market operator joint stock company Nasdaq Riga and the multilateral trading system, or the alternative market, First North Latvia, was on the following areas:

• pre- and post-trade disclosures;
• cooperation in the context of new issuers entering the market and issuers leaving the market;
• ensuring adequate trading in financial instruments;
• supervision of trading in financial instruments;
• the operational adequacy of IT systems and the prevention of incidents;
• assessment of the regulations and decisions of the joint stock company Nasdaq Riga.

In 2024, supervision of the Central Securities Depository Nasdaq CSD SE focused on:

• development and testing of the central securities depository risk assessment methodology, as well as the first risk assessment carried out in accordance with the new methodology (assessed areas and risks: business model, financing of operations, IT risks, risks to capital, governance, and internal controls);
• regular off-site supervisory activities, covering evaluation of the statements, reports, and other information submitted, and meetings with the responsible staff of Nasdaq CSD SE;
• cooperation within the Nasdaq CSD SE supervisory college between the supervisory authorities and the central banks of Lithuania, Estonia, and Iceland (two meetings of the supervisory college were held).

Supervision of issuers

The focus regarding supervision of issuers in 2024 was on:

• timely disclosure of regulated information;
• in-depth inspections of annual statements and interim reports;
• verifying compliance with the single electronic reporting format;
• verifying notifications on corporate governance;
• inspection of non-financial statements and submission of remuneration reports;
• compliance assessment of prospectuses for public offerings;
• an inspection of the work on audit committees;
• an inspection on shareholder disclosures;
• a horizontal review on early bond redemptions;
• a horizontal review on tenure limitations of auditors engaged by issuers;
• webinars and presentations on the application of regulatory requirements;
• an inspection regarding the maximum audit engagement duration for the certified auditors and certified auditor companies engaged by the issuer.

In 2024, Latvijas Banka started two administrative proceedings against issuers. The first was started for failure to publish annual statements in due time and for not disclosing information on the submitted shareholder holdings notifications. A sanction, i.e. a fine of 11 500 euro was applied to the issuer. The second administrative proceeding was initiated against the issuer for failure to comply with the share buyback obligation specified in the Share Buy-Back Law. The decision in the case was still pending in 2024.

Latvian capital market indicators 2024

<sup>Source: https://nasdaqbaltic.com/lv/.
* GDP for 2024 has been estimated based on Latvijas Banka's forecasts of +0.6% of GDP at 2023 current prices, see https://www.bank.lv/en/operational-areas/task-monetary-policy/forecasts.</sup>

At the end of 2024, securities of 23 regulated market issuers were approved to trade in the Latvian capital market, and securities of 22 issuers in the alternative market.

The total capitalisation of the regulated market at the end of 2024 was 1.8 billion euro, whereas the turnover was 32.1 million euro, which was 76.1% higher than in 2023.

The total capitalisation of the alternative market at the end of 2024 was 542.2 million euro, whereas the turnover was 46.3 million euro, which was 165.4% higher than in 2023.

The total capitalisation of the equity market to GDP at the end of the reporting year was 1.4%, while that of the bond market was 4.7%. Overall, positive trends were observed in the development of the market, especially in the area of bond issuance.

Capital market development was one of Latvijas Banka's priorities for 2024, and several activities were carried out to promote it. On 7 February 2024, the fourth Latvian Capital Market Forum organised by Latvijas Banka, titled Powerful Businesses – More Capable State, took place. The objective of the forum was to familiarise companies with the trends, opportunities, and experience of various companies in the capital market of Latvia as well as to encourage expert discussions and cooperation between institutions. These efforts aim to facilitate access to development financing, leading to the growth of strong companies as well as enhancing Latvia's competitiveness and overall economy.

Latvian Capital Market Forum Powerful Businesses – More Capable State, 7 February 2024.

The Securities Sandbox, a support tool for companies wanting to raise financing in the Latvian capital market, continued to operate in the reporting year. The Securities Sandbox is administered by Latvijas Banka, the key Latvian capital market participants and experts participate in the Securities Sandbox working group on a voluntary basis and pro bono. By the end of 2024, eight companies had used the support tool.

In 2024, the implementation of the 10-step programme for the development of the Latvian capital market continued, and most of the tasks (90%) were broadly completed. To continue with promoting the capital market development, Latvijas Banka, in cooperation with capital market participants and experts, developed a new 10-step programme for capital market development in 2024, which will include new measures, the implementation of which is essential for the further development of the Latvian capital market.

On 11 December 2024, the Sustainable Governance Award presentation ceremony was held. It was the fourth annual ceremony. Overall, 28 candidate applications were received. The aim of the award is to buttress the sustainability of businesses in Latvia and to advance the practical implementation of the Latvian Corporate Governance Code in Latvian companies, promoting operational efficiency and long-term value growth as well as shining a positive public light on businesses with a sustainable governance model.

The Latvian Sustainable Governance Award presentation ceremony, 11 December 2024.

Active cooperation across the Baltic states continued in the reporting year, and several awareness events were held for existing and potential market participants.

Supervision of trading in financial instruments and investor activities

Supervision of trading in financial instruments and investor activities in 2024 focused on:

• supervision of trading in financial instruments;
• a review of reports on suspicious transactions and orders submitted by market participants;
• in-depth inspections of suspicious transactions such as market manipulation or insider dealing;
• cooperation and information exchange with the supervisory authorities of other countries;
• timely and correct submission of investor notifications.

In 2024, Latvijas Banka imposed administrative sanctions on individuals involved in three cases for market manipulation at trading venues and insider dealing.

Supervision of information and communication technology and security risk management

The importance of ICT security and cyber risk supervision

A secure, sound, and trustworthy financial market is one of Latvijas Banka's supervisory priorities. Market participants are tasked with developing and improving their capabilities to protect themselves against growing and changing digital threats. Therefore, every financial market participant, and especially significant financial service providers, must be prepared to operate in crisis situations and recover their operations following a significant cyber incident.

In the reporting year, Latvijas Banka conducted focused on-site inspections, off-site horizontal and thematic reviews, and participated in a cyber resilience stress test of significant EU credit institutions organised by the ECB.

In addition, it implemented various activities to raise the awareness of financial market participants, advising them on the development of cybersecurity management capabilities, organising workshops, webinars, and providing individual consultations.

Compared to other EU Member States, Latvia's cyberspace experienced the highest intensity of cyber-attacks ever in 2024, when hostile state actors, and cyber activists supported by them, mainly targeted public institutions and the public sector. Nevertheless, there was also a high risk of attacks targeting the financial market infrastructure. As the general public should always have access to at least a minimum level of critical financial services, Latvijas Banka continued adjusting to the changing geopolitical environment in 2024 by incorporating the financial sector into the national cybersecurity strategy.

Chart 25. Number of significant threats with a broad impact

^{Source: CERT.LV Activity Report for Q3 2024.}

According to the European Union Agency for Cybersecurity (ENISA), the top threats creating risks, also for financial market participants in 2024, were the distributed denial-of-service (DDoS) attacks and ransomware, followed by social engineering and threats against data, including information manipulation, supply chain attacks, and malware.

ICT incident effects and trends

Despite the high intensity of cyber-attacks in Latvia's cyberspace, also affecting financial market participants, the situation was overall well-managed, and the number of significant ICT incidents was low in 2024. Latvijas Banka received reports on 10 significant payment service incidents, and the reasons were mainly related to DDoS attacks, operational risks, or third-party management, when customer access to individual financial services was temporarily affected.

Chart 26. Causes of significant payment-services-related ICT incidents

Like in 2023, market participants with a more advanced degree of maturity regarding their security incident management capabilities were able to detect the incidents more promptly and take response to contain and prevent them.

Chart 27. Number and impact of significant payment-services-related ICT incidents

In the event of a cyber-attack, it is important to be able to implement adequate defence activities, and the new regulation on digital operational resilience for the financial sector is aimed at enhancing market participants' ICT security management maturity, promoting a higher level of cyber resilience.

Information manipulation was used to a significant extent in Russia's war of aggression against the supporters of Ukraine, and false news about having accessed classified information from targeted organisations in Latvia were spread in cyberspace quite often. No such cases and incidents involving financial market participants under Latvijas Banka's supervision were identified in 2024.

Chart 28. Downtime caused by significant payment-services-related ICT incidents (hours)

 

Since cyber-attacks are often targeted against Latvian cyberspace as a whole rather than at specific organisations, even less significant financial market participants need to develop and improve their operational risk management process in order to be able to timely review their existing controls and identify any emerging risks, for example, in the field of financial fraud.

Focus areas in the supervision of financial market operations

In the field of ICT and security risk management, Latvijas Banka conducted six inspections of market participants in 2024:

• two on-site inspections as scheduled in the 2024 plan of inspections;
• one thematic review of outsourcing management;
• three off-site horizontal reviews in the field of ICT and security risks.

The inspections focussed on changes in critical systems, management of operational risks and business continuity, and the practical implementation of the three lines of defence against ICT and security risks in the internal controls system.

Latvijas Banka continued to draw the attention of financial market participants to the timely identification of external service providers and subcontractors. This was done to manage the risks arising from the use of insecure technologies, resulting in insufficiently effective security measures, and, ultimately, leading to potential geopolitical threats due to such cooperation. The attention of financial market participants was also drawn to the timely planning of internal audit activities and regular inspections in the field of ICT management and security.

During the inspections of less significant credit institutions, Latvijas Banka evaluated the functioning of the internal controls system and the implementation of the three lines of the defence system in accordance with good practices. Therefore, the focus was on assessing the capacity of the ICT security function and on ICT and operational risks management issues as well as implementing good practices in managing the ICT security vulnerabilities and penetration testing. The inspections improved the senior management's awareness that a corporate culture should be created where every employee of the organisation is responsible for cybersecurity.

Over the most recent years, external cybersecurity threats have increased significantly, and the regulatory changes also mean that the capacity of the ICT security function of credit institutions will need to be strengthened. As the shortage of cybersecurity specialists equally affects the financial sector, it is difficult for less significant credit institutions to find additional appropriately qualified specialists in both ICT security management and ICT auditing areas to ensure regulatory compliance and constant ICT security management.

Therefore, the shortcomings and gaps identified by the inspections of less significant credit institutions were mainly related to delays in developing and updating internal documentation on ICT management, conducting timely ICT risk analysis as well as planning ICT business continuity tests and engaging an internal auditor to conduct an independent assessment of ICT management.

The inspections did not reveal any critical shortcomings, and Latvijas Banka concluded that credit institutions are overall making improvements to enhance their ICT security processes, although they should reduce the mismatches between the documented processes and their practices and strengthen the supervision of external ICT service providers.

Chart 29. Shortcomings in ICT risk management – credit institutions (%)

Supervision of ICT risks in investment firms assessed the use and management of outsourcing, including cloud services, as well as the risks of change management, data integrity, and business continuity. Activities were particularly focussed on the performance of investment firms in the areas of ICT governance, risk management, and ICT security, in order to gain assurance that the sector is able to ensure data protection and compliance with regulatory requirements in the management of third-party ICT services.

The inspections identified that these market participants mainly need to make improvements in their internal control systems to strengthen the internal controls in ICT risk management, ICT change management, ICT incident management, and ICT security management in general. Investment firms should also reduce the mismatches between the documented processes and their practices and strengthen the supervision of external ICT service providers, in order to reduce the number of ICT incidents arising in relation to operational disruptions in ICT infrastructures and failures of supplied software.

Chart 30. Shortcomings in ICT risk management – investment firms (%)

The supervisory activities for payment institutions and electronic money institutions were focused on the management of payment services risks by evaluating the most recent payment-services-related risk assessments of payment service providers submitted to Latvijas Banka, in order to gain assurance that payment institutions and electronic money institutions responded to those risks with adequate risk mitigation measures and put the necessary control mechanisms in place.

Participants of this market sector highlighted external attacks, outdated infrastructure, insufficient personnel and insufficient competences, and inadequate change management as the main risks related to the provision of payment services. From the information on risk mitigation measures provided by market participants, it was concluded that the residual risk is not high and, in addition to higher external cyber threats, a significant part of risks is also caused by internal threats. Therefore, payment institutions and electronic money institutions must also strengthen their internal controls in the field of ICT governance and ICT security in order to eliminate shortcomings in the context of conflicting documented processes and practices and to strengthen the monitoring of the quality of external ICT services, especially in cases when ICT governance and ICT security functions are outsourced.

Chart 31. Shortcomings in ICT risk management – payment institutions and electronic money institutions (%)

Latvijas Banka did not conduct an ICT security risk assessment of the insurance sector in 2024, as the insurance sector was assessed as a priority in 2023 and no high risks were identified. Although no information was received in 2024 concerning any ICT incidents that could affect customer access to insurance services, taking into account the changes in the external threat environment and the tightening of the regulatory requirements, this sector also needs to make improvements to ensure that their ICT security processes are prepared to adequately manage the risks associated with external ICT service providers.

Limiting financial fraud

There was a significant increase in the number of social engineering attacks in 2024, which is associated with the growing possibilities provided by artificial intelligence in the implementation of more effective phishing campaigns. This was additionally facilitated by certain threat actors who were able to offer their professional knowledge and skills as a service, for example, fraud as a service.

In 2024, fraudsters stepped up their attacks on the Latvian-speaking audience, as was predicted, with artificial intelligence being increasingly used in the preparation of phishing letters and messages. According to major credit institutions, the proportion of prevented financial fraud cases in 2024 was significantly higher than that of successful fraud cases, however, the total amount defrauded from Latvia's population grew to 15.5 million euro.

In 2024, Latvijas Banka conducted an in-depth situational analysis on at least 28 customer complaints to determine whether credit institutions had taken all measures required by the regulations to prevent the loss of customer funds. Regarding some cases of financial fraud, Latvijas Banka requested additional explanations from the credit institutions, in order to gain assurance that the actions to prevent financial fraud are sufficiently effective. This resulted in requesting the credit institutions to fully or partially compensate the affected clients for the loss of funds.

In cooperation with the Finance Latvia Association, Latvijas Banka developed guidelines for financial fraud risk management and mitigation in 2024 to promote a common approach across credit institutions and implement good practices in financial fraud risk management as well as to promote cooperation in combating financial fraud among credit institutions. These guidelines can be used by credit institutions as well as other financial market participants who are interested in implementing good practices in the field of financial fraud risk management.

 

Latvijas Banka's achievements in implementing the new regulation

In 2024, the development of the second level regulation of the Digital Operational Resilience Act (DORA) together with EU supervisory authorities, and the implementation of the DORA continued. In relation to that, Latvijas Banka, as the supervisory authority for the ICT processes of the financial market participants, will be assigned new functions, including broader responsibilities in supervising third-party service providers and digital operational resilience testing. The DORA grants new powers to supervisory authorities, while it also provides new means for more effective supervision. Latvijas Banka experts participated in the working group organised by the Ministry of Finance to make recommendations for the legal changes needed for the DORA implementation.

During the reporting year, the Law on Digital Operational Resilience of the Financial Market and the Use of Artificial Intelligence was drafted, work was underway on the development of a new regulation and amendments to the existing regulation as well as the development and application of a new supervisory methodology. The previously effective ICT and security risk management regulations and reporting regulations on significant payment service incidents were repealed. The requirements of those regulations will be fully replaced by the new regulatory framework.

In relation to the implementation of the DORA requirements, Latvijas Banka:

• organised consultation meetings with financial market participant associations and individual market participants to explain the new regulatory requirements and the second-level regulatory technical standards that will be applied from 2025;
• provided more than 30 explanations on individual issues electronically, as well as regularly updated information on Latvijas Banka's website;
• provided explanations to financial market participants of the purpose and application of the Law on Digital Operational Resilience of the Financial Market and the Use of Artificial Intelligence;
• conducted a survey of market participants in December 2024 on their readiness to comply with the requirements of the DORA. Judging by the responses, the average compliance of market participants was at 65%.

Chart 32. Self-assessment of the financial market sectors readiness to comply with the DORA requirements (December 2024; average; %)

Supervision of money laundering and terrorism and proliferation financing risks

The goal of supervising ML/TPF risks and sanctions risks is to ensure that the financial sector has adequate and effective control mechanisms in place to prevent the financial market from being used for money laundering and sanctions violations. This is also crucial for enabling financial institutions to interact with other financial institutions worldwide, reduce the costs of international payments, and accelerate the speed of payment execution. If a financial institution's control systems are ineffective, other financial institutions may be unwilling to engage in cooperation, as such partnerships can expose them to a risk of involvement in money laundering or sanctions violations.

Historically, the primary risks in the financial sector were linked to servicing foreign customers. However, in recent years, the customer structure of financial institutions has undergone a significant shift, with domestic and EU customers now comprising the majority. The National Risk Assessment of Latvia also underscores that the country's risk profile has changed, with Latvia's financial sector no longer being regarded as a financial hub. Previously, the source of illicit funds was predominantly associated with foreign countries. However, in 2024, the most significant risks were linked to criminal activities occurring domestically. Based on the financial market risk assessment, Latvijas Banka identified the following as the key risks for 2024:

• tax evasion;
• sanctions circumvention;
• fraud.

Chart 33. Changes in the geographical structure of customer deposits in Latvian credit institutions (%)

The MONEYVAL 6th Round of Evaluation commenced in 2024 serves as a significant affirmation of the robustness of Latvia's financial sector and the progress made in preventing financial crimes. In recent years, Latvia has introduced substantial reforms, improving its regulatory framework and improving institutional capacity and inter-institutional cooperation. These measures have significantly bolstered our capacity to effectively prevent money laundering and terrorism financing, while simultaneously enhancing Latvia's reputation in the international financial system.

 Until 1 April 2024, Latvijas Banka had been responsible for issuing licences to financial market participants in regard to regulatory exceptions to sanctions. However, as of 1 April 2024, this responsibility was transferred to the Financial Intelligence Unit, which assumed the role of the central sanctions’ authority. As of 30 December 2024, Latvijas Banka took over the supervision of virtual service providers in the area of AML/CFTP from the State Revenue Service. In preparation for assuming supervisory responsibilities, Latvijas Banka not only refined regulatory frameworks and guidelines but also organised experience exchange visits with supervisory authorities in other countries to adopt best supervisory practices in this domain. Employees of Latvijas Banka also engaged in specialised training on ML/CFT risks within the virtual service field, with nine employees earning international certificates, including ACAMS and ICA certificates.

In 2024, a key priority for Latvijas Banka in the AML/CFTP domain was to enhance the accessibility of financial services while effectively implementing a risk-based approach in practice. A detailed overview of the activities undertaken is outlined in the section titled Accessibility of Financial Services.

Inspections and their results

In 2024, Latvijas Banka issued a warning to one credit institution, while the Chair of the Board of another credit institution was fined 31 731 euro, and a Board Member responsible for AML/CFTP compliance received a warning.

The findings of the 2024 inspections in the field of ML/CFT risk management revealed that financial institutions enhanced their internal control systems further, including in areas such as sanctions risk management and transaction supervision. The most notable improvements were observed in financial institutions' capacity to identify and understand their inherent risks, as ongoing progress remains critical for institutions to further strengthen the effectiveness of their systems by deepening the application of the risk-based approach and optimising the use of resources.

In 2024, Latvijas Banka carried out a horizontal review of all credit institutions to ensure that risk management measures are proportionate to the level of risks and that access to financial services remains safeguarded. Based on the review findings, credit institutions developed individual remediation plans in cases where deficiencies were identified. Latvijas Banka also compiled summaries of best and undesirable practices to foster the adoption of best practices and ensure the uniform application of requirements.

In addition, financial institutions consistently submitted to Latvijas Banka the procedures developed for the introduction of a new product or service throughout the reporting year. Following the assessment of these procedures, Latvijas Banka offered recommendations to address identified deficiencies, aiming to proactively enhance the effectiveness of financial institutions' internal control systems.

Changes in the regulatory framework

Improving the legal framework for the operation of financial market participants

Effective and clear regulation is crucial for the development of the financial sector, and the continuous enhancement of regulatory frameworks is a core element of Latvijas Banka's daily operations. This process is intrinsically tied to both reinforcing the stability of the financial system and fostering an environment that supports sustainable growth. A critical role is played in advancing European-level regulatory improvements and initiatives, with a particular focus on fostering the growth of small and dynamic sectors within the financial sector, ensuring they benefit from a proportionate and appropriate regulatory environment.

In 2024, Latvijas Banka concluded the two-year process of reaffirming the FCMC regulations, while continuing to refine the legal framework governing the activities of financial market participants. This included the implementation of EU directives, the adoption of guidelines issued by EU institutions, and the enforcement of applicable EU regulations.

Key activities in 2024

The completion of the process to review and reaffirm external regulations issued by the FCMC, which commenced in 2023, was one of the most significant accomplishments of Latvijas Banka in 2024, marking a key milestone in regulatory enhancement. This process not only ensured the reaffirmation of regulations but also their revision and refinement, aligning them with EU regulation and the evolving trends shaping the development of the Latvian financial market:

• the review of the regulations was prompted by the integration of the FCMC into Latvijas Banka. Under the transitional provisions of the Law on Latvijas Banka, all external regulations issued by the FCMC were set to expire on 31 December 2024;
• in 2024, the reaffirmation process for 144 external regulations issued by the FCMC was completed. This process involved the review of new Latvijas Banka's regulations by internal committees, engagement with public consultation mechanisms, evaluation by the Consultative Financial Market Council, and final endorsement by the Council of Latvijas Banka;
• as part of the reaffirmation process, Latvijas Banka conducted an assessment of the existing regulatory framework and the bank's delegated authority. This led to an optimised regulatory framework structure, including a streamlined set of regulations – reducing the number of regulations from 144 previously issued by the FCMC to 116 adopted by Latvijas Banka. In addition, the regulatory requirements outlined in the regulations were updated and refined to align with the evolving trends in EU legislation and within the Latvian financial market.

In 2024, Latvijas Banka alleviated the reporting burden by abolishing five data requests binding credit institutions, while also reducing the frequency of reporting or volume of information required in an additional five data requests. Meanwhile, the submission deadlines for two data requests, relevant to investment firms, electronic money institutions, and payment institutions, were extended, thereby enhancing the flexibility and efficiency of the data preparation process for these financial market participants.

On 9 December 2024, the Council of Latvijas Banka decided to lift the heightened risk weight applied to credit institutions for transactions secured by mortgages on commercial real estate located in the Republic of Latvia, with this change taking effect on 1 January 2025. The decision marked the completion of the gradual reduction of the heightened risk weight that began in 2023, initially lowering the risk weight to 80% as of 30 June 2024 – down from the 100% risk weight that had been in effect since 2007. Going forward, these transactions will be governed by the harmonised requirements set out in the Credit Institution Capital Requirements Regulation (CRR) at the EU level, including the application of a minimum risk weight of 60%.

The heightened risk weight was removed due to the gradual improvement in the credit quality of commercial real estate exposures within credit institutions' portfolios since 2007, coupled with a significant reduction in the associated risks. The decline in interest rates, along with other factors, contributed to more favourable conditions in the real estate market throughout 2024. However, uncertainty within the sector remained notably high. A key factor in the decision to cease the application of stricter national requirements was the amendments made to the CRR, which, starting in 2025, enhance the risk sensitivity of the requirements in this area and increase the minimum applicable risk weight from 50% to 60%. The reduction in risk weight is expected to lead to a decrease in capital requirements for several credit institutions, enabling them to accelerate lending activities both in the commercial real estate sector and across other segments.

In 2024, Latvijas Banka significantly revised the Regulation on Capital Adequacy Assessment Process of Credit Institutions to harmonise and enhance, following best practices, the process for evaluating the capital adequacy needed to cover the inherent and potential risks faced by credit institutions. The amendments defined and clarified the procedures for determining the required capital for credit risk, interest rate risk in the non-trading book (IRRBB), environmental, social, and governance (ESG) risks, as well as other material risks inherent in the operations of credit institutions.

Key activities in 2025

An environment that favours innovative and secure financial services

During the reporting year, a legal framework was established to support the development of the crypto-currency services sector in Latvia, while also enhancing its supervision, thereby promoting innovation and security.

Regulatory aspects in the development of new services

On 13 June 2024, the Saeima adopted the Law on Crypto-asset Services. It was developed in accordance with the Regulation on markets in crypto-assets (MiCA) framework. The purpose of the Law is.

To implement the MiCA requirements, Latvijas Banka:

• established a dedicated team for the licensing and supervision of crypto-asset service providers, composed of experts with extensive expertise and specialised skills in crypto-assets and blockchain technologies;
• enhanced the expertise of employees across various domains, horizontal training sessions on crypto-assets and blockchain technologies were organised, empowering them to effectively supervise the crypto-asset market;
• actively engaged in working groups of European supervisory authorities (ESMA, EBA, EIOPA), playing a role in shaping coordinated guidelines, while offering insights drawn from Latvia's regulatory practices;
• acquired a blockchain surveillance tool that enables the comprehensive supervision of AML/CFTP and regulatory compliance across the operations of crypto-asset service providers by thoroughly assessing the available tools in the market, considering their functionality, reliability, and compliance with regulatory needs;
• participated in a collective procurement organised by ESMA to acquire a market manipulation detection tool;
• reviewed and enhanced the supervisory processes and their governing procedures to integrate the specific MiCA requirements, ensuring coverage for both on-site and off-site supervision activities;
• organised several information events aimed at equipping crypto-asset service providers with the knowledge and tools necessary to ensure compliance with MiCA requirements.

The Artificial Intelligence Act (AI Act) entered into force on 1 August 2024, with its provisions scheduled to become applicable on 2 August 2026. However, certain exception provisions are set to take effect earlier, for example, the restriction on prohibited artificial intelligence practices. The AI Act was developed to improve the functioning of the internal market by laying down a uniform legal framework. This focused on development, placing on the market, putting into service, and using artificial intelligence systems in accordance with EU values to promote the uptake of human centric and trustworthy artificial intelligence, while ensuring a high level of protection of health, safety, fundamental rights, including democracy, the rule of law, and environmental protection, to address the harmful effects of AI systems in the EU and to support innovation. The AI Act ensures the free cross-border movement of AI-based goods and services, thus preventing Member States from imposing restrictions on the development, placing on the market, and use of AI systems. Latvijas Banka also developed a plan for the implementation of the AI Act and the monitoring of its enforcement.

In 2024, Latvia became the first EU Member State to amend its national legislation to offer non-bank payment service providers, including payment institutions and electronic money institutions, direct access to the payment system EKS. This initiative established a level playing field for payment service providers by ensuring equitable access to payment system operator services, thereby enabling them to prepare for substantial shifts in the payments market. The Instant Payments Regulation mandates the adoption of instant payments across the European payments area. Starting in 2027, non-bank payment service providers will be required to offer instant payment solutions to their customers, alongside traditional euro credit transfers. The Regulation further mandates that the pricing principles for instant payments be aligned with those for credit transfers, ensuring uniform service accessibility across all customer service channels. Starting in October 2025, all payment service providers will be required to verify the given name and surname or business name of the payment recipient entered by the customer against the corresponding IBAN account number. This measure is designed to enhance fraud protection and allow for the verification of the account holder before payment confirmation. In 2024, Latvijas Banka approved a supervisory action plan to ensure the timely implementation of the Instant Payments Regulation by all payment service providers in Latvia.

Latvijas Banka's support instruments for the development of financial technologies

Latvijas Banka strengthened its support instruments for the development of financial technologies. In 2024, the number of consultations offered by the Innovation Hub doubled compared to 2023, reaching 109 in total. They mainly focused on payment services, with a significant emphasis on questions regarding the possibility of connecting to Latvijas Banka's EKS and the ability to process payments directly within the Single Euro Payments Area (SEPA). The number of consultations provided to foreign companies increased as they assessed the potential of selecting Latvia as their country of domicile for offering both payment and crypto-currency services in the European market. A third of the consultations provided by Latvijas Banka focused on crypto-currency services, offering guidance to potential market participants on the licensing procedure and requirements. This pertains to the implementation and enforcement of MiCA, which took effect on 31 December 2024, as well as the role of Latvijas Banka in supervising the crypto-asset service provider sector. Several potential market participants began the pre-licensing phase to gather feedback on the planned business model, its inherent risks, and possible risk management mechanisms. The pre-licensing phase enables market participants to prepare thoroughly for the licensing process to ensure its smooth progression.

Chart 34. Topics and number of consultations provided at the Innovation Hub in 2024

To enhance the understanding of financial market participants and educate them on the latest regulations in the fields of financial technologies and innovation, Latvijas Banka organised a series of public events throughout the reporting year:

• a seminar on innovations in the Latvian market and artificial intelligence, which brought together over 100 financial market professionals from Latvia in person;
• a webinar on the licensing process and supervision within the crypto-asset services domain, which attracted participants from around 100 countries to understand the latest regulation, as well as learn about Latvijas Banka's expectations regarding the licensing and supervision process.

The central annual event of the FinTech sector was the Latvia FinTech Forum 2024, organised for the third time by Latvijas Banka in cooperation with the Investment and Development Agency of Latvia and the Investment and Tourism Agency of Riga.

Latvia FinTech Forum on 5 November 2024.

Latvia FinTech Forum 2024 brought together a record number of participants, promoting the development of financial innovations and positioning Latvia as a regional FinTech hub. Riga hosted about 450 participants, one-fifth of them coming from abroad.

The primary target audience of the forum encompassed current and prospective participants within the FinTech ecosystem, industry partners, public and educational institution representatives, politicians, sector professionals, and company founders. The goal of the forum was to educate the public and participants in the FinTech ecosystem on current topics in financial innovation and regulation, as well as to position Latvia as a regional FinTech hub on the international stage. The key discussion topics of 2024 were:

• progress and analysis of the implementation of Latvia's FinTech Strategy;
• technological advancement of the financial sector (Web3 and crypto-asset services, artificial intelligence);
• risks and opportunities of using artificial intelligence in the financial sector.

For the second year in a row, a FinTech startup competition FinTech Factor was also held during the forum, where companies competed for an investors' prize by pitching their innovative business ideas from the main stage.

Chart 35. Visitors to the Latvia FinTech Forum 2024 by professional field (%)

^{Source: Latvijas Banka.}

Chart 36. Geography of the Latvia FinTech Forum 2024 participants (excluding representatives from Latvia)

^{Source: Latvijas Banka.}

Innovative solutions in the financial market

For several years, Latvijas Banka has been surveying financial market participants to gain insights into trends and developments in financial innovation. In 2024, the survey questionnaire was expanded to include questions on the use of artificial intelligence in the operations of market participants, with 178 market participants taking part in the survey. Survey results indicate that a growing number of participants in the Latvian financial market use innovative financial technology solutions. Compared to 2021, the number of market participants using financial innovations doubled in 2024 (from 44 to 88 market participants).

Chart 37. Number of respondents offering innovative services to their customers

The insurance and credit institution sectors are the most active users of innovative solutions. Survey data collected over several years show that the most widely used innovative solutions include:

• application programming interface (API);
• cloud services;
• artificial intelligence;
• biometrics.

Chart 38. Technologies most often used by market participants (the number of respondents confirming the usage)

In 2024, the number of companies utilising artificial intelligence solutions to deliver financial services more than doubled, rising to 34 from just 14 in 2023. The leaders in adopting artificial intelligence solutions are participants in the insurance sector, investment firms, and investment management companies. Survey data also reveal that a number of market participants that participated in the survey, and had not yet adopted artificial intelligence, plan to do so in the future.

Based on the responses from market participants already utilising artificial intelligence, the technology was most widely used in 2024 for:

• customer services;
• marketing;
• design and development of products;
• management of insurance indemnities;
• pricing and underwriting of risks;
• sale;
• risk management;
• transaction monitoring.

Nearly all survey participants utilising artificial intelligence reported using tools like ChatGPT to assist with their daily tasks. Market participants acknowledged that artificial intelligence helps boost efficiency and productivity, enables resource optimisation, and enhances the automation of business processes.

Chart 39. The results achieved by market participants and the benefits derived from utilising artificial intelligence

However, while striving for good results with artificial intelligence, market participants also encountered several challenges, including:

• information system security;
• data security;
• errors in artificial intelligence systems;
• Latvian language deficiencies in artificial intelligence systems.

Data from the 2024 survey revealed that participants in the Latvian financial market introduce new and innovative business models. Several participants in the financial market sector use solutions offered by BigTech companies to enhance the efficiency of their business models and processes. Market participants also incorporate green technology solutions into their business models; these solutions include the assessment and integration of sustainability aspects. Digital customer acquisition is the most widely used innovative process. Other commonly used innovative processes include cloud services and biometric solutions. Application programming interfaces, digital platforms, and instant payments rank among the most widely used innovative technologies. Among innovative products, on-demand insurance is the most widely utilised in the Latvian market. This insurance solution is designed to customise the service according to the individual needs of each customer.

Survey data reveal that market participants encounter challenges in implementing innovations, with regulatory requirements being one of the most significant. Companies must navigate complex regulations, which differ across countries and regions. Entrepreneurs also identified several critical risks and challenges, including operational risks, cyber-security threats, data privacy and protection concerns, as well as issues related to technology integration.

Development of supervisory technologies at Latvijas Banka

Supervisory technologies or SupTech represent a specialised operational area at Latvijas Banka designed to deliver high-tech supervisory services. In 2024, a total of 43 SupTech projects of varying scales were developed, achieving an overall completion rate of 94% of the planned objectives. In the context of regular supervision, Latvijas Banka started using an internal analytics portal. This serves as a single access point for the analysis of supervisory data, streamlining information retrieval and minimising the risk of overlooking critical financial details regarding market participants.

The transition to the standardised international financial data reporting framework – Extensible Business Reporting Language (XBRL) – progressed further, with the implementation of 24 national and international reports. This standard helps market participants in streamlining data preparation and error description, as well as enables the maintenance of a centralised and standardised supervisory financial data warehouse at Latvijas Banka. Overall, it minimises solution fragmentation, enhances analytical capabilities, and accelerates the introduction of analytical products, while also reducing the human resources needed to maintain the technological infrastructure.

SupTech solutions are an important part of Latvijas Banka's in-house innovation. During the reporting year, iLab projects were executed focusing on the application of artificial intelligence in surveillance compliance processes and the supervision of crypto-asset services. As a result, a Generative AI assistant, powered by artificial intelligence, was introduced to facilitate the legal compliance analysis of securities issuance prospectuses. This will notably streamline the evaluation process of these prospectuses, leading to significant time savings and, over time, a reduction in human errors. It should be noted, however, that in complex information analysis processes, improving the quality of analysis requires time and the involvement of experts.

As a result of the iLab project focused on supervising crypto-asset service providers, a supervision process was defined, and suitable SupTech solutions selected.

Considering that one of the supervisory objectives of Latvijas Banka is to provide increasingly better supervisory services to market participants, a licensing template prototype was developed during the reporting year, which will form the basis for creating a more convenient and comprehensible process for potential market participants to search for and evaluate the necessary operating licences.