Circular 1/2021 of the Bank of Spain modifying Circular 1/2013 on the Risk Information Centre and Circular 5/2012 on banking transparency and lending responsibility

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Circular 1/2021, of January 28, of the Bank of Spain, amending Circular 1/2013, of May 24, on the Risk Information Centre, and Circular 5/2012, of June 27, to credit institutions and payment service providers, on the transparency of banking services and responsibility in the granting of loans. (BOE of January 30, 2021)

I

The main objective of this circular is to adapt Circular 1/2013, of May 24, of the Bank of Spain, on the Risk Information Centre (hereinafter, "Circular 1/2013"), and Circular 5/2012, of June 27, to credit institutions and payment service providers, on the transparency of banking services and responsibility in the granting of loans (hereinafter, "Circular 5/2012"), to the changes introduced in the regulation of the Risk Information Centre (CIR) and of the official reference rates by Order ETD/699/2020, of July 24, on the regulation of revolving credit and by which Order ECO/697/2004, of March 11, on the Risk Information Centre, Order EHA/1718/2010, of June 11, on the regulation and control of the advertising of banking services and products, and Order EHA/2899/2011, of October 28, on the transparency and protection of banking service clients (hereinafter "OM of revolving credit") are amended.

II

This circular consists of two regulations, a single final provision, and three annexes. The first regulation updates Circular 1/2013, and the second regulation updates Circular 5/2012. The single final provision establishes the entry into force of this circular, and the annexes update annexes 1 and 2 of Circular 1/2013 and annex 8 of Circular 5/2012.

On July 27, the OM of revolving credit was published in the "Boletín Oficial del Estado" (BOE), by which, among other regulations, Order ECO/697/2004, of March 11, on the Risk Information Centre (hereinafter, "OM of the CIR") is amended. Among the objectives of this order is to improve the information available to lenders to perform the solvency analysis of potential borrowers, so that positions of over-indebtedness that lead borrowers to be unable to meet their financial obligations can be avoided. Having adequate information that allows for a solid evaluation of solvency to prevent situations of excessive debt takes on special relevance in the context of the economic and social impact caused by the health crisis motivated by COVID-19.

This OM of revolving credit introduces changes in the OM of the CIR that affect various aspects of the functioning of the CIR. Specifically, it involves a review and adaptation of the regulatory framework of the CIR, aimed at providing more complete information to reporting entities and improving their capabilities in terms of available information for increasingly precise solvency analysis. To this end, it expands the perimeter of entities that must report their data to the CIR, lowers the threshold of data provided by the Bank of Spain to reporting entities and real estate credit intermediaries in the exercise of their activity, increases the volume of information that entities must report to the Bank of Spain, and advances the dates for the reporting of data that will be made available to entities. The process of reviewing the CIR regulations will be implemented progressively and will culminate with an assessment of its functioning. To this end, the OM of revolving credit establishes that, one year after its entry into force, the Ministry of Economic Affairs and Digital Transformation will assess, prior to a report from the Bank of Spain, the convenience of promoting changes in the functioning of the CIR that improve its public service function, as established in Article 59 of Law 44/2002, of November 22, on Measures for the Reform of the Financial System.

On the other hand, the exceptional situation created by COVID-19 has made it necessary to enable various financial measures to mitigate the economic impact of the pandemic. These measures have been articulated in four royal decree-laws and facilitate financing conditions for individuals, companies, and self-employed persons through the implementation of moratoria and public guarantees, and through private moratoria promoted by entity associations. To comply with the information obligations imposed by said royal decree-laws on lenders and to support the supervision and inspection activities of the Bank of Spain, reporting entities were requested to send to the CIR specific information regarding the characteristics of loans affected by the aforementioned measures.

The update of Circular 1/2013 is carried out in the first regulation with the triple purpose detailed below.

On the one hand, it is necessary to incorporate into Circular 1/2013 the changes introduced by the OM of revolving credit in the OM of the CIR. This circular addresses those changes whose entry into force will occur, in accordance with what is provided in the OM of revolving credit, in 2021. In this regard, it should be noted, first, the modification of the third and sixteenth rules to lower from 9,000 to 1,000 euros the amount of accumulated risk of a holder in an entity, which will be included in the information that the Bank of Spain returns to entities for the evaluation of their clients' solvency. Second, the inclusion, also in the sixteenth rule, of the maximum time limit for making the return information available to reporting entities and real estate credit intermediaries, which will be twenty-one calendar days from the date to which the last reported information refers. Third, the modification of the first rule with the aim of adding payment entities, including those operating in Spain, in the exercise of the right of freedom of establishment and under the regime of free provision of services, that carry out the credit activity indicated in Article 20.3 of Royal Decree-Law 19/2018, of November 23, on payment services and other urgent measures in financial matters, and e-money entities, including those operating in Spain, in the exercise of the right of freedom of establishment and under the regime of free provision of services, that carry out the credit activity indicated in Article 8.1.b) of Law 21/2011, of July 26, on e-money, as determined, in both cases, by the first additional provision of the OM of revolving credit. Finally, the fourth, fifth, and thirteenth rules are modified to determine the scope of the information that the new reporting entities must send to the CIR, which will coincide with the reduced reporting model already applied to real estate lenders and credit institutions operating under the regime of free provision of services. Likewise, the mention of the right to cancellation in the twentieth rule is updated, which is now called the "right to erasure" to align the terminology with current data protection regulations.

On the other hand, within the framework of the general reporting to the CIR established by Circular 1/2013, it is appropriate to incorporate the new information requested from reporting entities as a consequence of the crisis caused by COVID-19. This new information translates into the creation of six dimensions and the addition of new values in two other dimensions of annex 2 of Circular 1/2013.

Finally, with the aim of updating the regulation, some clarifications have been introduced in the aforementioned annex 2 to improve the reporting and technical management of the information, which will result in an improvement in the quality of the information requested from reporting entities.

Additionally, this circular introduces, in its second regulation, a modification of certain aspects of Circular 5/2012, regarding official interest rates, because the OM of revolving credit has also modified Order EHA/2899/2011, of October 28, on the transparency and protection of banking service clients (hereinafter, "OM of transparency"). With this change, among other objectives, it is sought to increase the alternatives of official interest rates that entities have, both for using them in the granting of loans and for including them as substitutes in said contracts. To this end, the list of interest rates that will have the status of official reference rates is reviewed, the name of some of the existing ones is changed, and their number is expanded. The OM of transparency empowers the Bank of Spain to establish the definition and the process for determining the official interest rates listed therein.

In particular, to the currently existing official reference rates, four indices based on different Euribor terms (one week, one month, three months, and six months) are added, another based on the "Euro short-term rate" (€STR), and any other index that is expressly established for this purpose by resolution of the General Secretariat of the Treasury and International Finance. Along with this, the MIBOR is removed from the list of official interest rates, although it maintains this status for operations formalized prior to January 1, 2000, and the Bank of Spain will continue to publish it monthly on its electronic headquarters and in the BOE.

Thus, as the main objective, the list of official rates provided for in the OM of transparency is updated, and the definition and procedure for determining the new indices are established.

For each of the Euribor terms, the index is defined as the simple monthly arithmetic mean of the daily values of the Euribor® reference index, which appears in the annex of Commission Implementing Regulation (EU) 2016/1368 of August 11, 2016, establishing a list of critical reference indices used in financial markets, in accordance with Regulation (EU) 2016/1011 of the European Parliament and of the Council on indices used as references in financial instruments and financial contracts or to measure the performance of investment funds, and amending Directives 2008/48/EC and 2014/17/EU and Regulation EU/596/2014 (hereinafter, "Regulation (EU) 2016/1011").

Regarding the reference interest rate based on €STR, it must be specified that €STR is an index that reflects the cost of funding in the wholesale financial market for one day and without collateral for deposit-taking entities located in the euro area. This index is compiled and published daily by the European Central Bank (ECB), following the methodology established by ECB Guideline ECB/2019/19, of July 10, 2019, which transposes the principles applicable to financial reference indices of the International Organization of Securities Commissions. The ECB, in its capacity as administrator of this index, is finalizing the development of a multi-term index based on €STR, which it plans to publish. This index will acquire the status of official reference rate based on €STR when the ECB completes the ongoing work and begins its publication.

Additionally, to adapt the process of determining the already existing official reference rates to the current operations of different financial markets, the circular updates the determination of four of these indices.

In the average rate of mortgage loans for more than three years for the acquisition of free housing, granted by credit institutions in Spain, the reference to the non-inclusion in the calculation of the index of interest rates communicated by savings banks that do not directly exercise the financial activity is eliminated. This reference made sense when the Bank of Spain published, in accordance with the second transitional provision of Circular 5/2012, the average type indices of mortgage loans for more than three years for the acquisition of free housing granted by banks and the average type of mortgage loans for more than three years for the acquisition of free housing granted by savings banks, in which the calculation method refers to the rates declared by savings banks that do not directly exercise the financial activity, a figure that no longer exists. Law 14/2013, of September 27, on support for entrepreneurs and their internationalization, established September 2013 as the last date for the publication of these indices.

For the one-year interbank reference (Euribor), which, in accordance with what is provided in the OM of revolving credit, is now called "one-year Euribor," the source used for its determination is replaced, so that the Bank of Spain will cease to perform simple calculations to obtain the monthly average, and will begin to publish and replicate the information compiled by the administrator of said index, the European Money Markets Institute (EMMI), which already calculates said average. As a subsidiary measure, only in the absence of such publication by the EMMI, the Bank of Spain will calculate and publish the monthly averages.

The modification of the internal yield rate in the secondary market for public debt with a term between two and six years is also motivated by the change in the source used for its determination and because the Bank of Spain will cease to perform the calculations it had been carrying out and will publish the data calculated by Sociedad de Bolsas, SA, belonging to the Bolsas y Mercados Españoles group. Sociedad de Bolsas, SA, is an authorized administrator of reference indices and is in the process of obtaining the corresponding authorization from the National Securities Market Commission regarding this debt index for the purposes of Regulation (EU) 2016/1011 on reference indices. Until the publication of the index calculated by Sociedad de Bolsas, SA, the Bank of Spain will continue to calculate the internal yield rate in the secondary market for public debt with a term between two and six years in accordance with the transitional provision introduced in Circular 5/2012 for these purposes.

The new wording of the "Interest rate swap (IRS) at five years" rate reflects the change in the source to obtain the data and the change of administrator of the underlying index from ISDA to ICE Benchmark Administration.

Finally, the maintenance of the dissemination of MIBOR by the Bank of Spain is implemented through a transitional provision in Circular 5/2012, in line with what is stated in the single transitional provision of the OM of transparency. The transitional provision equates the daily data that must be considered in the calculation of this index to that of the one-year Euribor, as was previously provided for as a subsidiary measure, as a consequence of the inactivity of the Spanish one-year interbank market.

The modifications of Circular 1/2013 and Circular 5/2012 will enter into force the day following their publication in the BOE, without prejudice to what is provided in the second final provision of the OM of revolving credit.

III

This circular complies with the principles of necessity, effectiveness, proportionality, legal certainty, and efficiency regulated in Article 129 of Law 39/2015, of October 1, on the common administrative procedure of Public Administrations, in that it achieves the pursued ends without imposing unnecessary or accessory burdens, regulating in a coherent manner with the rest of the legal system only the indispensable aspects.

Likewise, in application of the principle of transparency established in the same law, the circular, in the part corresponding to the modification of Circular 1/2013, has been submitted to the procedures of public consultation, hearing, and information regulated in Article 133 of Law 39/2015, of October 1. Regarding the modification of Circular 5/2012, the procedure of public hearing and information has been observed, but, as the latter article allows, the prior public consultation procedure has been dispensed with because the modifications introduced do not impose relevant obligations on the recipients and are limited to regulating partial aspects of this matter.

The empowerment of the Bank of Spain to modify Circular 1/2013 comes from Law 44/2002, of November 22, on measures for the reform of the financial system, and from the OM of the CIR, which develops the aforementioned Law 44/2002. On the other hand, the OM of revolving credit modifies the third final provision of the OM of transparency and empowers the Bank of Spain to establish the definition and the process for determining the official interest rates.

Consequently, in exercise of the powers granted, the Governing Council of the Bank of Spain, upon proposal of the Executive Committee and in agreement with the Council of State, has approved this circular, which contains the following

Regulations

First Regulation. Modification of Circular 1/2013, of May 24, of the Bank of Spain, on the Risk Information Centre.

The following modifications are introduced in Circular 1/2013, of May 24 [ 1 ] :

a) In the first rule, "Reporting Entities", paragraphs 1 and 2 are modified, which shall read as follows:

"1. The obligation to report to the CIR public service extends to the following entities and to real estate lenders (hereinafter, "reporting entities"):

a) Credit institutions (Instituto de Crédito Oficial, banks, savings banks, and credit cooperatives), including branches in Spain of foreign credit institutions and those operating in Spain under the regime of free provision of services.

b) Financial credit establishments.

c) Payment entities, including those operating in Spain, in the exercise of the right of freedom of establishment and under the regime of free provision of services, that carry out the credit activity indicated in Article 20.3 of Royal Decree-Law 19/2018, of November 23, on payment services and other urgent measures in financial matters.

d) E-money entities, including those operating in Spain, in the exercise of the right of freedom of establishment and under the regime of free provision of services, that carry out the credit activity indicated in Article 8.1.b) of Law 21/2011, of July 26, on e-money.

e) Mutual guarantee societies and reinsurance societies.

f) Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria, SA (Sareb).

g) Bank of Spain.

h) Deposit Guarantee Fund of Credit Institutions.

i) Sociedad Anónima Estatal de Caución Agraria (Saeca).

j) Real estate lenders referred to in Law 5/2019, of March 15, regulating real estate credit contracts, not included in the previous categories.

2. The obligation set out in paragraph 1 extends, in the case of Spanish entities, to their entire business, including that carried out by their branches abroad, and to that of instrumental companies integrated into their consolidatable group when they are residents in Spain, and their business, as an extension of the activity of said group.

Branches in Spain of foreign credit institutions, as well as payment entities and e-money entities operating in Spain in the exercise of the right of freedom of establishment, will only report to the CIR the operations of their offices in Spain.

Credit institutions, payment entities, and e-money entities operating in Spain under the regime of free provision of services will only report to the CIR the operations carried out with residents in Spain.

For the purposes of this circular, and in order to determine the obligations to transmit information, the following reporting entities shall be understood as entities subject to reduced reporting: credit institutions operating in Spain under the regime of free provision of services included in letter a) of paragraph 1, payment entities referred to in letter c) of paragraph 1, e-money entities referred to in letter d) of paragraph 1, and real estate lenders referred to in letter j) of paragraph 1.

When reporting entities cannot provide individually all or part of the data that must be reported for operations registered in a branch abroad due to being located in a country whose legislation prevents it, they must send a sworn declaration to the Bank of Spain sufficiently justifying this circumstance, detailing specifically which data is affected by the legal impossibility of transmission to the CIR and the regulation on which it is based, a copy of which will be sent along with the said sworn declaration. The sworn declaration must be updated at least every two years if the legal impediment to providing the data individually persists. If the cause preventing the sending of data ceases, reporting entities must communicate this to the Bank of Spain and, from that moment on, begin to report them individually."

b) In the third rule, "Holders and other reportable persons", paragraphs 3 and 5 are modified, which shall read as follows:

"3. Reporting entities must assign to each holder exclusively the risk, direct or indirect, that corresponds to them from the operations in which they intervene. Consequently:

a) Subsidized operations and those with holders of joint direct risks will be divided and reported to the CIR with as many different operation codes as necessary to be able to assign to each holder, or group of joint holders acting jointly, the amount that corresponds to them.

b) Operations with several holders of indirect risks will be reported monthly, as many times as necessary, in module C.2, Dynamic data of indirect risks, to be able to attribute to each holder the amount that corresponds to them.

The provisions of this paragraph do not apply to entities subject to reduced reporting, whose reporting will adhere to the criteria established for the reporting of module I, Data on the activity of entities subject to reduced reporting."

"5. Risk holders, direct and indirect, will be reported individually to the CIR, regardless of the amount of their risk in the reporting entity, except when their operations are not reportable, in accordance with what is provided in the second rule, paragraph 3. Exceptionally, the effects in which they have committed their signature may be excluded from the reporting of indirect risk in the name of a holder, provided that their amount is less than 6,000 euros and are part of a commercial credit operation with recourse. Likewise, entities subject to reduced reporting will not report to the CIR indirect risk holders who intervene in the operation as a counterparty to a purchased credit derivative, as a guarantor without the knowledge of the holder, or as a third party committed to paying amounts in a financial leasing operation.

The data of