Resolution JPRF-F-2023-073: Determining Proportionality of Deposit Payments Exceeding Insured Value in Forced Liquidation

Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Government Financial Management Platform. Yellow Block, 5th Floor | Postal Code: 170507 | Quito - Ecuador Resolution No. JPRF-F-2023-073 THE FINANCIAL POLICY AND REGULATION BOARD

CONSIDERING:

That Article 226 of the Constitution of the Republic of Ecuador prescribes that State institutions, their agencies, dependencies, public servants, and persons acting under state authority shall exercise only the competencies and faculties attributed to them in the Constitution and the law;

That the Supreme Norm, in its Article 237, establishes that it is an attribute of the Attorney General of the State to provide "legal advice and the resolution of legal queries to public sector organisms and entities with binding character, regarding the interpretation or application of the law, in those topics where the Constitution or the law do not grant competencies to other authorities or organisms";

That the Magna Carta, in Article 308, determines that financial activities are a service of public order, and may be exercised with prior State authorization, in accordance with the law; and their fundamental purpose is to preserve deposits and meet financing requirements to achieve the country's development objectives;

That Article 309 of the Fundamental Norm states that the national financial system is composed of the public, private, and popular and solidary sectors, which intermediated public resources; each of these sectors will have specific, autonomous, and differentiated control norms and entities, which will be responsible for preserving their security, stability, transparency, and solidity; additionally establishing that the directors of control entities will be administratively, civilly, and criminally responsible for their decisions;

That the objectives of the Organic Monetary and Financial Code are to "Seek the sustainability of the national financial system and the insurance and securities regimes and guarantee the fulfillment of the obligations of each of the sectors and entities that compose them;" and "Protect the rights of users of financial, securities, and insurance services;" as prescribed in Article 3 of Book I of said legal body;

That the article numbered after Article 6 of the Organic Monetary and Financial Code, Book I, prescribes that: "Organisms with regulatory, normative, or control capacity will seek to adopt international technical standards related to the scope of their competence as a reference framework for the issuance of regulations and the exercise of their functions, strictly adhering to the normative hierarchy established in the Constitution of the Republic of Ecuador," hierarchy established in Article 425 of the Magna Carta;

That the regulatory organisms and the Deposit Insurance Corporation, Liquidity Fund, and Private Insurance Fund have the duty to coordinate actions to fulfill their purposes and make effective the enjoyment and exercise of rights recognized in the Constitution, under the terms of Article 9 of the aforementioned Code;

That Article 13 of said Organic Code was reformed by the Organic Reforming Law to the Organic Monetary and Financial Code for the Defense of Dollarization, published in the Official Register Supplement No. 443 of May 3, 2021, creating the Financial Policy and Regulation Board, part of the Executive Function, as a public law legal entity, with administrative, financial, and operational autonomy, responsible for the formulation of credit, financial, securities, insurance, and prepaid comprehensive health care service policy and regulation;

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Government Financial Management Platform. Yellow Block, 5th Floor | Postal Code: 170507 | Quito - Ecuador |

That Article 14 of the cited Organic Code, referring to the scope of the Financial Policy and Regulation Board, determines that this collegiate body is responsible for formulating financial policy; issuing regulations that allow maintaining the integrity, solidity, sustainability, and stability of the national financial system; and also, issuing micro-prudential regulations for the national financial sector, based on proposals presented by the respective superintendencies, within their scopes of competence and without prejudice to their independence;

That Article 14.1 ibidem, in numbers 1, 13, and 25, states that it is the responsibility of the Financial Policy and Regulation Board to fulfill the duty and exercise the faculty to regulate the liquidation of financial entities, issue secondary regulation related to the Deposit Insurance; and, apply the provisions of said code and resolve cases not provided for in it;

That Article 315 of the aforementioned Organic Code establishes the order in which payments derived from the forced liquidation of a financial entity must be made, and its number 4 prescribes: "4. Proportionally, deposits for amounts that exceed the insured value and the total amount covered by the Deposit Insurance. In the event that the total amount covered by the Deposit Insurance exceeds the amount paid for this same concept, after the period established in Article 33 of this Code has elapsed, the difference must be returned to the financial entity in forced liquidation;";

That Articles 14.1 and 80 of the Organic Monetary and Financial Code, Book I, determine that the legal representative of the Deposit Insurance Corporation, Liquidity Fund, and Private Insurance Fund may propose regulation projects for consideration by the Financial Policy and Regulation Board within its scope of competence;

That the Twenty-Ninth General Provision of Book I of the Organic Monetary and Financial Code, Book I, added by the Organic Reforming Law to the Organic Monetary and Financial Code for the Defense of Dollarization, provides: "In the current legislation where mention is made of the 'Board of Monetary and Financial Policy and Regulation', replace it with 'Board of Financial Policy and Regulation'.";

That the Fiftieth-Fourth Transitional Provision of the aforementioned Organic Code, added by the Organic Reforming Law to the Organic Monetary and Financial Code for the Defense of Dollarization, provides: "Transitional Regime of Resolutions of the Codification of the Board of Monetary and Financial Policy and Regulation. The resolutions contained in the Codification of Monetary, Financial, Securities, and Insurance Resolutions of the Board of Monetary and Financial Policy and Regulation and the norms issued by control organisms will maintain their validity until the Board of Monetary Policy and the Board of Financial Policy and Regulation resolve what corresponds, within the scope of their competencies.";

That Articles 3 letter f) and 13 of the Organic Law of the Attorney General's Office of the State determine that the resolution of queries by the Attorney General of the State is of a binding character and mandatory application for the Public Administration, regarding the interpretation or application of legal norms;

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Government Financial Management Platform. Yellow Block, 5th Floor | Postal Code: 170507 | Quito - Ecuador |

That the General Manager of the Deposit Insurance Corporation, Liquidity Fund, and Private Insurance Fund, with Letter COSEDE-COSEDE-2022-0087-OFICIO of March 3, 2022, presents a proposal to determine the proportionality of the payment of deposits for amounts that exceed the insured value and the total amount covered by the Deposit Insurance, as established in the first part of precedence order 4 of Article 315 "Precedence of payments in forced liquidation" of the Organic Monetary and Financial Code; contained in Technical Report COSEDE-CMSF-ITV-2022-011 of March 3, 2022;

That with Letter No. COSEDE-COSEDE-2022-0362-OFICIO of September 12, 2022, COSEDE transmits Technical Report No. COSEDE-CMSF-ITV-2022-025 which contains a new proposal that allows determining the proportionality of the payment of deposits for amounts that exceed the insured value and the total amount covered by the Deposit Insurance through the inclusion of a new article in Section I "General Norms for the Operation of the Deposit Insurance of the Private Financial Sector and the Popular and Solidary Financial Sector", Chapter XXIX "On Deposit Insurance", Title II "National Financial System", Book I of the Codification of Monetary, Financial, Securities, and Insurance Resolutions;

That through Letter No. 00775 of January 26, 2023, the National Director of Consultancy of the Attorney General's Office of the State, requested the legal pronouncement of the Financial Policy and Regulation Board, regarding the queries made by the General Manager of the Deposit Insurance Corporation, Liquidity Fund, and Private Insurance Fund, according to Letter COSEDE-COSEDE-2023-0016-OFICIO of January 18, 2023, regarding the application of Article 315 in its precedence order 4 of the Organic Monetary and Financial Code, Book I. In response to the aforementioned request, the Financial Policy and Regulation Board transmitted the institutional legal criterion contained in Legal Report No. JPRF-CJF-2023-005 through Letter No. JPRF-JPRF-2023-0056-O, both dated February 10, 2023;

That by Letter No. 02072 of May 9, 2023, Juan Carlos Larrea Valencia as Attorney General of the State, issues his binding pronouncement on the query of the Deposit Insurance Corporation, Liquidity Fund, and Private Insurance Fund transmitted through the aforementioned Letter No. COSEDE-COSEDE-2023-016-OFICIO, related to the applicability of the proportionality of precedence order 4, Article 315, and the competencies of the Financial Policy and Regulation Board of the Organic Monetary and Financial Code, Book I, stating that: "(...) it corresponds to the Financial Policy and Regulation Board to develop normatively the application of number 4 of article 315 ibidem, in the exercise of its normative faculties for which effect, it may consider the regulation projects presented by the Superintendency of Banks, the Superintendency of Popular and Solidary Economy, and the Deposit Insurance Corporation through their legal representatives, with the backing of the respective technical reports (...)";

That the Technical Secretary of the Financial Policy and Regulation Board, through Memorandum No. JPRF-ST-2023-054-M of July 14, 2023, transmits to the President of the Board the following reports: i) Report No. JPRF-CTSF-2023-011 of July 13, 2023, through which, a normative reform is proposed that would allow those responsible for the execution of forced liquidations of financial entities, the application of precedence order 4 of article 315 of Book I of the Organic Monetary and Financial Code to effect the return of corresponding credits, aligning the secondary norm with reforms to the COMYF, approximating the recovery of resources used for the payment of deposit insurance with international best practices, contributing to COSEDE fulfilling its legal mandate of resource recovery, contributing to the stability of the deposit insurance fund of the private and popular and solidary financial sectors.

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Government Financial Management Platform. Yellow Block, 5th Floor | Postal Code: 170507 | Quito - Ecuador |

ii) Legal Report No. JPRF-CJF-2023-028 of July 14, 2023, issued by the Legal Coordination of Financial Policy and Norms of the Board, which concludes that: a) the Financial Policy and Regulation Board, as responsible for the formulation of policy and regulation of the financial system, has legal competence to regulate the liquidation of financial entities, issue secondary regulation related to the Deposit Insurance; and, apply the provisions of said code and resolve cases not provided for in the same, in accordance with what is provided in numbers 1, 13, and 25 of article 14.1 of the Organic Monetary and Financial Code, Book I; b) The pronouncement of the Attorney General of the State, asserted in the terms of Letter No. 02072 of May 9, 2023, is binding and of mandatory application for the Public Administration, as stated in letter f) of article 3 of the Organic Law of the Attorney General's Office of the State. In this way, the query regarding the breadth of the competencies of the Financial Policy and Regulation Board, contained in the aforementioned article 14.1 numbers 1, 13, and 25 to regulate the application of the proportionality established in number 4 of article 315 of the aforementioned Code, is resolved; c) The General Manager of the Deposit Insurance Corporation, Liquidity Fund, and Private Insurance Fund has the power to propose regulation projects to the Financial Policy and Regulation Board, within the framework of its competencies, as established in the penultimate paragraph of article 14.1 of the Organic Monetary and Financial Code, Book I, without prejudice to the technical autonomy with which this regulator counts; and d) The reform of the norm of the Codification of Monetary, Financial, Securities, and Insurance Resolutions is legally viable in light of the legal considerations exposed by this Coordination in the present report, in the terms indicated in Technical Report No. JPRF-CTSF-2023-011 of July 13, 2023, issued by the Technical Coordination of Financial System Policy and Regulation of this Board;

That the Financial Policy and Regulation Board, in ordinary session held by technological means, convened on July 14, 2023, and carried out via video conference on July 18, 2023, reviewed Memorandum No. JPRF-ST-2023-054-M of July 14, 2023, issued by the Technical Secretary of the Board; as well as the aforementioned reports from the Technical Coordination of Financial System Policy and Regulation and the Legal Coordination of Financial Policy and Norms, in addition to the corresponding draft resolution;

That the Financial Policy and Regulation Board, in ordinary session held by technological means, convened on July 14, 2023, and carried out via video conference on July 18, 2023, reviewed and approved the following Resolution; and, In exercise of its functions, RESOLVES:

ARTICLE FIRST.- Incorporate a "Section II: Provisions on the Forced Liquidation of Financial Entities" immediately after Section I "Norm Regulating Voluntary Liquidation of Financial Entities", Chapter XXVII "Liquidation of Financial Entities", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following text:

"SECTION II: PROVISIONS ON THE FORCED LIQUIDATION OF FINANCIAL ENTITIES Art. 11.- Application of the proportionality established in precedence order 4 of article 315 of the Organic Monetary and Financial Code, Book I.- Payments derived from the forced liquidation of an entity of the public and private financial sectors, which is carried out to fulfill precedence order 4 of article 315 of Book I of the Organic Monetary and Financial Code, will be made proportionally based on the amounts that exceed the insured value and the total amount covered by the Deposit Insurance, according to the procedure established in this section.

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Government Financial Management Platform. Yellow Block, 5th Floor | Postal Code: 170507 | Quito - Ecuador |

Art. 12.- Procedure for the application of the proportionality established in precedence order 4 of article 315 of the Organic Monetary and Financial Code, Book I.- For the application of the proportionality established in precedence order 4 of article 315 of the Organic Monetary and Financial Code, Book I, the person responsible for carrying out the liquidation of financial entities in forced liquidation of the public and private financial sectors, must execute the following procedure:

1. The person responsible for carrying out the liquidation must identify the available economic resources of the financial entity in forced liquidation and subtract the values corresponding to operating expenses, to thus obtain the effective amount available for payments.
2. The person responsible for carrying out the liquidation must obtain the Complete Depositor Database, through the channel that the administration of the Deposit Insurance Corporation, Liquidity Fund, and Private Insurance Fund establishes for this effect. This base will correspond to the consolidation of the databases - original and modified - of depositors formally delivered by the liquidator to the Deposit Insurance Corporation, Liquidity Fund, and Private Insurance Fund.
3. Based on the information contained in the Complete Depositor Database, the person responsible for carrying out the liquidation will determine for each entity in liquidation, a list of depositants pending return of their credits, included, as one more, the Deposit Insurance Corporation, Liquidity Fund, and Private Insurance Fund, with their respective pending payment values. The value for return to the Deposit Insurance Corporation, Liquidity Fund, and Private Insurance Fund, corresponds to the total amount covered by the Deposit Insurance in the first precedence order of payments. This list will estimate the relative percentage of the pending payment value for each depositor and the Deposit Insurance Corporation, Liquidity Fund, and Private Insurance Fund.
4. To the effective amount available for payments determined in number 1 of this article, the percentages obtained in number 3 must be applied, and the amounts to be paid to both the depositors and the Deposit Insurance Corporation, Liquidity Fund, and Private Insurance Fund will be determined, and the transaction must be recorded.
5. When a payment is made to the Deposit Insurance Corporation, Liquidity Fund, and Private Insurance Fund, the payment report of credits will be sent to it, which will include the historical detail of partial payments made, as well as the pending balance. The periodicity of payment of the values corresponding to the depositors will be the responsibility of the person in charge of carrying out the liquidation; who may make an accumulated monthly transfer to the Deposit Insurance Corporation, Liquidity Fund, and Private Insurance Fund.
6. When there is a new inflow of economic resources to the financial entity in forced liquidation, the procedure of this article must be applied until the total amount of the credit is paid."

ARTICLE SECOND.- Substitute the denomination of Section XII which says "Norms for the application of numbers 5 and 6 of article 315 and of the Seventh General Provision of the Organic Monetary and Financial Code in the forced liquidation processes of entities of the Popular and Solidary Financial Sector" with "Norms for the application of article 315 and of the Seventh General Provision of the Organic Monetary and Financial Code, Book I, in the forced liquidation processes of entities of the Popular and Solidary Financial Sector" of Chapter XXXVI "Popular and Solidary Financial Sector", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions.

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Government Financial Management Platform. Yellow Block, 5th Floor | Postal Code: 170507 | Quito - Ecuador |

ARTICLE THIRD.- Substitute the text of articles 249 and 250 of Section XII "Norms for the application of article 315 and of the Seventh General Provision of the Organic Monetary and Financial Code, Book I, in the forced liquidation processes of entities of the Popular and Solidary Financial Sector", Chapter XXXVI "Popular and Solidary Financial Sector", Title II "National Financial System", Book I "Monetary and Financial System" of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:

"Art. 249.- Application of the proportionality established in precedence order 4 of article 315 of the Organic Monetary and Financial Code, Book I.- Payments derived from the forced liquidation of an entity of the popular and solidary financial sector, which is carried out to fulfill precedence order 4 of article 315 of Book I of the Organic Monetary and Financial Code, will be made proportionally based on the amounts that exceed the insured value and the total amount covered by the Deposit Insurance, according to the procedure established in the following article. Art. 250.- Procedure for the application of the proportionality established in precedence order 4 of article 315 of the Organic Monetary and Financial Code, Book I.- For the application of the proportionality established in precedence order 4 of article 315 of the Organic Monetary and Financial Code, Book I, the person responsible for carrying out the liquidation of financial entities in forced liquidation of the popular and solidary financial sector, must execute the following procedure:

1. The person responsible for carrying out the liquidation must identify the available economic resources of the financial entity in forced liquidation and subtract the values corresponding to operating expenses, to thus obtain the effective amount available for payments.
2. The person responsible for carrying out the liquidation must obtain the Complete Depositor Database, through the channel that the administration of the Deposit Insurance Corporation, Liquidity Fund, and Private Insurance Fund establishes for this effect. This base will correspond to the consolidation of the databases - original and modified - of depositors formally delivered by the liquidator to the Deposit Insurance Corporation, Liquidity Fund, and Private Insurance Fund.
3. Based on the information contained in the Complete Depositor Database, the person responsible for carrying out the liquidation will determine for each entity in liquidation, a list of depositants pend