On 23 November, Decree-Law No 157/2014 of 24 October 2014 entered into force, amending the Legal Framework of Credit Institutions and Financial Companies.
Decree-Law No 157/2014 of 24 October 2014 transposed the European Union directive on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms – Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 ("CRD IV")
[1]. The Decree-Law also introduced other amendments to the Legal Framework of Credit Institutions and Financial Companies besides those arising from transposition of the directive.
The Decree-Law reformulates the range of credit institutions and financial companies, strengthens Banco de Portugal's range of corrective measures and legal enforcement powers, establishes more stringent rules for the members of the management and supervisory boards and for members of staff who have a significant influence on the management of credit institutions and financial companies, defines new requirements in the area of remuneration policy and new transparency requirements in relation to corporate governance, and awards Banco de Portugal the possibility to order the building up of capital buffers.
With the Single Supervisory Mechanism entering into operation, the European Central Bank, under the specific responsibilities conferred upon it in the area of prudential supervision of credit institutions, starts to apply the national legislation that transposes the provisions outlined in the CRD IV regarding that supervision.
1. Reformulation of the range of credit institutions and financial companies
The set of entities qualified as 'credit institutions' has been reduced.
A type of credit institution that is no longer used in practice by economic agents ('credit purchase financing companies') has been repealed.
Most entities that were not allowed to receive deposits but could receive other repayable funds from the public are requalified as 'financial companies'. These entities may no longer receive repayable funds from the public, but may continue to carry on the other activities that they were qualified for. The requalification of these entities will allow them to reduce the context costs determined by European regulation and thereby make themselves more competitive in the domestic market.
Creation of the 'credit financial company'
'Financial companies' now include a new type: the 'credit financial company'. Credit financial companies will be able to carry on similar activities to those of credit financial institutions, except receive repayable funds from the public.
2. Banco de Portugal has strengthened powers
The set of corrective measures applicable by Banco de Portugal as part of the supervision process has been broadened. Banco de Portugal may request divestment of activities that pose excessive risks, restrict or prohibit the remuneration of shareholders or holders of other own funds instruments, impose additional or more frequent reporting requirements and order specific requirements in relation to liquidity.
Easier to report breaches
A mechanism for reporting breaches to Banco de Portugal has been established, allowing anyone that becomes aware of serious evidence of breaches of legal and regulatory provisions to present their report to the supervisory authority.
Power to require capital buffers
The Decree-Law provides that under certain conditions, Banco de Portugal may require credit institutions to present higher level of own funds, by establishing capital buffers. These additional capital requirements ultimately aim to mitigate risks and safeguard financial stability, with Banco de Portugal responsible for applying the requirements relating to these buffers in its role as national macro-prudential authority.
It also establishes a list of capital conservation measures, which includes restrictions on the distribution of dividends and the need for presenting capital conservation plans.
Legal enforcement system is strengthened
The Decree-Law defines additional breaches and revises the maximum fine applicable to particularly serious breaches to €5 million for individuals and to 10% of annual net turnover for companies or €5 million, whichever is higher.
The criteria for applying fines have been adjusted and the standards regarding disclosure of decisions have been improved.
The Decree-Law introduces a very important set of amendments to encourage the report of breach mechanism while at the same time strengthening Banco de Portugal's powers of intervention, without prejudice to the essential rights and guarantees of the defence of anyone who has been charged. The amendments include the following:
- Creation of a crime of disobedience of Banco de Portugal orders or mandates;
- Introduction of a new cause for suspending the period of limitation that ultimately, given all applicable suspension and interruption factors, allows the maximum period of limitation to be extended to 12.5 years for mere breaches and to 17.5 years for particularly serious offences. Where the facts behind the breach procedure have been concealed, the period of limitation starts only from the moment Banco de Portugal becomes aware of those facts;
- Introduction of stricter limits on the production of testimonial evidence. As a rule, those who have been charged may not nominate more than three witnesses per infringement, nor more than 12 overall;
- Stipulation of a broad set of precautionary measures, including the imposition on individuals of restrictions on carrying out activity, the preventive suspension to the exercise of a given activity, role or position by the defendant or the full or partial preventive closure of the establishment where the illicit activity is carried out;
- Adjustment of the summary proceedings and broadening of its scope of use;
- Provision that, as a rule, appeal of decisions issued by Banco de Portugal only has suspensive effect if the appealer provides surety, within 20 days, to the value of half the fine applied.
3. Greater control of institutions' internal governance
Stricter rules for the members of the management and supervisory boards
The new Decree-Law introduces additional requirements in terms of suitability, reputation, qualifications, experience, independence and availability of the members of the management and supervisory boards of credit institutions and financial companies.
In this regard, the suitability assessment expressly requires that Banco de Portugal carries out a prognosis that for preventive purposes must take into account all the circumstances that permit assessment of whether those in question will manage the institution in a sound and prudent manner, including analysis of the way those in question usually manage their professional or personal businesses or carry out their profession. The Decree-Law also lays down that the suitability assessment must not be limited to situations of conviction in a court of law or elsewhere, but may also cover any pending proceedings.
Following this Decree-Law, the composition of the corporate bodies will also be assessed as a whole, as well as the way the institutions promote diversity in its composition, taking in the consideration qualification, competence and gender criteria.
Suitability extended to the members of staff with significant influence in management
In parallel, the suitability rules for the members of the management and supervisory boards now applies, mutatis mutandis, to the members of staff with significant influence in the management of the credit institutions and financial companies, including those responsible for compliance, internal audit and risk control and management functions.
Greater accountability among institutions for assessing the members of the corporate bodies and the members of staff with significant influence in management
It will primarily be the institutions' responsibility to verify the suitability both of the members of the corporate bodies and of the members of staff with significant influence in management, for which they should approve and implement an internal selection and assessment policy.
New requirements regarding remuneration policy
The set of rules on remuneration practices and policies has been updated to ensure that the credit institutions and financial companies define appropriate remuneration policies given the size, scope and complexity of the activities they carry out and that do not encourage excessive risk-taking.
The Decree-Law lays down rules governing the structure and composition of the remuneration, namely its variable component and constituent parts, identifying the members of staff subject to these requirements.
Greater transparency in institutions' internal governance
The Decree-Law defines duties of reporting policies and practices adopted by the institutions regarding corporate governance and remuneration practices and policies.
Risk committee for the most relevant institutions
For the most relevant institutions, the Decree-Law provides for the creation of a risk committee. The risk committee comprises members of the management body that do not carry out executive roles and is responsible for:
- (i) Advising and assisting the management body in relation to the institution's risk strategy;
- (ii) Checking whether the products and services offered to clients are in compliance with the institution's business model and risk strategy;
- (iii) Assessing the remuneration policy adopted by the institution.
In the other institutions, these functions are carried out by the supervisory board.
Lisbon, 21 November 2014
