The Council of Ministers today approved the new solvency regulations for the financial sector with a Royal Decree Law that contains the most urgent aspects and a Draft Law for subsequent parliamentary processing. This is intended to comply with the Basel III agreements and their corresponding transposition into European regulations. Thus, it is about strengthening financial institutions and improving corporate governance standards in order to overcome the shortcomings that gave rise 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 Basel Accord III, was the most relevant international response to these regulatory shortcomings. The central axes of this agreement were transformed at the end of June this year into harmonized regulations of the European Union, through two legal instruments, a regulation and a directive. These rules replace the entire previous solvency legal framework and in the case of the regulation, it comes into force automatically 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 regulations as a Spanish regulation and discipline.
Secondly, the regulation introduces 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 it may reach 200%.
The third aspect that regulates the royal decree law seeks to avoid negative consequences on our financial regulation derived from the entry into force of the new European regulations. In this sense, the legal regime of the Financial Credit Institutions is modified, which, provisionally and until the specific regime is approved, lose the consideration of 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requirement that had been introduced in the Memorandum of Understanding (MoU) signed with the European authorities is repealed because it is incompatible with the new requirements.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 transitory provision is incorporated in order to mitigate the effects that its repeal may produce.
As for what are known as DTAs (deferred tax assets), the royal decree law modifies the tax regulations of corporation tax in order to allow them to continue computing as first-class capital, in line with the already applied in other EU states. The DTAs included are temporary differences due to insolvencies, foreclosed assets and pension funds.
Regarding the Draft LawThe regulation focuses on three blocks: the legal regime of credit institutions, the prudential supervision and solvency of credit institutions, and the sanctioning regime. While the decree law comes into force in January 2014, the Government's intention is that the law be 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 procedure, and corporate governance.
In terms of 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 boards in which a director may 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 Chief Executive Officer (which will exceptionally be authorized by the Bank of Spain) is limited.
- Variable remuneration is limited to 100% of fixed remuneration, unless the shareholders' meeting authorizes exceeding this threshold, up to a maximum limit of 200%.
- Part of the total variable remuneration, to be determined by the entity, must be subject to clauses of reduction or even recovery of remunerations already satisfied.
- It also introduces the obligation for entities to have a remuneration committee and an appointments committee.
- Entities are required to publish the total remuneration received annually by all members of their board of directors.
- The need to legally approve their remuneration policies extends to all credit institutions, in parallel to what will be required of listed companies, as proposed by the Corporate Governance Expert Committee.
With regard to the prudential supervision and solvency of credit institutions, the draft bill integrates the supervisory functions in solvency of the Bank of Spain and the obligations of the entities, systematizing Spanish regulations and incorporating new developments from the EU. These are:
- For the first time, the Bank of Spain is obliged to present at least once a year a Supervisory Program that includes the content and the form that the supervisory activity and the actions to be taken will take by virtue of the results obtained. This program will include preparing a stress test at least once a year.
- The obligation of credit institutions to publish annually the so-called Annual Banking Report is established, a document that collects data such as the number of employees, taxes to pay or public subsidies received, among others, on a consolidated basis.
On the other hand, all the new solvency requirements that are left for national decision are incorporated. For these purposes, the so-called capital buffers are foreseen, which allow supervisors to demand capital levels higher than those established in the 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 penalties are increased and the formula for their calculation is modified, becoming, in the case of very serious infringements, up to 10% of the total annual net turnover or up to 10 million euros if the percentage was less than 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 amended to establish parallel obligations to those provided for credit institutions.