Circular Letter No. CC/2020/00000017: Regulatory and Supervisory Flexibility Measures for COVID-19 Contingency Relief

Circular Letter No. CC/2020/00000017 Sent to: Credit Institutions; Investment Companies; Financial Companies; Electronic Money Institutions and Payment Institutions. Mod. 40000375/T – 01/14 Subject: Measures to relax regulatory and supervisory requirements to alleviate the contingency situation arising from the COVID-19 outbreak

Dear Sirs,

The Banco de Portugal, taking into account the decisions already communicated by the European Central Bank (ECB) and the European Banking Authority (EBA), has adopted a set of measures related to its supervisory and resolution competences to ensure that credit institutions continue to perform their role in financing the real economy, at a time when the economic repercussions of the coronavirus (COVID-19) are manifesting.

Utilization of own funds reserves

Capital and liquidity reserves were designed to allow credit institutions to withstand especially adverse situations, and it is certain that the Portuguese banking sector has accumulated a significant amount of these reserves in recent years. Thus, in light of the current context and in line with the decision taken by the ECB for significant institutions, the Banco de Portugal will allow less significant credit institutions under its supervision to operate, temporarily, with a level lower than that of the own funds recommendation (“Pillar 2 Guidance”) and the combined own funds reserve, and with liquidity levels lower than the liquidity coverage requirement (“LCR”).

These measures guarantee significant flexibility to credit institutions to continue supporting the economy. This flexibility can only be used by credit institutions to support the economy, and cannot be used as a counterbalance for possible increases in dividend distributions or variable remuneration.

Suspension of stress tests

Also in line with the European Banking Authority’s decision to postpone the 2020 European stress test exercise, the Banco de Portugal has also suspended the work of the same nature that was underway regarding less significant institutions.

Postponement or cancellation of all inspection actions

In order to avoid physical contact, but also to reduce the operational effort required from institutions supervised by the Banco de Portugal during this period, it was decided to suspend or postpone all inspection actions, in the areas of behavioral supervision, prudential supervision, and prevention of money laundering and terrorist financing, except in situations of greater criticality or where it is possible to continue developing work remotely.

Rescheduling of the SREP exercise

Requests for information necessary for the Supervisory Review and Evaluation Process (SREP) have also been postponed, the dispatch of which should have occurred last Friday. The rescheduling of this process is under evaluation, which will be coordinated with the European Central Bank, in order to ensure fair treatment for national institutions, whether considered significant or non-significant.

Postponement or cancellation of reports

Additionally, regarding the reports indicated below, the Banco de Portugal decided, based on a judgment of their criticality for the exercise of various supervisory and resolution functions, that the obligation to send to the Banco de Portugal is suspended, or that the deadline for sending is extended, or that it will be accepted that the current contingency context constitutes a valid cause for eventual non-compliance with the established deadlines. More specifically:

a) Financing and Capital Plans (FCP): The economic and financial scenario considered in the exercise request has clearly become obsolete in light of the economic and financial developments associated with COVID-19, so this exercise is suspended with reference to all significant and non-significant institutions. If circumstances allow, a new exercise will be carried out in the second half of the year.

b) Internal Control Report: The information provided for in Notice No. 5/2008 may be reported until September 30, 2020.

c) AML/CFT Prevention Report: The information provided for in Instruction No. 5/2019, including the demonstration of compliance with all follow-up measures in this area, may be sent to the Banco de Portugal until May 31, 2020.

d) Report of transfers to offshore jurisdictions: The report relating to the first quarter may be carried out simultaneously with that relating to the second quarter, that is, until July 31, 2020.

e) Reports for resolution planning purposes: Regarding less significant institutions without cross-border activity, it is considered admissible that the reports of information for resolution planning purposes be sent to the Banco de Portugal until May 31, 2020, with the exception of reports related to the liability structure of the institution/group (LDT) and with the information necessary to assess the public interest of each of the institutions (related notably to economic functions), for which it is considered necessary that the sending be carried out until April 30, 2020.

f) Instruction No. 5/2011 (Concentration Risk), Instruction No. 2/2019 and Instruction No. 3/2019 (ILAAP and ICAAP), Instruction No. 34/2018 (Interest Rate Risk in the Banking Book), with deadlines of March 31 and April 15, 2020: sending is permitted until May 31, 2020.

g) Instruction No. 5/2013 (Credit Impairment) and Circular Letter 2020/00000013 (Granting and restructuring of credits to debtors or groups of debtors with increased risk): sending is permitted until August 31, 2020.

The Banco de Portugal is in dialogue with European authorities, regarding the adjustment of plans, processes, and reporting deadlines for significant institutions. On this matter, complementary information will be transmitted in due course, predictably within the framework of joint supervision teams and internal resolution teams.

Extension of the deadline for handling complaints

Regarding complaints submitted directly to the Banco de Portugal, as well as the actions promoted by this supervisory authority in the context of the assessment of complaints, the following measures are adopted, for the period between March 16 and April 20 and without prejudice to subsequent reassessment:

a) Extension of the deadline that institutions have to respond to banking clients within the scope of complaints submitted directly to the Banco de Portugal to 30 business days (compared to the current 20 business days);

b) Extension of the deadline that institutions have to respond to requests for additional information formulated by the Banco de Portugal during the assessment of complaints to 10 business days (compared to the current 3 business days).

Regarding the response deadlines for complaints that banking clients register in the Complaints Book (in physical or electronic format), these are fixed in Decree-Law No. 156/2005, of September 15, which is why the Banco de Portugal cannot extend the time that institutions have to assess these complaints. However, it is emphasized that in the exercise of its sanctioning power resulting from eventual non-compliance with these legal deadlines, the Banco de Portugal will not fail to consider the exceptional situation being experienced.

Flexibility of account opening requirements through videoconference

Institutions must continue to observe the rules aimed at protecting client security and information transparency, such as the legal and regulatory requirements applicable to the remote establishment of business relationships (e.g., account opening and credit contracting to consumers).

With regard in particular to account opening, adequate compliance with the currently provided requirements must be maintained, without prejudice to the use of identification documents with expired validity, in accordance with the legislation approved by the Council of Ministers on March 12 (“acceptance, by public authorities, and for all legal purposes, of the display of documents whose validity period expires during the period of validity of this legislation or in the 15 days immediately preceding or following”).

Contingency and business continuity plans

Under the General Regime of Credit Institutions and Financial Companies (RGICSF) and other applicable norms and guidelines for their activities, institutions are responsible for maintaining contingency and business continuity plans, which must ensure the ability to operate on a continuous basis and contain losses, in the event of a serious disruption of activity.

Also under the RGICSF, institutions must communicate to the Banco de Portugal the occurrence of events with significant negative impact on results or own funds, notably those related to operational incidents.

Specifically with regard to entities authorized to capture deposits, the Banco de Portugal, as already requested in due course, reiterates the need to:

a) Analyze their contingency and business continuity plans and consider what actions can be taken with a view to mitigating potential adverse effects of the spread of COVID-19;

b) Ensure that prevention measures associated with worker safety and business continuity take into account risks associated with a potential pandemic, including, among others: (a) risks arising from operational restrictions in the development of normal activities by workers due to illness, family care, or inability to work at the institution’s facilities due to prophylactic measures; (b) risks in the continuity of critical processes or services due to constraints on service providers under outsourcing or suppliers.

c) Adopt adequate preventive measures with a view to ensuring the continuity of their operations and the containment of financial losses;

d) Immediately communicate to the Banco de Portugal if they identify relevant deficiencies resulting from the verification procedures of their preparedness status mentioned in the previous points;

e) Immediately communicate to the Banco de Portugal the occurrence of events related to COVID-19 with significant negative impact on the institution.

The importance of the immediate communication of the situations referred to in the previous subparagraphs, as well as the reporting of cybersecurity incidents in accordance with current provisions, is emphasized, in order to allow the preventive action of the Banco de Portugal at the level of preserving financial stability.

Additionally, institutions are requested to promptly communicate to the Banco de Portugal plans for closing or conditioning the normal opening of branches, so that the need for adopting financial stability protection measures can be assessed, notably in terms of public communication.

The Banco de Portugal will continue to permanently monitor the situation, and new measures may be considered if necessary, and it is also available to evaluate any new proposals addressed to it.