Royal Decree-Law 8/2023, of 27 December, adopting measures to address economic and social consequences of conflicts in Ukraine and the Middle East and mitigate drought effects

I. GENERAL PROVISIONS HEAD OF STATE 26452 Royal Decree-Law 8/2023, of 27 December, adopting measures to address the economic and social consequences derived from the conflicts in Ukraine and the Middle East, as well as to alleviate the effects of drought.

I Since the spring of 2022 and to date, a total of seven packages of measures have been approved with the initial aim of addressing the consequences in Spain of the war in Ukraine, including both normative and non-normative measures, which have been adapted to the evolution of the economic and social situation.

Thus, Royal Decree-Law 6/2022, of 29 March, was approved, adopting urgent measures within the framework of the National Plan for response to the economic and social consequences of the war in Ukraine, which had basic objectives of containing energy prices for all citizens and companies, supporting the most affected sectors and the most vulnerable groups, and reinforcing price stability. Among the measures adopted, the reduction of taxes in the electricity sector, a bonus on fuel prices, and a social shield to especially support the most vulnerable groups stand out, in addition to significant aid to the productive sectors most affected by the rise in energy prices, such as transport, agriculture and livestock, fishing, and electro-intensive and gas-intensive industries. Furthermore, a significant increase in social benefits (Minimum Vital Income and non-contributory pensions) and other protection measures for the most vulnerable groups was adopted.

For its part, Royal Decree-Law 10/2022, of 13 May, established a mechanism for adjusting production costs to reduce the price of electricity in the wholesale market, known as the "Iberian mechanism," which has led to a significant reduction in electricity costs in Spain and Portugal, protecting the economy and society from part of the effects of the war in this area.

The maintenance of the armed conflict and its effects on the general price level led to the approval of a second package, through Royal Decree-Law 11/2022, of 25 June, adopting and extending certain measures to respond to the economic and social consequences of the war in Ukraine, to face situations of social and economic vulnerability, and for the economic and social recovery of the island of La Palma. Through this regulation, not only were the main temporary measures to reduce energy prices, inflation, and protect the most vulnerable groups, included in Royal Decree-Law 6/2022, of 29 March, extended, but important additional measures were also incorporated, such as the freezing of the price of butane gas cylinders, the subsidy of up to 30% of multi-journey public transport tickets, or provisions aimed at increasing public support for agricultural insurance.

In turn, Royal Decree-Law 14/2022, of 1 August, adopted a set of measures aimed at promoting energy savings and containing inflation, among which the free medium-distance rail public transport and the increase in the line of direct aid for urban and road transport stood out. Likewise, through Royal Decree-Law 17/2022, of 20 September, the reduction of VAT on natural gas was agreed.

Royal Decree-Law 18/2022, of 18 October, increased this catalog of measures to reinforce savings and prepare the Spanish economy for winter. Among these measures, the possibility for neighborhood communities to access the last-resort tariff for natural gas stands out.

These first five packages of measures represented a significant fiscal effort that was covered without prejudice to the fulfillment of deficit and public debt reduction objectives and, most importantly, had a very positive effect on the evolution of inflation and the main economic variables throughout 2022. Inflation dropped four points from the peak in July, while support measures for lower-income families allowed compensating for about 3.5 percentage points of purchasing power, preventing a deterioration in inequality indicators. The decline recorded since August placed the Spanish inflation rate below the euro area average, while the maintenance of a path of strong increase in real activity and employment, the external sector, and the reduction of the deficit and public debt evidenced the solidity of the Spanish economy in such a complex external and energy environment.

In the last months of 2022, energy prices moderated, being replaced as factors increasing the general price level by other fundamental goods such as food, raw materials, and intermediate goods. This price increase, explained mainly by the impact of the war on global supply and production chains and by previous increases in energy prices, was especially relevant in food, with basic necessity products, such as flour, butter, or sugar, experiencing annual increases close to 40%. Furthermore, although the price of natural gas and fuels also moderated, important elements persisted that suggested their price could increase again during 2023. With this scenario, it was necessary to continue adopting measures to avoid a rebound effect of inflation while protecting the most affected and vulnerable groups, all without putting at risk the fulfillment of fiscal objectives for 2023.

For this, through Royal Decree-Law 20/2022 of 27 December, on measures to respond to the economic and social consequences of the War in Ukraine and to support the reconstruction of the island of La Palma and other situations of vulnerability, a sixth package of measures was adopted, mobilizing about 10,000 million euros of public resources to articulate the economic policy response to the war in Ukraine from 1 January 2023, concentrating its action on groups vulnerable to the increase in the price of food and other basic goods and on the sectors most affected by the rise in energy.

As a consequence of the duration of the war and the persistence of upward pressures on the prices of food, raw materials, and intermediate goods, some of the measures put in place were extended and updated through Royal Decree-Law 5/2023, of 28 June.

In recent months, upward pressures on the prices of food, raw materials, and intermediate goods have been dissipating and markets have been adapting to persistent geopolitical uncertainty, which makes price evolution forecasts for 2024 not pessimistic. However, the fact is that the prolongation of the war in Ukraine and Russia, the emergence of a new conflict between Israel and Gaza, and the possibility of an escalation in geopolitical tensions continue to introduce a strong element of uncertainty that makes forecasts reversible at any moment. Along with this, the abrupt withdrawal of measures approved so far could entail undesired rebound effects on prices, with undesirable consequences, especially on the most vulnerable groups.

In this context, with this royal decree-law, a prudent approach is chosen to advance in the gradual withdrawal of the measures adopted so far, avoiding an unexpected evolution of prices and especially protecting the most vulnerable groups, but without putting at risk the sustainability of public finances and the fulfillment of deficit and public debt reduction objectives.

II This royal decree-law is structured in an expository part and a dispositive part consisting of six titles, formed by 91 articles, twelve additional provisions, eleven transitional provisions, one repealing provision, thirteen final provisions, and five annexes.

Title I is dedicated to measures in the economic matter and is divided into four chapters. The first of them deals with urgent actions in the regime of compensation and fees for early repayment of variable interest rate mortgage operations and conversion to fixed interest rate.

Since the second half of 2022, the monetary and financial conditions prevailing in Spain have changed drastically. In its meeting of July 2022, the Governing Council of the European Central Bank decided to raise the interest rate of the marginal deposit facility from the -0.50% in force at that time to 0%. Since then, this interest rate has continued to increase to the 4% in force since September 2023, the largest and fastest rate hike cycle in the history of the European Central Bank. In total, the interest rate of the marginal deposit facility has increased by 450 basis points, substantially more than expected.

This monetary tightening has been transmitted asymmetrically to the financial conditions faced by Spanish households. On the one hand, the increase in interest rates is automatically transferred to interest rates on variable rate mortgages as the reference value is updated (generally the 12-month Euribor). This has led to a generalized increase in the financial burden on households, which in June 2023 stood at an average slightly above 25% for the lowest income quintile and slightly below 20% for the highest income quintile, according to the Autumn Financial Stability Report of the Bank of Spain. On the other hand, the remuneration of deposits, one of the main destinations for family savings, has increased slowly and to a lesser extent than in previous episodes of monetary contraction. Again, according to information from the Autumn Financial Stability Report of the Bank of Spain, the pass-through rate of the increase in official interest rates to the remuneration of demand deposits was estimated at 10% until June 2023 and at 50% in time deposits.

Despite this tightening of financial conditions, characterized by a substantial increase in the cost of loans linked to the acquisition of housing without a symmetric increase in the remuneration of deposits, Spanish households have shown remarkable resistance in the new context. This has been contributed to by the growth of the Spanish economy and the good performance of the labor market, along with the de-leveraging process of families during the last decade, which has allowed them to face this new financial cycle from a much healthier starting position. As a consequence, household doubtful rate levels remain relatively low, and in fact, the mortgage doubtful rate ratio decreased for all income quintiles between December 2021 and June 2023, as illustrated by the Autumn Financial Stability Report of the Bank of Spain.

In the process of adaptation of households to the new financial conditions during the last year, the milestone of the approval of Royal Decree-Law 19/2022, of 22 November, establishing a Code of Good Practices to alleviate the rise in interest rates on mortgage loans for primary residence, modifying Royal Decree-Law 6/2012, of 9 March, on urgent measures for the protection of mortgage debtors without resources, and adopting other structural measures for the improvement of the mortgage loan market, must be highlighted.

On the one hand, Royal Decree-Law 19/2022, of 22 November, strengthened the preventive instruments available to households at risk of vulnerability as a consequence of the increase in interest rates, expanding the Code of Good Practices approved through Royal Decree-Law 6/2012, of 9 March, and creating a new Code of Good Practices with a temporary character.

On the other hand, Royal Decree-Law 19/2022, of 22 November, for variable rate loans, regardless of their formalization date, suspended the potential collection of fees and compensation for early repayment or conversion to fixed rate, with the aim of making adjustments in mortgage loan conditions cheaper and easier in the new financial situation. With data from the National Statistics Institute accumulated until September 2023, the number of registry cancellations (correlated with natural and early amortizations of mortgage loans) increased by 11%, subrogations by 11%, and novations decreased by 18%. Within the total of contractual modifications observed in 2023 (about 100,000 in total), 38% incorporated changes in the interest rate, and a net flow of about 10,000 operations of transformation from variable to fixed rate was observed. Furthermore, in the first half of 2023, 6% of the balance of live mortgages was amortized, one percentage point more than during the same period of 2022, according to the Bank of Spain. This higher amount of amortized debt, driven by the incentives generated by the increase in interest rates on variable rate loans and by the contained remuneration of deposits, would have potentially benefited from the suspension of the collection of early repayment fees. The expectation that the tightening of financial conditions will persist for some time advises extending these measures until 31 December 2024, so that households have the greatest possible flexibility at the lowest cost to adapt the conditions of their indebtedness.

Additionally, it is convenient to modify the regime limiting refund fees for subrogatory amortizations and novations provided for in section 6 of article 23 of Law 5/2019, of 15 March, initially applicable to all those real estate credit operations that, regardless of their formalization date, were subject to subrogation or novation to move from variable interest rate to fixed interest rate, to extend the regime to cases where the resulting operation has a fixed interest rate for an initial period of at least three years. This is to accommodate one of the products most frequently offered today: by September 2023, "mixed rate" operations, that is, with an initial rate fixed between 1 and 10 years, represent 42% of new mortgages. The extension of the suspension of the potential collection of compensation and fees collected in the first additional provision of Royal Decree-Law 19/2022, of 22 November, also applies to this new case.

Secondly, chapter II modifies, on the one hand, the title and section 1 of article 35 of Royal Decree-Law 19/2018, of 23 November, on payment services and other urgent measures in financial matters, regarding expenses and commissions for payment services charged by payment service providers. In this sense, the profound process of technological innovation and adaptation of payment methods in recent years has been carried out without prejudice to the relative importance that cash continues to have in Spain for certain sectors of society.

Thus, in recent years, the reduction in the use of cash as a payment method has accelerated, especially after the outbreak of the pandemic caused by COVID-19, which intensified the process of digitalization of the economy. However, payments in physical stores are still predominantly made in cash, although with a decrease in its use compared to 2019. Thus, according to information provided by the European Central Bank and the Bank of Spain, the percentage of purchases with cash stands at 66% in 2022, compared to 83% before the pandemic, being, nevertheless, one of the highest uses of cash among countries in the euro area. On the other hand, taking into account the sociodemographic characteristics of the population, we can observe that older people use cash more intensively. Specifically, those over 65 years old make approximately 74% of their payments in physical stores in cash, while among those under 40 years old this percentage decreases to almost 60%.

Furthermore, the 2023 follow-up report on physical accessibility to banking services in Spain by the Bank of Spain identifies certain groups that could be considered in a situation of vulnerability in terms of access to cash. Among these groups are those of advanced age or low digital capabilities. It is crucial, therefore, to ensure adequate access to cash for the most vulnerable groups, eliminating barriers and promoting measures to facilitate their access to it.

For this, article 35 of Royal Decree-Law 19/2018, of 23 November, is modified, incorporating into payment services legislation the principle that the charging of commissions or the passing on of expenses must respond to services effectively provided or expenses incurred, and limiting the possibility of charging commissions for the service of cash withdrawal at the counter for vulnerable groups. To this end, those over 65 years old and those persons with a recognized disability equal to or greater than 33 percent are considered vulnerable.

On the other hand, the necessary reinforcement of the framework applicable so that all relevant agents in the payment system manage operational risk adequately is introduced, avoiding incidents that harm citizens' confidence in said system.

The payment system is essential for our economy and our society. Understood in a broad sense, an efficient and reliable payment system is indispensable to meet two objectives. First, to guarantee that liquidity flows between different economic agents can be transferred and exchanged among them without failures or undue delays, thus contributing to economic development and wealth generation. Second, to guarantee the well-being of people, who interact permanently with the payment system, with greater or lesser intensity, in their different facets as workers, entrepreneurs, consumers, or clients. Incidents such as those that have occurred recently, making it impossible for a time to use payment cards or other digitized payment solutions, must be avoided, as citizens' confidence in the proper functioning of payment systems is, as we have mentioned, essential for our economy and for social well-being. The prevention and minimization of technological incidents in payment systems is especially relevant in the current context we are living through of digital transformation of our economy.

The payment system in a broad sense is formed by multiple agents, increasingly diverse and specialized. Along with payment service providers, which are mainly credit institutions, payment institutions, and electronic money institutions; there are different entities that perform various functions in the value chain of payment service provision, from the issuance of a payment instrument, to its clearing and settlement. The following entities are worth highlighting.

First, payment system operators in the strict sense, which are defined as those fund transfer systems regulated by formal and standardized provisions, and equipped with common rules for the treatment, clearing, and settlement of payment operations among participants. There are also wholesale payment systems, for payments between financial entities, and retail payment systems for different types of payment methods (such as cards or account-to-account payments).

Second, payment scheme operators, who manage a unique set of provisions and rules for the execution of payment operations, and which are independent of any infrastructure or payment system on which their application is based, such as the Single Euro Payments Area (SEPA) schemes for transfers and direct debits or the quadripartite or tripartite payment card schemes. Sometimes, a business group that has a payment system operator also provides scheme or processing services.

Third, electronic payment agreement operators, who develop payment solutions that add operational functionalities to payment services, such as digital wallets.

Fourth, payment processors, which are technology companies that provide transmission, management, and processing services for payment orders either to payment service providers, to other processors, or to payment systems in the strict sense.

Finally, there is another series of entities that provide technical and technological services to those involved in the value chain of payment service provision, among which include payment gateway services, privacy protection services, data and entity authentication, the supply of information technologies and communication networks, or the supply and maintenance of consumer-oriented interfaces used to collect payment information, including terminals and devices used for payment services.

European law has harmonized part of the rules applicable to some of these agents. Without claiming to be exhaustive, the following stand out: Directive 98/26/EC of the European Parliament and of the Council, of 19 May 1998, on settlement finality in payment and securities settlement systems; Regulation (EU) 260/2012 of the European Parliament and of the Council, of 14 March 2012, establishing technical and business requirements for credit transfers and direct debits in euros;