Circular 3/2014 of the Bank of Spain on fostering the independence of valuation activities and regulating the deduction of intangible assets

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Circular 3/2014, of July 30, from the Bank of Spain, to credit institutions and approved valuation companies and services, establishing measures to foster the independence of the valuation activity through the modification of Circulars 7/2010, 3/1998 and 4/2004, and exercising regulatory options regarding the deduction of intangible assets through the modification of Circular 2/2014 (BOE July 31) (Correction of errors BOE September 12)

The need to foster the independence of valuation companies as a requirement to favor, especially in the mortgage market, the quality of the valuations they perform, was clearly perceived by the legislator in 2007 when modifying, through Law 41/2007, of December 7, article 3 of Law 2/1981, of March 25, on the regulation of the mortgage market, establishing the obligation that those valuation companies that had strong business relationships with credit institutions, or shareholdings with said entities or other shareholders with interests in the field of real estate promotion or marketing, must have certain mechanisms to ensure their professional independence and prevent conflicts of interest. Subsequently, Law 1/2013, of May 14, on measures to strengthen the protection of mortgage debtors, debt restructuring and social housing, deepened this objective, modifying again the aforementioned Law 2/1981 to, among other purposes, prohibit credit institutions from maintaining significant participations in valuation companies and make stricter the requirements of the aforementioned mechanisms favoring the independence of these.

In the same sense, this circular intends, through the development of the aforementioned mechanisms and the establishment of additional rules to foster the independence of the valuation activity, to remove obstacles that hinder the adequate valuation of the real estate assets that serve as collateral for the loans and mortgage credits granted by credit institutions. These mechanisms and rules are specified in the incorporation of the new fourth, fifth and sixth rules to Circular 7/2010, and in the modification of Circular 4/2004 which contemplates section 1 of the third rule of this circular. Of special relevance, for the aforementioned purposes, is the new fifth rule of Circular 7/2010, which establishes the minimum content of the internal code of conduct that must be held by the own valuation services of credit institutions, as well as those valuation companies referred to in section 2 of the aforementioned article 3 of Law 2/1981, of March 25, on the regulation of the mortgage market, since said regulation is configured as the core mechanism for promoting the independence of the valuation activity.

Likewise, the regulatory text has been used to effect, always within the scope of asset valuation activity, certain technical improvements in the statements of Circular 3/1998 (second rule), related to the information that approved valuation companies and services must report to the Bank of Spain.

Additionally, new contents are incorporated into the sixtieth rule and in annex IX of Circular 4/2004, with the object, in the first case, of unifying in said rule all mentions to the mandatory content of the annual activity report, specifying the minimum content of the note referred to in article 29.1 of Law 2/2011, of March 4, on the Sustainable Economy; and, in the second, to complete the implementation of the recommendations of the European Systemic Risk Board of September 21, 2011, on the granting of loans in foreign currency, initiated through Circular 5/2012, of June 27, to credit institutions and payment service providers, on transparency of banking services and responsibility in the granting of loans. Finally, and although it does not constitute the primary object of this circular, through its final provision first, Circular 6/2010, of September 28, to credit institutions and payment entities, on advertising of banking services and products, is also modified, in order to adequately reference the rules on the calculation of the APR to Circular 5/2012, already mentioned, which repealed Circular 8/1990, of September 7, to credit institutions, on transparency of operations and protection of the clientele, to which the aforementioned Circular 6/2010 referred.

The diversity of norms being modified entails, correspondingly, a variety of competence titles enabling this, without prejudice, on the other hand, to the general attribution to the Bank of Spain of the powers of supervision of credit institutions and approved valuation companies and services – carried out by Law 10/2014, of June 26, on the ordering, supervision and solvency of credit institutions, and by Law 2/1981, of March 25, on the regulation of the mortgage market, respectively –.

The modifications introduced in Circular 7/2010, of November 30, are carried out within the framework of the regulatory authorizations contemplated, on the one hand, in section 2 of article 3 of the aforementioned Law 2/1981, of March 25, on the regulation of the mortgage market, and, on the other, in section 2 of the final provision third of Royal Decree 775/1997, of May 30, on the legal regime for the approval of valuation services and companies. This Royal Decree also empowers, through section 3 of its article 15, the Bank of Spain to request from valuation services and companies, individually or generally, all information deemed appropriate for the exercise of their supervisory powers, an authorization under which Circular 3/1998, of January 27, is modified.

As for the modifications made in Circular 4/2004, of December 22, to credit institutions, on public and reserved financial information norms and financial statement models, its regulatory framework is constituted by article one of the Order of March 31, 1989, by which the Bank of Spain is authorized to establish and modify the accounting norms of credit institutions.

Finally, through separate final provisions, certain normative references included in Circular 6/2010, of September 28, to credit institutions and payment entities, on advertising of banking services and products, are updated, and 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 amending Regulation (EU) No. 648/2012, is modified, with the purpose of unifying the treatment of the deduction of intangible assets during the transitional period established by the aforementioned Regulation (EU) No. 575/2013.

Consequently, in the exercise of the powers conferred upon it, the Governing Council of the Bank of Spain, upon proposal of the Executive Committee, and in agreement with the Council of State, has approved this circular, which contains the following rules:

First Rule.

Modifications of Circular 7/2010, of November 30.

The following modifications are introduced in the Bank of Spain Circular 7/2010, of November 30, to credit institutions, on the development of certain aspects of the mortgage market:

1. Approved valuation companies and services are added as recipients of the aforementioned circular, so that henceforth the rule will be identified as «Bank of Spain Circular 7/2010, of November 30, to credit institutions and approved valuation companies and services, on the development of certain aspects of the mortgage market».

2. The first rule is drafted as follows:

«For the purposes established in article 5.2.j) of Royal Decree 716/2009, of April 24, rating agencies shall be understood as those defined in number 98), section 1, of article 4 of 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.»

3. The following new rules are added, with the content indicated:

«Fourth Rule. Mechanisms to foster the independence of the valuation activity.

The valuation services of credit institutions, as well as the valuation companies referred to in article 3.2 of Law 2/1981, of March 25, on the regulation of the mortgage market, must inform the Bank of Spain of the mechanisms that, in accordance with the aforementioned provision, they have established to foster the independence of the valuation activity and avoid conflicts of interest, and which must at least include the internal code of conduct referred to in the following rule. This information must mention the internal body that approved these mechanisms and include a detailed description of them.

The information referred to in the previous paragraph must be communicated to the Bank of Spain within one month from the creation of the valuation services of the credit institutions and, in the case of the valuation companies referred to in the first paragraph of article 3.2 of Law 2/1981, of March 25, on the regulation of the mortgage market, no later than March 31 of the year in which, in accordance with the criteria established in the final provision third of Royal Decree 775/1997, of May 30, on the legal regime for the approval of valuation services and companies, they meet the condition provided therein. In the cases referred to in the third paragraph of article 3.2 of the aforementioned law, the repeated information must be sent by the affected valuation companies within one month from the moment they know or should know that they are included in the situation referred to in the aforementioned paragraph.

Any modification of the mechanisms established to foster the independence of the valuation activity and avoid conflicts of interest must also be communicated to the Bank of Spain within one month, counted from its approval.

The Bank of Spain will verify the adequacy of these mechanisms, and may reasonably require valuation services and companies to adopt additional measures deemed necessary to preserve their professional independence.

Fifth Rule. Minimum content of the internal code of conduct.

The internal code of conduct that must be adopted by the own valuation services of credit institutions, as well as those valuation companies referred to in article 3.2 of Law 2/1981, of March 25, on the regulation of the mortgage market, as a minimum mechanism to foster the independence of the valuation activity and avoid conflicts of interest, must incorporate at least the following content:

1. Specific circumstances that generate the legal obligation to have the regulation.

2. Principles and objectives that inspire the regulation.

3. Material scope of the regulation, with expression of whether this applies exclusively to the activity whose object is the valuation of real estate assets that must take effect in the cases referred to in article 1 of Royal Decree 775/1997, of May 30, on the legal regime for the approval of valuation services and companies, or if it is also applicable to the whole or part of the rest of the activity of the company or service.

4. Subjective scope of the regulation, with delimitation of the different groups of people to whom it applies, such as professionals (whether or not linked), members of the governing body, other employees or representatives.

5. Consequences and, if applicable, penalties provided for the persons indicated in the previous point for non-compliance with the provisions of the regulation.

6. Detail of the framework of the professional, financial or operational relationship of the valuation services with their credit institution and the companies of their economic group, and of the valuation companies with:

i) Credit institutions and other natural or legal persons that are part of the influence group of the valuation company.

ii) The parent company and companies of the economic group to which, if applicable, the valuation company belongs.

The information referred to in this section must refer to the units and positions of the valuation companies or services through which the receipt of commissions, information on services provided, and delivery of the corresponding valuation reports are channeled.

For the purposes of this circular, the existence of an economic group will be presumed in the cases contemplated in article 42 of the Commercial Code. Likewise, it will be understood that the following form part of the influence group of the valuation companies:

– The credit institution or institutions of the same economic group whose total business relationship with the valuation company represents, individually or collectively, at least 10% of the total net income of that company, calculated in accordance with what is provided in the final provision third of Royal Decree 775/1997, of May 30, on the legal regime for the approval of valuation services and companies, which coincides with the amount of item 1 of statement II of Circular 3/1998, of January 27, from the Bank of Spain, to approved valuation companies and services.

– Natural or legal persons who have specific interests in the promotion or marketing of real estate assets or in analogous activities and are controlling shareholders or who exercise significant influence in the valuation company, as well as the companies controlled or in which said shareholders exercise significant influence. The existence of that significant influence will be appreciated taking into account the criteria defined for this purpose in the accounting regulations in force.

7. Identification of the person responsible for the valuation service.

8. Indication of the internal body (board of directors or delegated commission) of the valuation company or, in the case of valuation services, of the credit institution that approves the regulation.

9. Detail of the incompatibilities applicable collected in articles 6 or 10 (depending on whether they are valuation companies or services) and 13 (related to professionals) of Royal Decree 775/1997, of May 30, on the legal regime for the approval of valuation services and companies, as well as other incompatibilities that, in addition to those, apply to the valuation company or service, the person responsible for that service, the linked valuers, the remaining valuers, the councilors and executives of the valuation company and the rest of the employees.

Specifically, at least the measures adopted regarding those incompatibilities must be detailed:

a) To prevent members of the board of directors of the valuation company who have executive functions from maintaining any professional or labor relationship with natural or legal persons of their influence group or with those companies of their economic group, to which the valuation company provides services and which are directly related to the credit activity or real estate promotion. Likewise, it must be indicated whether said executive councilors can be, and if so, in what cases and under what conditions, significant shareholders of said companies of their economic or influence groups.

b) To ensure that the person responsible for the valuation service is totally unrelated to the purchasing and commercial units of the entity, adopting the necessary measures to separate the valuation service from the commercial and operational services of the organization, so as to guarantee that the former takes autonomous decisions regarding the scope of its activity and conflicts of interest are avoided.

c) To avoid direct treatment of the valuation company and its professional valuers with those employees or executives of the companies of the economic or influence groups who provide their services for the units that, without specific competencies in risk analysis or management, are related to the granting or marketing of mortgage loans or credits.

10. Specification that the action of the valuation company or service in the scope of its valuation activity must be governed exclusively by technical criteria.

11. Indication that neither the valuation service or the valuation company, nor their respective professional valuers, will accept guidelines, instructions, recommendations, pressures or relevant information of any type, especially those coming from natural or legal persons that are part of the economic or influence groups or from the executives or employees thereof, regarding the valuation activity and, particularly, its result. Furthermore, in the case of valuation services of credit institutions, the specification will be collected that the operational or commercial departments of the latter cannot promote the revision of the valuation value.

For the purposes of the provision in the previous paragraph, relevant information will be understood as that which, such as those related to the loan amount or the purchase price of the asset, could guide the result of the valuation.

12. Expression of the confidentiality obligations incumbent on the company or credit institution, its administrators or executives, professionals and employees, which must include, at least, those collected in article 11 of Royal Decree 775/1997, of May 30, on the legal regime for the approval of valuation services and companies.

13. Description of the code or set of conduct rules that, with the objective of preventing conflicts of interest, have been approved to regulate the relationships of the valuation companies and services and their respective professional valuers, whether linked or not, with the clients of said valuation companies or services. These conduct rules will incorporate, at least, criteria on the offering to clients or the rejection of gifts or favors from them, which could compromise their independence, as well as the indication that professional valuers cannot maintain direct communication with clients regarding the value of the asset to be valued.

14. Other contents:

a) Description of the criteria or policies established to prevent the remuneration corresponding to the executives or administrators of the valuation company, as well as that of its employees, from being significantly linked to the results of the natural or legal persons of their influence group or of those companies of their economic group to which they provide services.

b) Description of the mechanisms established to prevent the remuneration of the members and managers of the valuation service from having a significant relationship with the mortgage credit granted by the entity or its economic group and, in general, with the total business captured.

c) Indication of whether the price of the valuations carried out for or by order of the natural or legal persons of the economic or influence groups is established in the same way as for the rest of the valuations.

d) Detail of the procedures established to prevent the transmission of any type of prior opinions on the valuation value, such as estimates or indicative valuations that could enable arbitrage in the selection of valuation services or companies. Likewise, the procedures implemented to ensure that, in those cases where, for justified necessity, those prior valuations must be carried out, the company or valuation service abstains, for a minimum period of six months, from carrying out the subsequent valuation of the same assets, and leaves a written record of each of these cases and the reasons that justified it, in a specific file that remains available to the Bank of Spain.

e) Description of the policies established with the purpose of rejecting commissions for whose realization the valuation company or service lacks the due qualification, either by not having specialized professionals or the necessary technical means, or by lack of recent experience either in the valuation of assets of the same type or in the geographic area where the assets to be valued are located.

f) Indication of the procedures generally used to assign valuations, specifying in particular if such assignment is centralized and random. Likewise, indication of whether there is any difference between the aforementioned general procedures and those specifically used for the assignment of commissions coming from natural or legal persons of the economic or influence groups, with expression, if applicable, of the differences existing.

g) Detail of the stipulations established to prevent shareholders of valuation companies that have specific interests in the promotion or marketing of real estate assets, or in analogous activities, from intervening directly or indirectly in the valuation of those assets, and to know the result of said valuation before it is invoiced and delivered.

h) Description of the procedure established for the systematic monitoring of the degree of compliance with the regulation itself, as well as for the valuation of the effectiveness of its provisions in preserving the independence of the valuation company or service.

i) Indication that the internal controls and audits of the commercial and operational areas of the economic group to which the valuation company belongs, or of the credit institution with its own valuation service, will be carried out independently of those carried out on the valuation company or service.

j) In the event that shareholders or councilors of the valuation company, or other executives of this or of the valuation service, provide services as professional valuers, linked or not, for the aforementioned company or service, description of the respective functions.

k) Indication of the rules or contents of this regulation that will be made public, with expression of the procedure that will be used to do so.

Sixth Rule. Annual report of the technical commission that certain credit institutions must constitute.

The annual report that, on the compliance with the independence requirements referred to in the previous rule, must be prepared by the technical commission of those credit institutions mentioned in article 3.3 of Law 2/1981, of March 25, on the regulation of the mortgage market, must incorporate, at least, the following content:

1. Identification of the members of the technical commission itself, with indication of their function and responsibilities within the economic group to which the credit institution belongs