Circular 3/2022 of the Bank of Spain, of March 30, amending Circulars 2/2016, 2/2014, and 5/2012

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Circular 3/2022, of March 30, of the Bank of Spain, amending Circular 2/2016, of February 2, to credit institutions, on supervision and solvency, which completes the adaptation of the Spanish legal system to Directive 2013/36/EU and Regulation (EU) No 575/2013; Circular 2/2014, of January 31, to credit institutions, on the exercise of various regulatory options contained in Regulation (EU) No 575/2013 of the European Parliament and of the Council of June 26, 2013, on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No 648/2012; 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 April 6, 2022). [1]

[1]

Includes error correction published in the BOE of June 30, 2022.

I

Directive (EU) 2019/878 of the European Parliament and of the Council of May 20, 2019, amending Directive 2013/36/EU as regards exempted entities, holding companies, mixed financial holding companies, remuneration, supervisory powers and measures, and capital conservation measures (hereinafter, "CRD V"), and Regulation (EU) 2019/876 of the European Parliament and of the Council of May 20, 2019, amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, the requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, and reporting and disclosure requirements, and Regulation (EU) No 648/2012 (hereinafter, "CRR II"), respectively amend Directive (EU) 2013/36 of the European Parliament and of the Council of June 26, 2013, on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, and Regulation (EU) 575/2013 of the European Parliament and of the Council of June 26, 2013, on prudential requirements for credit institutions and investment firms, and amending Regulation (EU) No 648/2012, representing a significant reform of the basic rules of European banking regulation since their enactment.

With regard to CRD V, the transposition process into the Spanish legal system has begun with Royal Decree-Law 7/2021, of April 27, on the transposition of European Union directives in the matters of competition, anti-money laundering, credit institutions, telecommunications, tax measures, prevention and repair of environmental damage, posting of workers in the provision of transnational services, and consumer defense, published in the "Boletín Oficial del Estado" on April 28, 2021, which modified, among other norms, Law 10/2014, of June 26, on the organization, supervision, and solvency of credit institutions, and Royal Decree 970/2021, of November 8, amending Royal Decree 1644/1997, of October 31, regarding administrative authorization rules and solvency requirements for reinsurance companies; Royal Decree 2660/1998, of December 14, on the exchange of foreign currency in establishments open to the public other than credit institutions, and Royal Decree 84/2015, of February 13, which develops Law 10/2014, of June 26, on the organization, supervision, and solvency of credit institutions. This circular will develop the authorizations of the Bank of Spain contained in Law 10/2014, of June 26, and in Royal Decree 84/2015, of February 13, by modifying Circular 2/2016, of February 2, of the Bank of Spain, to credit institutions, on supervision and solvency, which completed the adaptation of the Spanish legal system to Directive 2013/36/EU and Regulation (EU) No 575/2013. This will conclude the transposition process of CRD V in Spain.

For its part, CRR II, like the original text it amends, contains a number of national options and discretions (hereinafter, "OND") that must be exercised, insofar as Law 10/2014, of June 26, or Royal Decree 84/2015, of February 13, entrust them to the Bank of Spain. The ONDs are currently regulated in Circular 2/2014, of January 31, of the Bank of Spain, to credit institutions, on the exercise of various regulatory options contained in Regulation (EU) No 575/2013 of the European Parliament and of the Council of June 26, 2013, on the prudential requirements of credit institutions and investment firms, and amending Regulation (EU) No 648/2012, the modification of which will also be addressed in this circular. The ONDs are options that must be exercised by Member States or by competent authorities, as specified in CRR II. The ONDs of competent authority are exercised by the Bank of Spain, which, like the ECB, each within the scope of their competences, are subject on the one hand to national legislations and, on the other, have autonomy regarding regulatory options that only they can exercise as competent authorities.

Additionally, this circular modifies Circular 5/2012, of June 27, of the Bank of Spain, to credit institutions and payment service providers, on the transparency of banking services and responsibility in the granting of loans, in order to comply with the general authorization of the Bank of Spain to issue the rules necessary for the development and execution of Order EHA/2899/2011, of October 28, on transparency and customer protection of banking services (hereinafter, "Order 2899/2011", as amended by Order ETD/699/2020, of July 24), contained in the third final provision, paragraph one, of that Order 2899/2011, as well as the specific authorizations conferred in the matter of revolving credit in paragraph 2, letters b) and c), of that same third final provision. Specifically, through this modification, certain information transparency obligations required, both in the pre-contractual phase and during the validity of the contract, will be developed for the adequate marketing by entities subject to the supervision of the Bank of Spain of indefinite-duration consumer loans, or fixed-duration renewable loans, on a revolving basis, which are established in Chapter III bis of Order 2899/2011, and which are necessary to achieve the public policy objectives in the matter of banking customer protection pursued in that ministerial order. In the development of these transparency obligations, the authorization provided for in Article 11 of Order 2899/2011 is also used, which empowers the Bank of Spain to require entities to highlight certain essential elements of pre-contractual and post-contractual information (in this case, of consumer credit contracts that include the revolving financing modality).

The modifications of Circular 2/2016, of February 2, and of Circular 2/2014, of January 31, will enter into force the day after their publication in the "Boletín Oficial del Estado", while the modification of Circular 5/2012 will enter into force six months after its publication in the "Boletín Oficial del Estado".

II

This circular consists of three regulations, one transitional provision, two final provisions, and three annexes. The first regulation updates Circular 2/2016; the second, Circular 2/2014, and the third, Circular 5/2012. The first final provision establishes the incorporation of European Union law, and the second final provision establishes the entry into force of this circular. For its part, the annexes update annexes I, IV, and VI of Circular 2/2016.

The update of Circular 2/2016, of February 2, is carried out in the first regulation, and the changes pursue different purposes, which are detailed below.

On the one hand, it is necessary to exercise in Circular 2/2016, of February 2, the authorizations that the modifications of Law 10/2014, of June 26, and Royal Decree 84/2015, of February 13, grant to the Bank of Spain with the mandate that they be developed, specifically, by circular. This is the case of Article 29.7 of Law 10/2014, which empowers the Bank of Spain to regulate the information that entities must document and make available to the Bank of Spain regarding loans granted to members of the board of directors and their related parties; Article 32.6 of Law 10/2014, which empowers the Bank of Spain to develop the application of remuneration requirements in a broader manner than generally established, ceasing to consider the exceptions contemplated in paragraphs 4 and 5 of said article; Article 34.3 of Law 10/2014, which empowers the Bank of Spain to reduce the threshold of entities to which certain requirements on variable remuneration will not apply, taking into account the nature, scale, and complexity of the entity's activities, its internal organization, or the characteristics of the group to which it belongs; and Article 67.1 of Royal Decree 84/2015, which empowers the Bank of Spain to define the calculation method of the systemic risk buffer.

On the other hand, the authorizations conferred on the Bank of Spain to develop certain provisions of Law 10/2014 or Royal Decree 84/2015 are exercised when the modifications of those norms do not specify the instrument through which the Bank of Spain must exercise the authorization. This purpose underlies Article 17.3 of Royal Decree 84/2015, which empowers the Bank of Spain to include, in the annual information communication of branches of credit institutions with headquarters in non-EU countries, the additional information requirements it deems necessary; Article 62.2 bis of Royal Decree 84/2015, which empowers the Bank of Spain to determine the additional method of identifying G-SIIs, and Article 73 bis.2 of Royal Decree 84/2015, which empowers the Bank of Spain to specify the calculation of the maximum distributable amount based on the leverage ratio.

Finally, it should be mentioned that the content has been updated to adjust it to the new texts of Law 10/2014 and Royal Decree 84/2015. In this regard, no authorization is being exercised, but simply adapting existing norms in the circular to the new content of higher-ranking norms, since, even though CRD V is completely transposed in these texts, certain adjustments may be required. Among the modifications due to this purpose are those made in the scope of application and suitability requirements that apply to financial holding companies and mixed financial holding companies; in capital buffers and restrictions on distributions for non-compliance, an update is necessary due to the various modifications of CRD V in this area, as well as the need to incorporate the leverage ratio buffer; with regard to remuneration, various adjustments are incorporated, such as the new requirement that the remuneration policy must not be discriminatory regarding gender; in the supervisory review and evaluation process, systemic risk is eliminated; finally, in interest rate risk, although the modifications of CRD V have been completely transposed in the higher-ranking norms, it has been necessary to adapt the circular to consider the new standardized method, considering, in addition, that its technical development will be determined by regulatory technical standards and guidelines of the European Banking Authority.

Finally, the opportunity provided by the transposition of CRD V has been taken to introduce modifications in the circular in areas not related to the directive, but which improve the regulatory framework of credit institutions. Among these changes are those related to the regime of delegation of functions, where some provisions of the guidelines on outsourcing issued by the European Banking Authority (EBA/GL/2019/02) have been incorporated, which were adopted as their own by the Bank of Spain, in its capacity as competent authority for the direct supervision of less significant credit institutions, and by the European Central Bank (ECB), as supervisor of significant entities. In addition, doubts arising in the industry have been clarified, and issues derived from the practical experience accumulated by the Bank of Spain in the supervision of Spanish entities have been reflected.

In summary, the modifications of Circular 2/2016, of February 2, affect norms in its nine chapters, incorporate an additional provision, eliminate two transitional provisions, modify three annexes, and eliminate another.

In Regulation 1, of Chapter 1, on definitions and scope of application, the definition of delegation has been added, aligned with the European Banking Authority's outsourcing guidelines, and the equivalence of the concept of delegation with that of outsourcing is also clarified. In Regulation 2, on scope of application, in its paragraph 1, a clarification is introduced to take into account that supervision requirements or powers apply on a consolidated or sub-consolidated basis to financial holding companies and mixed financial holding companies approved in accordance with Article 15 bis of Law 10/2014. In its paragraph 4, on suitability, it is clarified that the norm is applicable to all financial holding companies and mixed financial holding companies, and not only to parent companies. In its paragraph 5, the scope of application of the remuneration section is modified to take into account the exceptions established in paragraphs 4 and 5 of Article 32 of Law 10/2014, as well as the discretion for the Bank of Spain established in paragraph 6 of the same article. In its paragraph 6, on delegation of service provision or exercise of functions, the scope of application has been revised to adjust it to the modifications made in Article 109 of CRD and in Article 43.4 of Royal Decree 84/2015, which establish the scope of application of the entities' internal governance systems, procedures, and mechanisms. And, in its paragraph 7, the scope of application of the capital self-assessment has been modified to include some cases that were not contemplated and have arisen from supervisory experience. In Regulation 4, on branches and cross-border service provision in Spain of credit institutions with headquarters in non-EU countries, the authorization regarding additional information that the Bank of Spain can request from branches of credit institutions with headquarters in non-EU countries has been exercised, and the content and terminology of the norm regarding cross-border service provision in Spain have been aligned with Royal Decree 84/2015, of February 13.

In Chapter 2, on the exercise by the Bank of Spain of permanent regulatory options provided for in Regulation (EU) No 575/2013, the terminology regarding the classification of exposures to the Administration has been modified, in order to clarify that public health foundations may receive the same risk weighting as exposures to the General State Administration.

Chapter 3, on capital buffers, has been modified to introduce the changes incorporated in CRD V, among which stand out the inclusion of capital requirements that cannot be met with capital intended to meet the combined buffer requirement; the introduction that non-compliance with the combined buffer requirement for reasons other than meeting the minimum own funds and eligible liabilities requirements automatically results in restrictions on distributions and the obligation to present a capital conservation plan; or the modification of the definition of capital buffers for systemic importance entities and the systemic risk buffer, which are the ones modified to the greatest extent in the new directive. With regard to the capital buffer for Global Systemically Important Institutions (G-SIIs), it has been decided to maintain in Regulation 13.4 of the circular the table containing the G-SII subcategories and their associated buffer percentages, instead of eliminating it and replacing it with a more general wording, as included in CRD V. CRD V eliminated the aforementioned table due to the possibility of a new G-SII subcategory being established at the international level in the event that any entity reaches the upper category of the table, which must always remain empty. Nevertheless, the option exercised in the circular of maintaining the table allows for clarity and certainty in the norm, providing legal certainty to the process of fixing the buffer percentages that are known a priori by the entities. The authorization contained in Article 62.2 bis of Royal Decree 84/2015 is used to determine the additional method of identifying G-SIIs, which excludes from the cross-border activity indicator operations between Member States belonging to the eurozone or with which there is close cooperation, as defined in Article 131.2 bis of the directive. With regard to the buffer for other systemic importance entities (O-SIIs), the modification of Article 131.5 of the directive makes it necessary to modify Regulation 14 of the circular to raise the maximum buffer percentage from 2% to 3%, a level that can be exceeded with the authorization of the European Commission. On the other hand, CRD V introduces, in its Articles 133 and 134, substantial changes in the definition, fixing procedure, and recognition of the systemic risk buffer. As a consequence, Regulation 17 of the circular is modified to, among other things, eliminate the minimum buffer level of 1%, introduce the possibility of assigning a buffer percentage only to subsets of exposures, and use the authorization contained in Article 67.1 of Royal Decree 84/2015 to define the formula with which entities will calculate their systemic risk buffer. In addition, in order to align the wording of the circular with that of CRD V, the fixing or modification process of the systemic risk buffer is drafted in a single regulation regardless of its level – Regulation 18 – eliminating consequently the content of Regulations 19 and 20 of the circular. Furthermore, it has been chosen to clarify the legislator's intention that the Bank of Spain, although it continues to be obliged to evaluate quarterly the adequacy of the countercyclical buffer percentage, will only need to resolve on the buffer percentage in the event that it decides to fix or adjust it. Finally, the authorization to determine the rules for the joint application of the buffers of Article 65 of Royal Decree 84/2015 is used, where the systemic risk buffer will be cumulative with the highest between the G-SII buffer and the O-SII buffer. With regard to distribution restrictions, adjustments are introduced with the aim that the results generated during the fiscal year, and not only since the last distribution, can be counted in the maximum distributable amount (MDA), and a new regulation is introduced to develop the distribution restrictions for non-compliance with the leverage ratio buffer and the calculation of the maximum distributable amount (A-MDA).

Chapter 4, on internal organization, contains three sections. In the second section, on suitability, it is specified that, in financial holding companies and mixed financial holding companies, both members of the board of directors and general managers or equivalent are subject to suitability requirements, and managers of internal control functions are explicitly included as a category of employees to whom suitability requirements apply, despite already being considered as key personnel. It is also indicated that the general composition of the management body will adequately reflect a wide range of experiences, and the requirement of independence of ideas is clarified, stating that being a member of related companies or affiliated entities will not in itself constitute an obstacle to making decisions independently. Likewise, in Regulation 33, on the evaluation of the suitability of members of the board of directors, general managers, and equivalents by the competent authority, other clarifications necessary as a result of supervisory experience have been included. Three new regulations have been introduced to establish the additional procedure for documentation, making available, and forwarding information regarding loans to directors and related parties to them, which coexists with the current authorization regime contained in the circular. Nevertheless, an attempt has been made to unify and avoid unnecessary duplicities between the two regimes, to the extent possible. Thus, the object of the obligations will be loan operations, understood as such, credits, guarantees, and securities that had been subject to regulation until now. A specific regulation has been drafted for directors (to whom both regimes apply), as well as others for general managers or equivalents and related parties to directors, drafted by reference to the regulation for directors. Communication obligations are grouped, for clarity, in a single regulation, extending its scope of application to loans to related parties of directors. With regard to the obligation to maintain documentation and information related to these loans, it has not been considered necessary to depart from the general documentation retention period provided for in the Commercial Code. In the third section, on remuneration, two authorizations are exercised. The first authorization has been exercised to avoid an arbitrary application of remuneration rules within the prudential group, so that any person whose professional activity has a significant direct impact on the risk profile or business of the group entities must enter the scope of application, on a consolidated basis, of remuneration requirements. This aims to ensure the application of the directive's anti-avoidance clause, which prescribes non-exemption from remuneration requirements under certain circumstances. On the other hand, the authorization empowering the Bank of Spain to reduce the asset value threshold of entities to which remuneration requirements apply is exercised...