Law 10/2014 of 26 June, on the organization, supervision and solvency of credit institutions (“Law 10/2014”) was published in Spain’s Official State Gazette on 27 June.
The purpose of Law 10/2014 is to continue adapting the Spanish legal system to the new provisions of Directive 2013/36/EU[1] (also known as “CRD IV”) and Regulation (EU) no. 575/2013[2] (also known as “CRR”).
In addition, Law 10/2014 repeals and combines some of the numerous and diffuse rules on organization and discipline of credit institutions in a single piece of legislation, although it leaves many matters to be developed by future regulations. Among others, Law 10/2014 repeals the Law of Banking Organization of 1946, Royal Legislative Decree 1298/1986 of 28 June, on the adaptation of the law on credit entities to the law of the European Communities, Law 26/1988 of 29 July, on the discipline and intervention of credit institutions and Law 13/1985 of 25 May, on investment ratios, own funds and information obligations of financial intermediaries.
The most significant changes set out by Law 10/2014 are described in the following sections.
1. LEGAL REGIME OF CREDIT INSTITUTIONS
Law 10/2014 combines the existing rules relating to the process for the authorization of credit institutions, the performance of activities in other states, the acquisition of significant holdings and the rules governing the suitability of the senior management and the limits to the positions which may be held at the same time by the senior management. New provisions relating to corporate governance and remuneration policies have also been added.
1.1. Definition of credit institution and business reserved for credit institutions
In accordance with CRR, credit institutions are defined as authorised undertakings that are engaged in taking deposits or other repayable funds from the public and granting credits for their own account. On the other hand, only the business of taking repayable funds from the public in the form of deposits loan, temporary assignment of financial assets and other similar forms, regardless of their use, is reserved for credit institutions.
1.2. Authorization process
Law 10/2014 sets out the fundamental aspects of the process for the authorization of Spanish credit institutions. It leaves the development of the terms to carry out this process to be implemented in future regulations. In line with the amendments to the authorization process for banks and credit cooperatives, the Bank of Spain, as opposed to the Ministry of Economy and Competitiveness (the “MEC”), will be entitled to authorize a credit institution.
A new set of factors which may give rise to the refusal or revocation of the authorization have been established, together with the waiver of the authorization by the institution itself and the expiry of the authorization due to the failure by the institution to commence its activities as a result of a cause attributable to it.
1.3. Establishment of branches and freedom to provide services in Spain by foreign credit institutions
- EU credit institutions: the regime which was applicable to date has been replicated, with the particularity that a process has been established in order for a financial entity (other than a credit entity) from another EU Member state, subsidiary of one or several credit institutions, or the subsidiary of such financial entity, to be able to operate in Spain.
- Non-EU credit institutions: these will be subject to the prior authorization of the Bank of Spain.
1.4. Significant holding provisions
Among others, the following provisions modify the previous regime:
- resolutions passed by a credit institution with the votes of a shareholder acting in breach of the obligations to notify the Bank of Spain may only be challenged in court to the extent that the votes corresponding to those shares have resulted in the passing of such resolutions, as opposed to being subject to potential challenge in all cases; and
- the authority to take measures in the event of the influence of significant shareholders which may damage the management or financial situation of the institution no longer corresponds to the MEC but to the Bank of Spain.
1.5. Suitability of directors, general managers and holders of similar positions
A suitability regime has been established, which is in line with the regime currently applicable to banks (which has not been repealed). There are however, certain differences, such as:
- the board of directors is required to monitor the process for the appointment of its members so that it (i) favours a diversity of experience and knowledge, (ii) facilitates the appointment of female members and (iii) is not discriminatory; and
- where appropriate, the purchasers of a significant holding will be required to assess the suitability of directors, general managers and holders of similar positions.
1.6. Limits to the positions which may be held at the same time by directors, general managers and holders of similar positions
In general, the Bank of Spain will determine the maximum number of positions that may be held simultaneously by a director, general manager or the holder of a similar position in view of the particular circumstances of the institution and the nature, size and complexity of its activities.
Nevertheless, save in case of directors appointed pursuant to a measure of replacement, directors, general managers and holders of similar positions in institutions that are significant in size, or are more complex or of a special nature, may not hold more than four non-executive positions simultaneously or one executive position at the same time as two non-executive positions.
In addition, Law 10/2014 provides a definition of executive positions, the positions that must be counted as a single position, the positions that will not be counted and the cases in which the Bank of Spain may authorise an additional non-executive position. Furthermore, the capacity of credit institutions to grant credit or guarantees to those holding such positions is limited.
1.7. Corporate governance
Law 10/2014 obliges credit institutions to put corporate governance arrangements in place that are sound and proportionate in view of the risks taken by the institution. In addition, the following obligations are established:
- Non-delegation of functions: the board of directors may not delegate functions related to corporate governance arrangements, the management and administration of the institution, the accounting and financial reporting systems, the process for the disclosure of information and the supervision of the senior management.
- Incompatibility: the chairman of the board of directors must not exercise the position of managing director simultaneously unless this situation is justified by the institution and authorised by the Bank of Spain.
- Website: a website must be maintained on which the information required by Law 10/2014 will be published and on which the institution will explain how it complies with its corporate governance obligations.
- General Viability Programme: the obligation to draft and keep an up-to-date General Viability Programme which considers all the measures that will be taken to restore the viability and financial soundness of the institutions in the event that they suffer any significant damage. The General Viability Programme will have to be put in place within the six months following the date on which the regulation setting out its contents is approved.
- Nomination committee: the obligation to establish a nomination committee comprised of non-executive directors and in which, at a minimum, a third of its members and, in any case, its chairman, are independent directors. This committee must decide on a target figure for the representation of the gender which is currently underrepresented in the board of directors.
- Responsibility of the board of directors for risk management: the board must actively participate in the management and valuation of the assets and approve and review the risk policies and strategies of the institution on a regular basis.
- Risk committee: the Bank of Spain will be entitled to determine which institutions must establish a risk committee or, as the case may be, those institutions which may establish combined audit committees in order to perform the functions of the risk committee.
1.8. Remuneration policy
Law 10/2014 includes the provisions of CRD IV relating to the obligation of credit institutions to put in place remuneration policies that are consistent with their risks. Highlighted below are the following provisions:
- the obligation to make a clear distinction between the criteria used for setting fixed remuneration and variable remuneration;
- the obligation that the remuneration policy is subject to the approval of the general shareholders’ meeting or equivalent body under the same terms as those applicable to listed companies;
- the principles[3] that will apply to variable elements of remuneration, with special attention in this regard to credit institutions which benefit from public financial assistance; and
- the obligation to establish a remuneration committee or, if the Bank of Spain so determines, a joint nomination and remuneration committee.
2. SOLVENCY OF CREDIT INSTITUTIONS
2.1. Internal capital adequacy assessment process and liquidity requirements
Law 10/2014 establishes the obligation of credit institutions to assess their capital in order to determine if it is adequate to cover the risks to which they are exposed.
In addition, it sets out the criteria which must be taken into account by the Bank of Spain when determining the adequate level of liquidity requirements for each institution.
2.2. Combined buffer requirement
In accordance with CRD IV, institutions must:
(a) in all cases, maintain a capital conservation buffer of Common Equity Tier 1 capital equal to 2.5% of their risk exposure. This requirement is applicable as from 1 January 2016 and must be fulfilled in tranches in the following three years.
(b) as the case may be, maintain the following additional capital buffers:
(i) Institution-specific countercyclical capital buffer: equivalent to the total risk exposure of the institution multiplied by a specific countercyclical buffer rate. This rate shall be the weighted average of the countercyclical buffer rates applicable in those territories where the institution has a certain credit exposure.
The countercyclical buffer must be calculated specifically for each institution or group. The rate and its calculation will be determined by future regulations.
This requirement will be applicable as from 1 January 2016 and may not exceed certain levels within the following three years.
(ii) Capital buffers applicable to global systemically important institutions (G-SII) and other systemically important institutions (O-SII): the Bank of Spain will identify which institutions qualify as G-SIIs or O-SIIs and establish the buffer which must be maintained by each of them in accordance with the following limits:
- for G-SIIs, it will range, on a consolidated basis, between 1% and 3.5% of their risk exposure; and
- for O-SIIs, it will not exceed, on a consolidated, sub-consolidated or individual basis, as the case may be, 2% of their risk exposure.
This requirement will be applicable as from 1 January 2016 and, in the case of G-SIIs, must be fulfilled in tranches in the following four years.
(iii) Systemic risk buffer: additional capital requirements which may be imposed by the Bank of Spain in order to prevent and avoid risks of disruption in the financial system with the potential to have serious negative consequences to the financial system and the real economy.
Institutions that fail to maintain the above capital buffers will have limited capacity to make distributions of Common Equity Tier 1 capital, or Additional Tier 1 instruments, or pay variable remuneration. In addition, they will be required to prepare a capital conservation plan which must be approved by the Bank of Spain.
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3. SUPERVISION
The Bank of Spain is vested with the necessary powers and faculties to perform the supervision of credit institutions, where Law 10/2014 determines the object and subjects of such supervision and the collaboration with supervisory authorities of other countries. Nevertheless, once the Single Supervisory Mechanism enters into force and is effective, the Bank of Spain must perform its supervisory functions in coordination with the European Central Bank.
In addition, the Bank of Spain is entitled to agree on prudential supervision measures, additional requirements regarding own funds or measures for intervention and replacement. Further, the Bank of Spain is subject to several obligations to publish periodical information relating to solvency rules. At the same time, credit entities are subject to additional obligations to publish information, among them, the so-called “relevant prudential information” and an annual banking report.
On the other hand, in accordance with CRD IV, the Bank of Spain must approve annual supervisory programs and carry out annual stress tests on the institutions it supervises.
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4. PENALTY REGIME
Law 10/2014 modifies the current penalty regime in order to include new types of infringements and sets out the penalties resulting from the new rules on solvency, transparency and suitability.
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5. SIGNIFICANT ADDITIONAL AND FINAL PROVISIONS
Law 10/2014 contains several additional and final provisions, which govern very different matters, such as:
- the establishment of the conditions for preferred shares to be accounted for as Tier 1 capital;
- the ability of the MEC to request information from, and perform inspections on, institutions which are not supervised but which perform financial transactions or provide financial services;
- the MEC will be the body entrusted with the authorization of structural changes in credit institutions;
- the establishment of a fee payable to the Bank of Spain for the performance of the overall assessment of credit institutions; and
- the substantial amendment of Law 24/1988, of 28 July, on the Securities Market, to, among others, transpose the CRD IV provisions applicable to investment services firms relating to suitability and limits to the positions that may be held at the same time by the senior management, corporate governance, remuneration policy, committees, capital buffers, sanctions and supervisory activity of the National Securities Market Commission.
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[1] Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013, on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC.
[2] Regulation (EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013, on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No. 648/2012.
[3] Among them: (i) the variable component must not exceed 100% of the fixed component save in case of approval of the general shareholders’ meeting granted in accordance with the procedure laid down in Law 10/2014, (ii) at least 40% of the variable remuneration is deferred over a period of between three to five years, or (iii) the variable remuneration is paid or vests only if it is sustainable according to the financial situation and results of the institution.
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1. LEGAL REGIME OF CREDIT INSTITUTIONS