Royal Decree 256/2013 incorporating EBA criteria on the assessment of the adequacy of members of the administrative body and key function holders into credit institution regulations

OFFICIAL STATE GAZETTE No. 89 Saturday, April 13, 2013 Sec. I. Page 27667 I. GENERAL PROVISIONS MINISTRY OF ECONOMY AND COMPETITIVENESS 3908 Royal Decree 256/2013, of April 12, incorporating into the regulations for credit institutions the criteria of the European Banking Authority of November 22, 2012, on the assessment of the adequacy of members of the administrative body and key function holders.

European Parliament and Council Directive 2006/48/EC of June 14, 2006, on the taking up and pursuit of the business of credit institutions, assigns the European Banking Authority the function of ensuring the existence of guidelines for the assessment of the fitness of persons who effectively direct the activity of the credit institution. In compliance with this provision, the aforementioned authority has issued guidelines on corporate governance of credit institutions on November 22, 2012.

Although the aforementioned guidelines are not binding in nature, it is clearly positive for our country to align, as soon as possible, our financial regulation on this matter with European standards. Although these orientations refer exclusively to credit institutions, with the aim of maintaining consistency in the regime of honorability and experience previously in force, the new regulation will apply to a wide range of financial entities that includes, in addition to credit institutions, electronic money institutions, payment institutions, valuation companies, reinsurance companies, foreign currency exchange establishments, and mixed financial holding companies.

To this end of improvement and adaptation to the guidelines set by European authorities, this Royal Decree responds, introducing substantive modifications in three fundamental areas. First, in the matter of commercial and professional honorability, the Bank of Spain is endowed with the faculty to evaluate the concurrence of this requirement taking into account a broad set of criteria, which pivot essentially on three circumstances: the track record of professional and personal compliance with the obligations of the position evaluated; convictions or sanctions for crimes, offenses, or administrative infractions (taking into account mitigating circumstances such as whether the judgment is final, the gravity of the sanction, the time elapsed, or other analogous factors), and the existence of well-founded investigations related to economic-financial crimes.

Second, with regard to experience requirements and following the provisions of the European Banking Authority guidelines, the Royal Decree goes beyond the mere consideration of professional experience and also takes into account theoretical training (training that must be of the appropriate level and profile, particularly in the areas of banking and financial services). Furthermore, the Royal Decree introduces as a novelty the evaluation of the adequacy of the board of directors as a whole, taking into account the different profiles of its members with the aim of strengthening their independence and autonomy as the highest management body of the entity.

And finally, thirdly, the Royal Decree adds a new requirement applicable to members of the board of directors, according to which they must be in a position to exercise good governance of the entity, which translates fundamentally into a broader regime in the consideration of conflicts of interest.

Likewise, in order to reinforce the supervision of the fitness of members of the boards of directors, the Royal Decree enhances the continuous control of the aforementioned requirements, both by the Bank of Spain and by the entities themselves. The latter must have internal units and procedures that carry out the selection and continuous evaluation of their directors and general managers. Finally, the Bank of Spain is endowed with all the faculties and competencies necessary to exercise a function of constant control and monitoring of the fitness of directors and general managers.

On the other hand, with this Royal Decree, competencies for authorizing the modification of the Articles of Association of credit institutions are attributed to the Bank of Spain, in coherence with the prior transfer operated by Law 9/2012, of November 14, on the restructuring and resolution of credit institutions, in favor of the supervisor to carry out the authorization of credit institutions.

In virtue thereof, upon proposal of the Minister of Economy and Competitiveness, in agreement with the Council of State and prior deliberation of the Council of Ministers in its meeting of April 12, 2013,

I HEREBY ORDER:

Article first. Modification of Royal Decree 1245/1995, of July 14, on the creation of banks, cross-border activity, and other matters relating to the legal regime of credit institutions.

Royal Decree 1245/1995, of July 14, on the creation of banks, cross-border activity, and other matters relating to the legal regime of credit institutions is modified as follows:

One. Paragraphs 1 and 2 of Article 1 are drafted as follows:

"1. It shall be the responsibility of the Bank of Spain, prior to the report of the Executive Service of the Commission for the Prevention of Money Laundering and Monetary Offenses in aspects of its competence, to authorize the creation of banks.

The Bank of Spain shall communicate to the General Secretariat of the Treasury and Financial Policy the opening of the authorization procedure, indicating the essential elements of the file to be processed, and its completion.

2. The application for authorization shall be resolved within six months following its receipt by the Bank of Spain, or at the moment when the required documentation is completed, and in any case, within twelve months following its receipt. When the application is not resolved within the aforementioned period, it may be understood as dismissed."

Two. Article 2 is drafted as follows:

"Article 2. Requirements to carry out banking activity.

1. The necessary requirements to carry out banking activity are:

a) To assume the form of a joint-stock company constituted by the procedure of simultaneous foundation and with indefinite duration.

b) To have an initial share capital of no less than 18 million euros, fully paid up in cash and represented by registered shares.

c) To limit the corporate purpose to the activities typical of a credit institution.

d) That shareholders holding significant participations be considered fit, in accordance with the terms provided in this article and in Article 4.

e) Not to reserve any special advantage or remuneration for the founders.

f) To have a board of administration formed by no fewer than five members. All members of the board of administration of the entity, as well as those of the board of administration of its parent entity if it exists, shall be persons of recognized commercial and professional honorability, must possess adequate knowledge and experience to exercise their functions, and be in a position to exercise good governance of the entity. The requirements of honorability, and knowledge and experience, must also concur in the general managers or equivalent, as well as in those responsible for internal control functions and other key positions for the daily development of the activity of the entity and its parent, as established by the Bank of Spain.

g) To have adequate administrative and accounting organization, as well as adequate internal control procedures that guarantee the sound and prudent management of the entity. In particular, the board of administration must establish rules of operation and adequate procedures to facilitate that all its members can fulfill at all times their obligations and assume the responsibilities corresponding to them in accordance with the regulations on the ordering and discipline of credit institutions, the Legislative Decree 1/2010, of July 2, approving the consolidated text of the Law of Capital Companies, or other applicable provisions.

h) To have its registered domicile, as well as its effective administration and direction, within national territory.

i) To have adequate internal control and communication procedures and bodies to prevent and impede the carrying out of operations related to money laundering under the conditions established by the corresponding regulations.

2. Commercial and professional honorability exists in those who have shown a personal, commercial, and professional conduct that does not cast doubt on their capacity to carry out a sound and prudent management of the entity.

To assess the concurrence of honorability, all available information must be considered, including:

a) The track record of the position in question in relation to regulatory and supervisory authorities; the reasons why they might have been dismissed or ceased from previous positions or posts; their personal solvency history and compliance with their obligations; their professional conduct, if they had held positions of responsibility in credit institutions that were subject to a restructuring or resolution process; or if they had been disqualified under Law 22/2003, of July 9, on Insolvency, while the disqualification period established in the qualification judgment has not concluded, and those declared bankrupt and not rehabilitated in insolvency proceedings prior to the entry into force of the aforementioned law.

b) Conviction for the commission of crimes or offenses and sanction for the commission of administrative infractions, taking into account:

1. The intentional or negligent nature of the crime, offense, or administrative infraction,

2. Whether the conviction or sanction is final or not,

3. The gravity of the imposed conviction or sanction,

4. The classification of the facts that motivated the conviction or sanction, especially if they were crimes against property, money laundering, against the socio-economic order, and against the Public Treasury and Social Security, or if they constituted an infringement of the regulations governing the exercise of banking, insurance, or securities market activities, or consumer protection,

5. Whether the facts that motivated the conviction or sanction were carried out for personal benefit or to the detriment of the interests of third parties whose administration or business management had been entrusted to them, and, if applicable, the relevance of the facts for which the conviction or sanction occurred in relation to the functions assigned or to be assigned to the position in question at the bank,

6. The statute of limitations for illicit facts of a criminal or administrative nature or the possible extinction of criminal liability,

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7. The existence of mitigating circumstances and subsequent conduct since the commission of the crime or infraction,

8. The repetition of convictions or sanctions for crimes, offenses, or infractions.

For the purpose of assessing what is provided in this letter, the Bank of Spain may establish a Committee of independent experts in order to inform the valuation files in which there is a conviction for crimes or offenses.

c) The existence of relevant and well-founded investigations, both in the criminal and administrative fields, regarding any of the facts mentioned in point 4 of letter b) above. It will not be considered that there is a loss of honorability arising merely from the circumstance that, while in the exercise of their position, a director, general manager or equivalent, or another employee responsible for internal control or occupying a key position in the development of the general activity of the entity is subject to such investigations.

If during the exercise of their activity any of the aforementioned circumstances concur in the person evaluated and this is relevant for the evaluation of their honorability, the credit institution shall communicate this to the Bank of Spain within a maximum period of fifteen business days.

Members of the board of administration, general managers or equivalent, and other employees who are responsible for internal control functions or occupy key positions for the daily development of the entity's activity who have knowledge that any of the circumstances described in this paragraph concur in their person, must inform their entity of this.

3. Members of the board of administration, general managers or equivalent, and other employees who are responsible for internal control functions or occupy key positions for the daily development of the entity's activity must possess adequate knowledge and experience.

Those who have training of the appropriate level and profile, particularly in the areas of banking and financial services, and practical experience derived from their previous occupations for sufficient periods of time, possess adequate knowledge and experience to exercise their functions in banks. For this purpose, both the knowledge acquired in an academic environment and the experience in the professional development of functions similar to those to be developed in other entities or companies will be taken into account.

In the valuation of practical and professional experience, special attention must be paid to the nature and complexity of the positions held, the competencies and decision-making powers and responsibilities assumed, as well as the number of people under their command, the technical knowledge achieved on the financial sector and the risks they must manage.

In any case, the experience criterion will be applied by valuing the nature, scale, and complexity of the activity of each financial entity and the specific functions and responsibilities of the position assigned in the bank to the person evaluated.

Likewise, the board of administration must have members who, considered as a whole, possess sufficient professional experience in the governance of credit institutions to ensure the effective capacity of the board of administration to make decisions independently and autonomously for the benefit of the entity.

4. Members of the board of administration must be in a position to exercise good governance of the entity. For the purpose of considering this quality of the members of the board of administration, the following will be taken into account:

a) The presence of potential conflicts of interest that generate undue influences from third parties derived from:

1. Positions held in the past or present in the same entity or in other private or public organizations, or;

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2. A personal, professional, or economic relationship with other members of the board of administration of the entity, its parent, or its subsidiaries, or;

3. A personal, professional, or economic relationship with the shareholders who hold control of the entity, its parent, or its subsidiaries.

b) The capacity to dedicate sufficient time to carry out the corresponding functions.

If during the exercise of their activity any circumstance arises in any director that could alter their capacity to exercise good governance of the entity, the credit institution shall communicate this to the Bank of Spain within a maximum period of fifteen business days.

5. Banks must have, in conditions proportionate to the nature, scale, and complexity of their activities, adequate internal units and procedures to carry out the selection and continuous evaluation of the members of their board of administration and their general managers or equivalent, and of the persons who assume internal control functions or occupy key positions for the daily development of banking activity in accordance with what is established in this article.

Likewise, banks must identify the key positions for the daily development of their banking activity, maintaining at the disposal of the Bank of Spain an updated list of the persons holding them, the fitness assessment carried out by the entity, and the documentation accrediting the same.

6. The appointment of new members of the board of administration, general managers or equivalent, must be communicated by the bank to the Bank of Spain within a maximum period of fifteen business days from the moment of the appointment.

7. The assessment of the fitness of the members of the board of administration, as well as of the general managers or equivalent and of the persons who assume internal control functions or occupy key positions for the daily development of banking activity, will adhere to the criteria of honorability, experience, and good governance established in this Royal Decree and will occur:

a) By the entity itself or, when appropriate, by its promoters, upon the request to the Bank of Spain for authorization to carry out banking activity, when new appointments are made, and always when circumstances arise that advise revisiting the fitness assessment in application of the procedures provided in paragraph 5. If the assessment of the fitness of the positions results negative, the entity must refrain from appointing or taking office the person in question, or if it is a subsequent circumstance, it must adopt the appropriate measures to remedy the identified deficiencies and, if necessary, provide for their temporary suspension or definitive dismissal.

b) By the Bank of Spain, upon the authorization of the creation of a bank, after receipt of the communication of new appointments, as well as when, in the presence of well-founded indications, it is necessary to assess whether fitness is maintained in relation to the members in office. To this end, the Bank of Spain must notify its fitness assessment within a period that cannot exceed two months, counted from the communication referred to in paragraph 6 of this article. In the absence of notification within the indicated period, it will be understood that the assessment is positive.

8. Any non-compliance with the requirements specified in paragraphs 2, 3, and 4 must be communicated to the Bank of Spain by the entity within a maximum period of fifteen business days from when it is known.

9. Banks must comply at all times with the requirements provided in paragraph 1. To this end, the Bank of Spain:

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a) May exceptionally revoke authorization for lack of fitness of any shareholder, in accordance with what is provided in Article 62 of Law 26/1988, of July 29, on Discipline and Intervention of Credit Institutions.

b) Will require the temporary suspension or definitive dismissal of the position of director or general manager or equivalent, or the remediation of the identified deficiencies in case of lack of adequate honorability, knowledge, or experience, or capacity to exercise good governance.

If the entity does not proceed to execute such requirements within the period set by the Bank of Spain, the latter will agree on the temporary suspension or definitive dismissal of the corresponding position, in accordance with the procedure provided in Law 26/1988, of July 29.

10. For their registration in the High-Level Positions Register created by Decree 702/1969, of April 26, which develops Law 31/1968, of July 27, on the Regime of Incompatibilities of High-Level Positions in Banking and Determination of Limits in Credit Granting, the directors and general managers or equivalent of the entity must expressly declare, in the document accrediting their acceptance of the position, that they meet the requirements set out in letter f) of paragraph 1, and that they are not subject to any of the limitations or incompatibilities established in Law 31/1968, of July 27, or any other norm applicable to them.

11. In addition to the management of the high-level positions register of banking, the creation and management of a register of directors and general managers of parent entities, which are not credit institutions, investment service companies, or insurance or reinsurance entities of Spanish banks, will correspond to the Bank of Spain, where the directors, managers, and equivalent of the latter must be registered obligatorily. For registration in said register, these persons must communicate their appointment within fifteen business days following the acceptance of the position, including the personal and professional data established, in general, by the Bank of Spain, and expressly declare, in the document accrediting their acceptance of the position, that they meet the requirements of honorability and, where applicable, professionalism and disposition to exercise good governance of the entity referred to in this article, and that they are not subject to any limitation or incompatibility established in the norms applicable to them."

Three. The first paragraph of Article 3 is drafted as follows:

"The application for authorization for the creation of a bank shall be addressed to the Bank of Spain in duplicate, and must be accompanied by the following documents:"

Four. Letter d) of Article 3 is drafted as follows:

"d) List of persons who will integrate the first board of administration and those who will act as general managers or equivalent, with detailed information on the professional and commercial honorability, theoretical training in economic, financial, or commercial matters, professional track record and activity, and disposition to exercise good governance of the bank of all of them."

Five. The first paragraph of Article 4.1 is drafted as follows:

"1. The Bank of Spain, by motivated resolution, will deny the authorization for the creation of a bank when the requirements of Articles 2 and 3 are not met and, in particular, when, taking into account the need to guarantee a sound and prudent management of the projected entity, the fitness of the shareholders who will have a significant participation in it or a participation such that the percentage of voting rights or capital owned results equal to or greater than 5 percent is not considered adequate. To this end:"

Six. Paragraph 1 of Article 8 is drafted as follows:

"1. The modification of the Articles of Association of banks will be subject to the procedure"