Opinion of the European Central Bank of 16 May 2014 on the legal framework for credit institutions and financial companies (CON/2014/34)

OPINION OF THE EUROPEAN CENTRAL BANK of 16 May 2014 on the legal framework for credit institutions and financial companies (CON/2014/34) Introduction and legal basis

On 5 March 2014, the European Central Bank (ECB) received a request from the Portuguese Minister of State and for Finance for an opinion on a draft law (hereinafter the ‘draft law’) amending Decree-Law No 298/1992 of 31 December 1992 establishing the legal framework for credit institutions and financial companies and other closely related laws and decree-laws (hereinafter the ‘legal framework’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and on the third and sixth indents of Article 2(1) of Council Decision 98/415/EC , as the draft law relates to the Banco de Portugal (BdP) and to rules applicable to financial institutions insofar as they materially influence the stability of financial institutions and markets. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft law

1.1 The draft law introduces changes to the legal framework whose main purpose is to implement Directive 2013/36/EU of the European Parliament and of the Council by incorporating the relevant provisions in the banking law, and to effect changes and

clarifications to Portuguese law made necessary by Regulation (EU) No 575/2013 of the European Parliament and of the Council . The draft law introduces changes with regard to, inter alia, capital buffers, risk management, corporate governance and administrative sanctions, as required by Directive 2013/36/EU. It also proposes amendments to several related laws, such as Decree-Law No 317/2009 of 30 October 2009 which approves the legal framework governing the taking up of the business of payment institutions and the provision of payment services. 1.2 The draft law also contains amendments to the resolution framework for credit institutions in order to clarify some of the provisions of Decree-Law No 31-A/2012 of 10 February 2012, which introduced a resolution regime into the legal framework for credit institutions and financial companies. In addition to the implementation of Directive 2013/36/EU, the draft law introduces the following amendments: (a) reduction of the list of entities that are considered as credit institutions; (b) in-depth revision of the sanctions regime; (c) express introduction of the ‘no creditor worse off principle’ in the resolution of credit institutions, which has until now only been implicit; (d) reorganisation of the bank accounts database regarding the disclosure of information to relevant authorities; and (e) revision of the regime for assessing suitability of members of the management body and its extension to key function holders.

2. General observations

The ECB generally welcomes the draft law, which implements Directive 2013/36/EU while reflecting the participation of the BdP in the single supervisory mechanism, and clarify the ‘no creditor worse off principle’ in the current framework. It is important that the transposition into national law of the micro- and macro-prudential tools contained in Directive 2013/36/EU and the implementation of the requirements that fall under the remit of 5 6 the SSM Framework Regulation are carried out accurately .

3. Implementation of Directive 2013/36/EU

3.1 The draft law revises the criteria and requirements for assessing the suitability of the members of the management body and of the key function holders of a credit institution in order to comply with Directive 2013/36/EU and with guidelines from the European Banking

Authority (EBA) . It also implements the options under Articles 412(5), 413(3), 458(1) and 493(3) of Regulation (EU) No 575/2013. By these means, the draft law helps promote consistency across all participating Member States, thereby helping to ensure a level playing field and lowering the risk of regulatory arbitrage . 3.2 The draft law also revises the sanctions regime in order to align it with Articles 64 to 72 of Directive 2013/36/EU and with the rules laid down in Directive 2005/60/EC of the European 9 10 Parliament and of the Council and in Commission Directive 2006/70/EC . Furthermore, it contains new and clearer rules regarding the disclosure of information relating to bank accounts to certain entities in circumstances where exceptions to the obligation of professional secrecy apply . 3.3 The draft law provides that the categories of entities to be considered as credit institutions will be limited to: (a) banks; (b) savings banks; (c) central mutual agricultural credit banks and mutual agricultural credit banks; (d) credit financial institutions ; and (e) any other undertakings which fulfil the definition of credit institution and are classified as such in the law. 3.4 A new Article 4A lists the investment firms and specifies which of them are subject to the legal framework and to the prudential supervision of the BdP (dealers, brokers, wealth management companies, foreign exchange and money market mediating companies). 3.5 Although the draft law leaves unchanged the definition of ‘credit institution’, it reduces the list of entities that may be considered as such in Portugal. It removes certain categories of credit institutions that are currently provided for in the banking law but not used in practice (e.g. credit purchase financing companies) and classifies certain other categories of credit institutions as ‘financial companies’ (e.g. investment companies, financial leasing companies, factoring companies) . The ECB understands that ‘financial companies’ will not be authorised to accept deposits from the public and will not be subject to all of the

prudential provisions laid down in Directive 2013/36/EU and Regulation (EU) No 575/2013, and that the BdP will lay down rules specifically applicable to them. 3.6 The ECB considers that the above might allow financial companies to be more competitive by reducing their administrative costs in the context of European regulation. It is confident that a level playing field will be preserved, thus safeguarding all of the interests in a wellfunctioning banking system and the financial system as a whole . The relevant authorities should, however, ensure that the transfer of these institutions, which were previously regulated as credit institutions, to a less onerous regime of prudential regulation is in line with Union law. This is particularly the case if they still fulfil the criteria for authorisation as credit institutions.

4 Amendments to the resolution framework

As mentioned above, the draft law introduces some amendments to the resolution framework to clarify some of its provisions. In particular, it introduces the ‘no creditor worse off principle’ , which is not expressly set out in the current legal framework. The ECB welcomes this amendment as it is an essential core principle of the European Commission’s proposal for a directive on the recovery and resolution of credit institutions and investment firms (hereinafter the ‘proposed BRRD’). However, this does not preclude the need to amend more broadly the resolution framework in view of the entry into force of the proposed BRRD.

This opinion will be published on the ECB’s website.

Done at Frankfurt am Main, 16 May 2014.

[signed]

The President of the ECB

Mario DRAGHI