JPRF-S-2022-034 — Harmonization of External Auditor Chapter Provisions on Services Provided to the Same Audited Entity in the Insurance Sector

Resolution No. JPRF-S-2022-034 THE FINANCIAL POLICY AND REGULATION BOARD CONSIDERING: That, Article 226 of the Constitution of the Republic orders that: “State institutions, their agencies, dependencies, public servants, and persons acting by virtue of a state power shall exercise only the competencies and faculties attributed to them in the Constitution and the law. They shall have the duty to coordinate actions for the fulfillment of their purposes and to make effective the enjoyment and exercise of the rights recognized in the Constitution.”; That, through Article 13 of the Organic Code of Money and Finance, Book I, the Financial Policy and Regulation Board was created as part of the Executive Function, as a public law legal entity, with administrative, financial, and operational autonomy, responsible for formulating credit, financial, securities, insurance, and prepaid comprehensive health care services policy and regulation; and its composition was determined; That, Article 14 ibidem, in its items 1, 2, and 3, determines that it corresponds to the Financial Policy and Regulation Board to formulate credit, financial, including insurance, prepaid comprehensive health care services, and securities policies; to issue regulations that allow maintaining the integrity, solidity, sustainability, and stability of the national financial, securities, insurance, and prepaid comprehensive health care services systems in attention to what is provided in Article 309 of the Constitution of the Republic of Ecuador; and to issue micro-prudential regulations for the national financial, securities, insurance, and prepaid comprehensive health care services sectors, based on proposals presented by the respective superintendencies, within their respective scopes of competence and without prejudice to their independence; That, Article 14.1 ibidem, in its number 7, establishes that, for the performance of its functions, the Financial Policy and Regulation Board must comply, among others, with the duty to issue the prudential regulatory framework to which financial, securities, insurance, and prepaid comprehensive health care services entities must be subject, a framework that must be coherent and not give rise to regulatory arbitrage; That, the unnumbered article incorporated following Article 6 of the Organic Code of Money and Finance, Book I, titled “International Best Practices,” states that bodies with regulatory, normative, or control capacity will seek to adopt as a reference framework the international technical standards related to the scope of their competence for the issuance of regulations and for the exercise of their functions, strictly adhering to the normative hierarchy established in the Constitution of the Republic of Ecuador;

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That, the Fiftieth Transitory Provision of Article 106 of the Organic Law Reforming the Organic Code of Money and Finance for the Defense of Dollarization, published in the Official Register Supplement No. 433 of May 3, 2021, states that: “Resolutions contained in the Codification of Monetary, Financial, Securities, and Insurance Resolutions of the Monetary and Financial Policy and Regulation Board and norms issued by control bodies will remain in force until the Monetary Policy and Regulation Board and the Financial Policy and Regulation Board resolve what corresponds, within the scope of their competencies.”; That, the Technical Secretary of the Financial Policy and Regulation Board, through Memorandum No. JPRF-SETEC-2022-0059-M of July 26, 2022, submits to the President of the Board the following reports: (i) Technical Report No. JPRF-CT-2022-00029 of July 26, 2022, in which it is concluded that, from the review of international best practices in the matter, it is evident that they are oriented towards establishing measures that allow maintaining the independence of the external auditor, constituting these a fundamental mechanism of support for the supervision and control performed by the Superintendencies and other control instances, in their respective scopes, with the purpose of ensuring that the pronouncement on the reasonableness of financial statements lacks biases that could result from conflicts of interest arising from the constitution of prolonged commercial relationships or expectations of future business. In this line, and with the aim of applying what is provided in the third paragraph of Article 233 of Book I of the Organic Code of Money and Finance, which establishes that entities that make up financial groups and popular and solidary groups will obligatorily have the same external auditor or correspondent or associated firms with it, it is considered pertinent to harmonize the regulations applicable to the securities and insurance sectors, to what is provided for the financial sector, also covering the criteria relative to the termination of the contract with the external auditor; and, (ii) Legal Report No. JPRF-CJ-2022-0034 of July 26, 2022, in which it was determined that the Financial Policy and Regulation Board is competent to reform the provisions of Article 11 of Section IV “Hiring and Restrictions of the External Audit Service”, Chapter XI “Norms for the Hiring and Operation of External Audit Firms that exercise their activity in Insurance Companies and Reinsurance Companies”, Title III “Of the Surveillance, Control and Information of the Private Insurance System”, Book III “Private Insurance System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions;

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That, through Resolution No. JPRF-V-2022-033 of July 29, 2022, the Financial Policy and Regulation Board substituted Article 17 of Section IV “General Provisions”, Chapter I “External Auditors”, Title XIX “External Audit”, Book II “Securities Market” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, reforming the applicable regulations of the securities sector for its harmonization with what is provided for the financial sector, in consideration of what is provided in the third paragraph of Article 233 of the Organic Code of Money and Finance, Book I, which establishes that entities that make up financial groups and popular and solidary groups will obligatorily have the same external auditor or correspondent or associated firms with it; being also necessary to carry out the pertinent reform to adapt the applicable regulations of the insurance sector; That, the Financial Policy and Regulation Board, in ordinary session convened by technological means on July 26, 2022 and carried out through video conference on July 29, 2022, learned about Memorandum No. JPRF-SETEC-2022-0059-M of July 26, 2022, issued by the Technical Secretary; Technical Report No. JPRF-CT-2022-00029 of July 26, 2022, issued by the Technical Coordination; and Legal Report No. JPRF-CJ-2022-0034 of July 26, 2022, issued by the Legal Coordination; as well as their annexes, and approved the following Resolution; and, In exercise of its functions, RESOLVES: SINGLE ARTICLE.- Substitute Article 11 of Section IV “Hiring and Restrictions of the External Audit Service”, of Chapter XI “Norms for the Hiring and Operation of External Audit Firms that exercise their activity in Insurance Companies and Reinsurance Companies”, of Title III “Of the Surveillance, Control and Information of the Private Insurance System”, of Book III “Private Insurance System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following: “Art. 11.- It corresponds to the general shareholders' meeting or the body that acts in its place, to select the external audit firm, remove it from its function, and designate its replacement within a period of one month from the occurrence of its definitive absence. The entity may not terminate the contract with the external auditor without the authorization of the control body. The designation will be made from a shortlist of three candidates presented by the administration. External audit firms may provide their services to the same audited entity for consecutive periods of up to three years, observing the alternability criteria and reference prices that the control body establishes for this effect. The superintendency may, at its sole discretion and in a motivated manner, dispose of the termination of the contract with the external auditor; in this case, the entity will proceed to replace it within a period not exceeding two months.

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The external auditor may only provide audit services for which they were hired and may not provide any other service or collaboration to the audited entity through natural or legal persons directly or indirectly related. Likewise, the external auditor may not, within the year following the termination of their contract, provide any other service to the audited entity. No one who has provided services, other than external audit services, to the entity in the immediately preceding year can be an external auditor.” FINAL PROVISION.- This Resolution will enter into force from the present date, without prejudice to its publication in the Official Register. Publish this Resolution on the website of the Financial Policy and Regulation Board, within a maximum term of two days from its issuance. COMMUNICATE.- Given in the Metropolitan District of Quito, on July 29, 2022. THE PRESIDENT, Mgs. María Paulina Vela Zambrano The resolution preceding this was processed and signed by Master María Paulina Vela Zambrano, President of the Financial Policy and Regulation Board, in the Metropolitan District of Quito, on July 29, 2022.- I CERTIFY. TECHNICAL SECRETARY Dr. Nelly Arias Zavala