Circular 6/2015 of the Bank of Spain on Remuneration and Corporate Governance Reports for Savings Banks and Obligations of Banking Foundations

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Circular 6/2015, of November 17, of the Bank of Spain, to savings banks and banking foundations, on certain aspects of the remuneration and corporate governance reports of savings banks that do not issue securities admitted to trading on official securities markets and on the obligations of banking foundations derived from their holdings in credit institutions. (BOE of November 20)

The approval of Law 26/2013, of December 27, on savings banks and banking foundations (hereinafter, Law 26/2013), represented a radical change in the legal regime of savings banks. This change came to culminate a regulatory process whose primary objectives were to return these institutions to their classic values (social character and territorial rootedness) and to professionalize their management.

Among the measures aimed at achieving the aforementioned objectives, Law 26/2013 obliges savings banks that exceed the established limits of operation (in territorial terms or business volume) to transform into foundations, either ordinary or banking, losing their status as credit institutions. Additionally, the aforementioned law subjects those banking foundations that exceed certain limits of participation in credit institutions to a regulatory and supervisory regime that is more demanding depending on the degree of participation in them.

Specifically, Law 26/2013 establishes the obligation for banking foundations that hold a 30% participation in the capital of a credit institution to submit to the Bank of Spain, for approval, a management protocol for their financial participation and an annual financial plan. Additionally, those banking foundations that have a participation equal to or greater than 50% in a credit institution, or any other lesser participation that allows them to control it, must reinforce the aforementioned financial plan by incorporating into it a plan for diversification of investments and risk management, and must establish a reserve fund to meet possible needs for own resources of the participated entity or, as an alternative to the latter, a divestment plan in the credit institution, until reducing it below the stated limits. In this regard, Royal Decree 877/2015, developing Law 26/2013, of December 27, on savings banks and banking foundations, by which the reserve fund that certain banking foundations must establish is regulated; Royal Decree 1517/2011, of October 31, approving the Regulation developing the consolidated text of the Account Audit Law, approved by Legislative Decree 1/2011, of July 1; and Royal Decree 1082/2012, of July 13, approving the Regulation developing Law 35/2003, of November 4, on collective investment institutions (hereinafter, Royal Decree 877/2015), have completed the regulatory development regarding the method of calculating and determining the reserve fund.

This circular fulfills the mandates received by the Bank of Spain:

a) The adaptation, for savings banks that do not issue securities admitted to trading on official securities markets (Article 31 of Law 26/2013), of the models and forms established in CNMV Circulars 4/2013, of June 12, which establishes the models for the annual remuneration report of directors of listed joint-stock companies and members of the board of directors and control committee of savings banks that issue securities admitted to trading on official securities markets, and 5/2013, of June 12, which establishes the models for the annual corporate governance report of listed joint-stock companies, savings banks, and other entities that issue securities admitted to trading on official securities markets, which are included as Annexes 1 and 2 of this circular.

b) The determination of the minimum content and other aspects related to the obligations derived from the preparation of the management protocol and the financial plan (Articles 43 and 44 of Law 26/2013).

c) The determination of the impairment to be applied to the assets in which the reserve fund must be invested, based on liquidity and estimated loss of value that might occur at the time of sale or swap (Article 5 of Royal Decree 877/2015).

Consequently, in exercise of the powers conferred, the Governing Council of the Bank of Spain, upon proposal of the Executive Commission, and in accordance with the Council of State, has approved this circular, which contains the following regulations:

INDEX

Title I. Savings Banks.

First Regulation. Corporate Governance Report.

Second Regulation. Remuneration Report.

Title II. Banking Foundations.

Chapter I. Management Protocol.

Third Regulation. Content of the management protocol.

Fourth Regulation. Submission to the Bank of Spain.

Fifth Regulation. Assessment by the Bank of Spain.

Chapter II. Financial Plan.

Section 1. Common Rules.

Sixth Regulation. Content of the financial plan.

Seventh Regulation. Deadline for submission of the financial plan.

Eighth Regulation. Assessment of the financial plan by the Bank of Spain.

Section 2. Reinforced Financial Plan.

Ninth Regulation. Scope of application.

Tenth Regulation. Plan for diversification of investments and risk management.

Eleventh Regulation. Establishment of the reserve fund.

Twelfth Regulation. Composition of the reserve fund.

Thirteenth Regulation. Use of the reserve fund.

Fourteenth Regulation. Divestment program.

Fifteenth Regulation. Other additional measures.

Chapter III. Foundations acting in concert.

Sixteenth Regulation. Concerted action.

Chapter IV. Collaboration with the Single Supervisory Mechanism.

Seventeenth Regulation. Periodic information.

Transitional Provision First. Update of the management protocol.

Transitional Provision Second. Update of the financial plan.

Transitional Provision Third. Accreditation of compliance with the restrictions established in the second transitional provision of Law 26/2013, of December 27, on savings banks and banking foundations.

Final Provision. Entry into force.

Annexes.

Annex 1. Model of annual corporate governance report for savings banks that do not issue securities admitted to trading on official securities markets.

Annex 2. Model of annual remuneration report for members of the board of directors and control committee of savings banks that do not issue securities admitted to trading on official securities markets.

TITLE I

Savings Banks

First Regulation.

Corporate Governance Report.

1. Savings banks that do not issue securities admitted to trading on official securities markets shall annually submit to the Bank of Spain, accompanying a copy of the documents in which it is recorded, the annual corporate governance report referred to in Article 31 of Law 26/2013, of December 27, on savings banks and banking foundations (hereinafter, Law 26/2013), which must offer, taking into account the legal nature of said entities, a detailed explanation of the structure of the entity's governance system and its functioning in practice.

The content of the report shall comply with what is provided in Article 31.2 of the aforementioned law and its developing regulations, and must conform to the model included in Annex 1 of this circular and the completion instructions contained in said annex.

2. The submission to the Bank of Spain of said report must occur within the first four months of the year following that to which the report refers, and in any case no later than the date on which the call for the ordinary general assembly for the approval of the annual accounts corresponding to the same year as the cited report is officially published.

In the case of savings banks that, according to Article 14.1 of the aforementioned law, are not obliged to publish such call in the "Official Bulletin of the Mercantile Registry", the indicated submission cannot take place later than the date on which it is published on the entity's website or communicated individually to the general directors.

Second Regulation.

Remuneration Report.

1. Savings banks that do not issue securities admitted to trading on official securities markets shall annually submit to the Bank of Spain, accompanying a copy of the documents in which it is recorded, the annual remuneration report of the members of the board of directors and the control committee referred to in Article 31 of Law 26/2013, which must collect, in a complete, clear, and understandable manner, the entity's remuneration policy that had been approved for the reference economic year, as well as that which, if applicable, had been foreseen for future years. This report shall also include a global summary of how said policy was applied during the reference year and will detail the individual remuneration accrued by each of the directors and members of the control committee.

In any case, the content of the report shall comply with what is provided in Article 31.3 of the aforementioned law and its developing regulations, and must conform to the model included in Annex 2 of this circular and the completion instructions contained in said annex.

2. The submission to the Bank of Spain of said report must occur within the first four months of the year following that to which the report refers, and in any case no later than the date on which the call for the ordinary general assembly for the approval of the annual accounts corresponding to the same year as the cited report is officially published.

In the case of savings banks that, according to Article 14.1 of the law, are not obliged to publish such call in the "Official Bulletin of the Mercantile Registry", the indicated submission cannot take place later than the date on which it is published on the entity's website or communicated individually to the general directors.

TITLE II

Banking Foundations

CHAPTER 1

Management Protocol

Third Regulation.

Content of the management protocol.

The management protocol that, in accordance with Article 43 of Law 26/2013, banking foundations that individually or jointly hold a participation equal to or greater than 30% of the capital in a credit institution or that allows them to exercise control because any of the criteria established in Article 42 of the Commercial Code apply, must contain, at least, the following points:

a) The basic strategic criteria governing the management by the banking foundation of its participation in the participated credit institution. Specifically, it must include detailed information on:

i) The purpose of the participation in the credit institution and the synergies or advantages that, in relation to the foundation's social work, the referred participation offers compared to other investment alternatives.

ii) The policy that will be applied regarding the distribution of results of the participated entity (dividend distribution, increase in own resources, etc.).

iii) Possible agreements with other shareholders. If applicable, all shareholder agreements subscribed to will be detailed, particularly those that imply the limitation of voting rights. Limitations of this type that have statutory character will also be specified.

iv) When several banking foundations maintain a participation in the same credit institution and the sixteenth regulation of this circular is not applicable, the management protocol must include an express mention that there is no concerted action among them. In particular, in cases where the foundations come from the transformation of savings banks that had subscribed in the past an agreement for the joint performance of their financial activity through the credit institution participated or another that had been absorbed by it, the banking foundations must include in their respective management protocols an express mention that said agreement is no longer in force.

b) The description of the relationships between the board of trustees of the banking foundation and the governing bodies of the participated credit institution, specifying at least:

i) The criteria that, without prejudice to what is required by Law 10/2014, of June 26, on the ordering, supervision, and solvency of credit institutions, and its developing regulations, the foundation will apply in the choice of persons it will propose as directors of the credit institution, indicating the requirements it will demand of them in terms of honorability, experience, and incompatibilities.

ii) The members of the board of trustees who also hold the status of members of the governing body of the participated credit institution, having availed themselves of the transitional period provided for in the second transitional provision of Law 26/2013. Likewise, a forecast of the time when they will comply with the incompatibility regime provided in Article 40.3 of the aforementioned law must be included.

iii) The mechanisms established to prevent possible conflicts of interest that may arise from the compatibility of the positions of trustee and member of the governing body of the participated credit institution during the transitional period provided for in the second transitional provision of Law 26/2013.

iv) The agreements and mechanisms established with the participated credit institution to ensure fluid communication and the exchange of necessary information for the correct fulfillment of the legal obligations applicable to the banking foundation.

c) The description of the general criteria for carrying out transactions between the banking foundation and the participated entity, as well as the mechanisms provided to avoid possible conflicts of interest, with a description, at least, of the following points:

i) Special protocols that have been adopted for the formalization of transactions between the banking foundation or the companies controlled by it and the participated credit institution or the companies of its group.

ii) Procedures established by the foundation, if any, that regulate the negotiation of transactions between the trustees (or their relatives) and the participated credit institution.

iii) Regarding the transactions indicated in the two previous subpoints, indication, if applicable, of the need for approval by a reinforced majority of the members of the board of trustees or any other collegiate body or committee of the banking foundation, and the criteria required for their processing and formalization by the foundation.

iv) Procedures established, if they exist, for the individualized monitoring and control of the transactions cited in the previous subpoints and their subsequent modifications, as well as the periodic information the board of trustees will receive regarding said transactions.

v) Measures adopted, if they exist, to ensure that the transactions referred to in this letter c) are carried out under market conditions.

vi) Indication of the form, place, and periodicity with which, if applicable, the banking foundation will make public information regarding the transactions referred to in this letter c), and their eventual modifications.

Fourth Regulation.

Submission to the Bank of Spain.

1. The management protocol shall be elaborated by the board of trustees of the banking foundation and submitted to the Bank of Spain within a maximum period of two months from the constitution of the banking foundation. Any modification made to the management protocol shall be submitted within one month from its corresponding approval by the board of trustees. In the letter accompanying the new protocol, all modifications introduced will be detailed, and an explanation of the reasons that, in the opinion of the foundation, justify or motivate them will be included.

In any case, during the first half of each year, banking foundations must send a letter to the Bank of Spain by which they ratify the full validity of the last protocol submitted. In said letter, the protocol being ratified will be identified, and the date on which it was submitted to the Bank of Spain will be specified.

2. In the case of banking foundations that, according to the sixteenth regulation, act in concert, the protocol shall be submitted to the Bank of Spain within the deadlines and conditions referred to in the previous paragraph, and must be approved by the boards of trustees of all of them. In the submission letter, the date of approval by each of the boards of trustees will be specified.

This protocol shall be subject to the modification and confirmation regime provided in the previous paragraph.

Fifth Regulation.

Assessment by the Bank of Spain.

1. Within one month from the receipt of the management protocol or its modification, the Bank of Spain shall send a letter to the foundation in which it will pronounce on the approval of the presented protocol, once the assessment provided in Article 43.1 of Law 26/2013 has been carried out, taking into account the possible influence of the banking foundation on the sound and prudent management of the credit institution.

2. The Bank of Spain may request any information it deems necessary to carry out said assessment. The lack of pronouncement within the established deadline will imply the approval of the management protocol.

3. In the event that the Bank of Spain does not approve the management protocol, the corresponding letter will detail the grounds for that decision and may contain the changes that must be made to the protocol.

Within two months from the foundation's receipt of the Bank of Spain's letter denying approval, the board of trustees thereof must submit a new management protocol for approval.

CHAPTER II

Financial Plan

Section One.

Common Rules

Sixth Regulation.

Content of the financial plan.

1. In accordance with Article 44.1 of Law 26/2013, the banking foundations referred to in Article 43.1 must approve a financial plan in which they determine how they will meet possible capital needs that the participated credit institution might incur and the basic criteria of their investment strategy in financial entities.

2. To this end, banking foundations will request from the participated credit institutions the relevant information that proves necessary.

3. Banking foundations will include, as an essential part of the financial plan, their estimates on the own resource needs of the participated credit institution in different scenarios, specifying their estimates both on the additional own resources beyond those existing that would be necessary and on the composition that those would have (ordinary Tier 1 capital or additional capital and Tier 2 capital), in accordance with the distribution requirements established 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.

4. The financial plan will detail how the foundation would meet the estimated own resource needs of the credit institution for the different scenarios contemplated, should they materialize. It will also assess the sufficiency of measures undertaken or planned by the credit institution and determine, if applicable, any additional measures that the banking foundation deems necessary.

5. In the event that the financial plan foresees additional measures that imply the contribution of resources by the foundation, the following will be specified:

a) The patrimonial means of free and immediate disposition with which the foundation has to meet said needs.

b) The own patrimonial means in which the conditions of the previous letter a) do not apply.

c) In the event that the foundation had to resort to other sources of financing, the following must be specified:

i) The specific markets to which it would presumably be resorted, accompanying, for each of them, an analysis of their reliability that includes, at least, the evaluation of access conditions and market depth.

ii) The possible cost of financing, accompanying a foreseeable amortization plan that evidences the foundation's capacity to generate sufficient resources to meet the corresponding payments, considering the dividend policy communicated by the entity or, if applicable, reasonably estimated by the banking foundation. Said plan will be established under criteria of financial prudence and taking into account any commitment already assumed or expected to be assumed.

6. When, in light of the estimates of the own resource needs of the participated entity, the foundation considers it necessary to adopt divestment measures in it in order to reduce the burden of its financial obligations derived from its participation, the financial plan must include a detailed description of the measures considered.

7. In the event that the banking foundation is aware or reasonably anticipates that the participated credit institution already contemplates possible capital increase measures, the financial plan must describe the resources that, if applicable, it would use to face it.

8. The financial plan will specify the general principles governing the investment strategy in credit institutions by the foundation, both regarding potential participation in other entities and regarding risk management policies derived from said participations, including the criteria assumed for their diversification. It will also specify the mechanisms by which said principles have been established and can be modified.

Additionally, it will collect information on the procedures established for the adoption, after the corresponding opportunity analysis that examines both the compatibility of the different investments and their possible synergies, of decisions regarding the foundation's participations in credit institutions, as well as for their monitoring and follow-up.

9. The financial plan must necessarily include information on the type of portfolio the foundation intends to constitute and its objective. It will also indicate if limits have been set on investment, whether absolute or subject to the fulfillment of certain conditions. It will also explicitly state the time horizon foreseen for investments.

Seventh Regulation.

Deadline for submission of the financial plan.

Banking foundations that hold a participation equal to or greater than 30% of the capital in a credit institution, or that allows them to exercise control because any of the criteria of Article 42 of the Commercial Code apply, must present the initial financial plan within three months from their constitution as banking foundations.

Subsequently, they must submit the financial plan annually, within the first quarter following the closing of the fiscal year.

Eighth Regulation.

Assessment of the financial plan