The Council of Ministers approved today the new solvency rules for the financial sector with a Royal Decree Law that contains the most urgent aspects and a Draft Law for its subsequent parliamentary processing. This is intended to comply with the Basel III agreements and their corresponding transposition to European regulations. This is about strengthening financial institutions and improving corporate governance standards in order to overcome the shortcomings that led to the recent financial crisis.

The so-called “Global regulatory framework to strengthen banks and banking systems” of the Basel Committee on Banking Supervision, better known as the Basel III Agreement, was the most relevant international response to these regulatory deficiencies. The central axes of this agreement were transformed at the end of June of this year into harmonized regulations of the European Union, through two legal instruments, a regulation and a directive. These rules replace the entire legal solvency framework above and in the case of the regulation, it automatically enters into force on January 1, 2014.

The Royal Decree Partial transposition of European solvency regulations, approved today, guarantees the operational control of supervisors. This is necessary to ensure compliance with the obligations arising from the new European regulatory package for credit institutions and investment services companies. For these purposes, it expands and adapts the supervisory functions of the Bank of Spain and the National Securities Market Commission. Likewise, the direct incorporation of the aforementioned EU regulation as a Spanish regulation and discipline is carried out.

The rule introduces, in the second place, new requirements regarding remuneration. Specifically, it is established that the variable remuneration cannot exceed the fixed one unless authorized by the shareholders meeting, in which case 200% may be reached.

The third aspect that regulates the royal decree law seeks to avoid negative consequences on our financial regulation arising from the entry into force of the new European regulations. In this sense, the legal regime of the Financial Credit Institutions is modified, which, on a provisional basis and until the specific regime is approved, they lose the consideration of a credit institution. In addition, the principal capital requirement that had been introduced in the Memorandum of Understanding (MoU) signed with the European authorities is repealed because it is incompatible with the new requirements. However, a transitional provision is incorporated in order to mitigate the effects that its repeal may cause.

As for those known as DTAs (deferred tax assets, for its acronym in English), the royal decree law modifies the tax regulations of corporate tax in order to allow them to continue computing as first category capital, in line with the already applied in other EU states. The DTAs included are temporary differences due to insolvencies, adjudicated and pension funds.

As for the Bill of Law, the rule focuses on three blocks: the legal regime of credit institutions, prudential supervision and solvency of credit institutions and the penalty system. While the decree law enters into force in January 2014, the Government's intention is that the law is processed urgently for its entry into force in the first quarter of next year.

In relation to the legal regime of credit institutions, the Draft Law establishes the requirements for the operation of credit institutions in Spain regarding the authorization, suitability and honorability and corporate governance procedure.

Regarding corporate governance and remuneration, measures are introduced from the directive (2013/36 / EU) to promote good corporate governance of financial institutions. Specific:

  • Limits are imposed on the number of councils in which a director can participate (two more if executive functions are exercised and up to four if executive functions are not exercised).
  • The simultaneous exercise of the position of Chairman of the board of directors and CEO (which will be exceptionally authorized by the Bank of Spain) is limited.
  • The variable remuneration is limited to 100% of the fixed remuneration, unless the shareholders' meeting authorizes exceeding that threshold, up to a maximum limit of 200%.
  • Part of the total variable remuneration, to be determined by the entity, must be subject to reduction or even recovery clauses for remuneration already paid.
  • It also introduces the requirement that entities have a remuneration committee and an appointment committee.
  • Entities are required to publish the total remuneration received annually by all members of their board of directors.
  • The need to approve their remuneration policies in a binding manner is extended to all credit institutions, in parallel to what will be required of listed companies, as proposed by the Committee of Experts on Corporate Governance.

Regarding the prudential supervision and solvency of credit institutions, the preliminary bill integrates the supervisory functions on the solvency of the Bank of Spain and the obligations of the entities, systematizing the Spanish regulations and incorporating the novelties from the EU. These are:

  • The obligation of the Bank of Spain is set for the first time to present at least once a year a Supervisory Program that collects the content and the form that the supervisory activity will take and the actions to be undertaken by virtue of the results obtained. This program will include the development of a stress test at least once a year.
  • It establishes the obligation of credit institutions to publish annually the so-called Annual Banking Report, a document where data such as the number of employees, taxes payable or public subsidies received among others are collected on a consolidated basis.

On the other hand, all the new solvency requirements that remain for national decision are incorporated. For these purposes, the so-called capital mattresses are foreseen, which allow supervisors to demand higher capital levels than those established in Regulation (EU).

Finally and in relation to the sanctioning regime, the standard integrates the legislation already in force and introduces those modifications necessary for the transposition of the Directive. The amounts of the sanctions are increased and the formula for its calculation is modified, becoming, in the case of very serious infringement, up to 10% of the total annual net turnover or up to 10 million euros if the percentage out below this figure. In the event that the benefits derived from the infringement could be quantified, up to five times the amount of the benefits.

The European solvency package extends the provisions on supervision and solvency to investment services companies. To this end, the Securities Market Law is modified, to establish obligations parallel to those established for credit institutions.

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