Circular 5/2012 of the Bank of Spain on Transparency of Banking Services and Responsibility in Lending

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Circular 5/2012, of June 27, of the Bank of Spain, to credit institutions and payment service providers, on transparency of banking services and responsibility in lending (BOE of July 6) [ 1 ]

[ 2 ]

[1]

Includes correction of errors published in the BOE of October 11, 2012

[2]

See the final provision of this Circular.

Article 48.2 of Law 26/1988, of July 29, on the Discipline and Intervention of Credit Institutions, empowers the Minister of Economy and Finance to establish a set of specific obligations applicable to the contractual relations between credit institutions and their clients, with the aim of protecting the legitimate interests of the clients of credit institutions, and to require the communication of the conditions of certain operations to the administrative authorities responsible for their control.

Under this authorization, the Minister of Economy and Finance issued, at that time, the Order of December 12, 1989, on interest rates and commissions, rules of conduct, information to clients, and advertising of credit institutions, which was, in turn, developed through Bank of Spain Circular 8/1990, of September 7, to credit institutions, on the transparency of operations and protection of customers, so that the set of these two provisions, the Order and the Circular, has constituted until now –with the various modifications and updates to which they have been subject– the basic regulatory framework for the conduct of credit institutions in their relationship with customers. However, legislative evolution has shown how the common or general Spanish banking transparency regulation has gradually become obsolete.

In this situation, Law 2/2011, of March 4, on the Sustainable Economy, not only represented a significant advance in banking transparency, but also provided a novel approach. On the one hand, it legally embodied the concept of responsibility in granting loans to consumers by credit institutions, establishing the obligation for these to carry out an adequate assessment of the solvency of clients, in accordance with a set of criteria and practices that are also listed; and, on the other hand, it empowered the Minister of Economy and Finance to "approve the necessary rules to guarantee the adequate level of protection of users of financial services in their relations with credit institutions".

In exercise of the aforementioned authorization, Order EHA/2899/2011, of October 28, on transparency and protection of banking service clients, has been promulgated. As its statement of reasons indicates, this Order aims to fulfill a triple purpose: i) concentrate and systematize in a single text the basic transparency regulation, to improve its clarity and accessibility for the citizen; ii) update the set of provisions regarding the protection of banking clients, in order to rationalize and increase transparency obligations and rationalize the conduct of credit institutions, and iii) develop the general principles provided for in the Sustainable Economy Law with regard to responsible lending.

The new Order EHA/2899/2011 expressly empowers the Bank of Spain to issue the necessary rules for its development and execution. However, in addition to this general authorization, throughout its articles it contains several specific authorizations and, on other occasions, imposes certain specific obligations on the Bank of Spain.

Consequently, this Circular aims, above all, by replacing Bank of Spain Circular 8/1990, of September 7, to develop in an orderly manner and consistent with market best practices, the set of mandates contained in the Order.

At the same time, the specific regulatory authorization contained in Article 3.3 of Order EHA/1608/2010, of June 14, on the transparency of conditions and information requirements applicable to payment services, has also been used to specify how payment service providers offering currency exchange services must establish and make public the exchange rates, commissions, and expenses, even minimum ones, applicable to operations.

In this way, through the set formed by both norms –the Order and the Circular–, a new code of conduct is intended to be configured, which, endowed with a systematic structure, with a vocation for permanence and stability, and clearly oriented towards the protection of banking service clients, shall govern henceforth the relations between them and credit institutions.

Based on the principles set forth, the main novelties with respect to the previous regulation are specified, basically, in the following aspects.

In Chapter I (object and scope of application), with regard to said scope, the Circular reproduces the principle established in the Order, which follows the most current approaches regarding the scope of preferential protection: that of natural persons.

Thus, when the client acts within the scope of their professional or business activity, the parties may agree that what is provided in the Circular does not apply totally or partially, except with regard to the calculation of the Annual Percentage Rate (APR), official interest rates, and indexes or reference rates applicable for the calculation of the market value in the compensation for interest rate risk in mortgage loans.

Chapter II collects one of the most novel aspects of the new regulation: the information that institutions must make available to the public regarding interest rates and commissions, replacing the current declarations of the preferred rate and reference rates for other active operations, and the brochures of maximum commission rates.

The new Order establishes the obligation of institutions to make available to clients, in a format to be determined by the Bank of Spain, the interest rates usually applied to the services they provide most frequently, as well as the commissions usually received, also in the case of the services they provide most frequently. In order to comply with this mandate, a document has been created, under a homogeneous format, which aims to respond to this requirement (Annex 1) and which selects various operations considered as the most usual of the institutions in their relations with consumers.

The data provided will serve as an indication of the institutions' pricing policy, will allow the monitoring of the evolution of the pricing policy of each institution, and, published on the Bank of Spain's Internet pages, will facilitate comparisons between institutions.

Likewise, a rule is included dedicated to clarifying the scope of the duty of diligence imposed by the Order on institutions, especially with regard to the explanations they must provide to clients in the case of banking operations more complex than normal or with particular risks.

In Chapter III, another requirement introduced by the Order is developed (following precedents already existing in consumer credit and payment services), namely the obligation of credit institutions to provide the client, free of charge, with certain pre-contractual information so that they can make an informed decision about a banking service and compare similar offers. This minimum information, which for the first time extends to deposit operations, must be clear, sufficient, and objective, and must be delivered with due advance notice, and in any case before the client becomes bound by a contract or offer.

It begins by establishing generally that, before providing any banking service, institutions will indicate to the client the amount of all commissions and expenses owed to them, and thereafter offer them the possibility to withdraw from the operation. Next, certain banking services are detailed, especially deposits, for which the specific information to be provided is specified in each case.

In exercise of the authorization to the Bank of Spain to highlight the essential elements of that pre-contractual information, rules have also been established so that certain elements of the operations are highlighted in a uniform manner. This aims to draw the clients' attention to the essential elements of the business offered to them. Likewise, a minimum size has been established for the font used in any pre-contractual or contractual information document, in order to guarantee that all of it is easily legible for any banking client.

In Chapter IV, the obligation of credit institutions to deliver to the client, regardless of whether they request it or not, the corresponding copy of the contractual document formalizing said services is extended to all banking services received, and, with regard to the content of contractual documents, some of their financial contents are developed and systematized.

The Order also determines that institutions must deliver to their clients, in each settlement of interest or commissions they carry out for their services, a settlement document with minimum content, and empowers the Bank of Spain to establish standardized settlement models. The obligation to deliver a settlement document already exists in the current regulation which is now being replaced. In exercise of this authorization, the eleventh rule establishes the content of such communications, and Annex 4, the models for the most common ones, following the formats already in force, but including some additional content in specific cases.

Within communications to clients, the Order has introduced a relevant novelty, consisting of the fact that credit institutions must send to their clients annually, during the month of January of each year, a communication –whose model will be determined by the Bank of Spain– in which, in a complete and detailed manner, the information provided for in the Order itself regarding commissions and expenses incurred and interest rates effectively applied to each banking service provided to the client during the previous year is collected. This communication model is what has been embodied in Annex 5 of the Circular.

Chapter V and the general principles contained in Annex 6 to which it refers aim to develop the concept of "responsible lending", initially incorporated in Article 29 of Law 2/2011, of March 4, on the Sustainable Economy, and subsequently, in Article 18 of the Order.

This chapter of the Circular delves into the initiatives with which public authorities intend to promote responsible lending, both by increasing the information that must be actively made available to potential borrowers, and –especially– by requiring lenders to adopt policies and procedures that favor prudence and specific attention to the needs and possibilities of clients.

The contents and principles referred to, which, like the rest of the Circular, are rules whose compliance will be subject to verification by the Bank of Spain within the framework of the prudential supervision process of credit institutions, have had very diverse sources of inspiration, which, nevertheless, share the objective of promoting the prudence and professionalism of institutions in their lending activity, requiring them to have specific policies, procedures, and practices aimed at a better evaluation and consideration of the debtor's solvency. The principles, in direct application of the lessons learned from recent experiences, seek to minimize the risks that this activity may entail for the institutions themselves and the financial system as a whole, on the one hand, and for the clientele, on the other.

Chapter VI, following the Order, which establishes a significant number of cases in which the Bank of Spain is entrusted with establishing the elements that must be included in the calculation of the APR, addresses the calculation methods for these cases, incorporating, in addition, the appropriate clarifications for said calculation. In this sense, mention should be made of the incorporation of the particularities of the calculation of the APR of implicit overdrafts in cases of remuneration in kind; and, for the first time, the principles and elements that must be taken into account in the calculation of the APR of hybrid instruments with a guarantee of repayment of the principal have also been established.

In this same chapter, the method of calculating official interest rates is established, in particular the two new ones introduced by the Order: the one linked to mortgage loans between one and five years, intended for the acquisition of housing in the euro zone, which will be taken directly from those published by the European Central Bank; and that of Interest Rate Swaps (IRS) for five years, which will use those published daily on screens usually used by financial operators.

Also defined in this chapter are the indexes and reference rates that must be used in determining the market value of mortgage loans that are cancelled early, for the purpose of verifying if there is grounds for compensation for interest rate risk provided for in Article 9.2 of Law 41/2007, of December 7, which modifies Law 2/1981, of March 13, on the Regulation of the Mortgage Market.

Finally, the Circular establishes the formal obligations of institutions regarding the information they must periodically send to the Bank of Spain. Among them, it includes the only provision that will affect all savings banks, even if they do not directly exercise their financial activity, which, by reason of what is established in the transitional provision of the Order, must send to the Bank of Spain certain information on interest rates, in order to temporarily maintain the publication of certain reference indexes.

With the aim of ensuring quality and rigor in the compliance with the new obligations imposed on institutions, and not burdening them unnecessarily with non-urgent tasks, the Circular provides for a phased entry into force of said obligations.

Consequently, in exercise of the powers granted, the Governing Council of the Bank of Spain, upon proposal of the Executive Committee, has approved this Circular, which contains the following rules:

CHAPTER I

Object and Scope of Application

First Rule. Object. [ 3 ]

This Circular aims to issue the necessary rules for the development and execution of the provisions of Order EHA/2899/2011, of October 28, on transparency and protection of banking service clients (hereinafter, the Order) in the terms attributed to the Bank of Spain by this Order, as well as the information obligations of payment service providers offering currency exchange services, in accordance with what is dictated by Article 4 of Order ECE/1263/2019, of December 26, on the transparency of conditions and information requirements applicable to payment services and modifying Order ECO/734/2004, of March 11, on the departments and services for customer attention and the customer advocate of financial institutions, and Order EHA/2899/2011, of October 28, on transparency and protection of banking service clients (hereinafter, Order 1263/2019).

[3]

Drafted according to Circular 3/2022, of March 30, of the Bank of Spain, modifying Circular 2/2016, of February 2, to credit institutions, on supervision and solvency, which completes the adaptation of the Spanish legal order 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 modifying Regulation (EU) No 648/2012; and Circular 5/2012, of June 27, to credit institutions and payment service providers, on transparency of banking services and responsibility in lending. (BOE of April 6, 2022), third rule.

Second Rule. Scope of Application.

The scope of application of the provisions of this Circular is limited to banking services directed or provided in Spain by Spanish credit institutions and branches in Spain of foreign credit institutions (hereinafter, "institutions") to clients, or potential clients, natural persons (hereinafter, "clients" or "customer base") referred to in Article 2 of the Order; all this without prejudice to the particularities, for consumer credit services and for payment services, determined respectively in their Articles 33 and 34, and without prejudice to what is provided in the first rule regarding payment service providers offering currency exchange services.

Communities of goods, such as owners' associations, communities of heirs, undivided estates, and similar, shall be understood to be included within the customer base, provided they are predominantly constituted by natural persons. However, when the natural persons forming the community of goods act within the scope of their professional or business activity, what is provided in the following paragraph shall apply.

When the client acts within the scope of their professional or business activity, the parties may agree that what is provided in this Circular does not apply totally or partially, with the exception of what is established in its thirteenth to fifteenth rules.

CHAPTER II

General Information to the Public

Third Rule. Public Information on Interest Rates and Commissions.

1. Institutions shall publish, in the manner indicated in section 3 of this Rule, the interest rates and commissions usually applied to the banking services provided most frequently to their customer base, in the format established in Annex 1 of this Circular, on operations carried out in each natural quarter for the different product and client profiles reflected in said Annex. This information shall be updated quarterly at the time of sending it to the Bank of Spain as provided in the sixteenth rule. When the institution does not provide its customer base with any of the services reflected in Annex 1, it shall expressly state, in that section of the format established in the Annex, the expression "NOT PRACTICED".

Commissions, expenses, and interest applied to services associated with payment accounts shall not be included in this information. This information must be supplied to the client, in the manner established in Rule 7 of Circular 2/2019, of March 27, of the Bank of Spain, on the requirements of the Document of Commissions and the Statement of Commissions, and payment account comparison websites, which partially modifies this Circular.

Likewise, interest rates or commissions practiced in other banking services provided by the institution shall not be included in this information, without prejudice to their reflection in the corresponding contracts and what is legally provided regarding adequate explanations and pre-contractual information.

However, the institution that usually offers other types of active banking products (for example, loans secured by securities), passive products (for example, certificates of deposit), or services (for example, payment orders by cash delivery) different from those mentioned in Annex 1 may prepare a complementary document to that established in said Annex 1, as an addendum to it, under the title "Other Usual Banking Operations and Services", provided that it has previously communicated this to the Bank of Spain, at least one month before its first publication, with accrediting information that those products are provided to at least 10% of the client base corresponding to the type of product; this latter information must be accredited annually before the Bank of Spain. [ 4 ]

2. Institutions that allow implicit overdrafts in their deposit accounts or implicit excesses in their credit accounts shall publish, in the format established in Annex 2, the interest rates –or the surcharges in the case of excesses– applicable to these situations. In this information, the commissions that, due to their granting, they will apply to these operations shall also be included.

The information mentioned in the preceding paragraph must also be sent to the Bank of Spain, as provided in the sixteenth rule.

3. The publication of Annexes 1 and 2 referred to in sections 1 and 2 above shall be carried out:

– In the commercial establishments of the institutions, at least, through specific and exclusive information (in a prominent place that attracts public attention) that these Annexes, with their full names, are available to the public duly updated to the date to which they refer.

– On the Internet pages of the institutions, through links that, in a prominent and legible manner, are located on the initial screen of the first page, from which one can directly access the conditions of any of the banking services to which they refer.

The format to be applied in the publication of the aforementioned information (and in its submission to the Bank of Spain, as provided in the sixteenth rule) will respect, in each of the operations collected in the Annexes, the technical specifications communicated for this purpose.

[4]

Section 1 drafted according to Circular 2/2019, of March 29, final provision first.

Fourth Rule. Public Information on Exchange Rates.

1. Institutions that carry out with their customer base operations of buying and selling foreign currency against euros, or foreign banknotes against euros, shall publish the minimum buying rates and maximum selling rates, or, if applicable, the single rates they will apply, in spot operations, when the amount of the buying and selling does not exceed 3,000 euros.

2. The publication of exchange rates, which shall be carried out in the manner referred to in section 3 of the third rule, shall be accompanied, when applicable, by the publication of the commissions and expenses they apply in the operations cited in the previous section, explaining the concept to which they respond when this does not derive from the denomination adopted for the commission itself.

3. What is provided in this rule shall apply to any payment service provider offering currency exchange services, including the exchange of foreign banknotes.

Fifth Rule. Adequate Explanations and Duty of Diligence.

1. Before initiating any contractual relationship with a client, institutions will provide them with the explanations referred to in Article 9 of the Order, even in the case of...