Resolution No. JPRF-F-2022-047: Norm for the Formation of Financial Groups and Permitted Operations

Resolution No. JPRF-F-2022-047 THE FINANCIAL POLICY AND REGULATION BOARD CONSIDERING: That, Article 226 of the Constitution of the Republic of Ecuador provides: “State institutions, their agencies, dependencies, public servants, and persons acting by virtue of state authority shall exercise only the competencies and powers attributed to them in the Constitution and the law. They shall have the duty to coordinate actions to fulfill their purposes and make effective the enjoyment and exercise of rights recognized in the Constitution.”; That, the first paragraph of Article 308 of the Supreme Norm stipulates that financial activities are a matter of public order and efficiently intermediated captured resources to strengthen national productive investment, and socially and environmentally responsible consumption; it also stipulates that: “The regulation and control of the private financial sector shall not transfer the responsibility for banking solvency nor shall they constitute any guarantee by the State. (...)” In concordance, Article 309 of the Constitution of the Republic stipulates that the norms of the national financial system shall be responsible for “preserving its security, stability, transparency, and solidity.”; That, the first paragraph of Article 312 of the Constitution of the Republic stipulates that institutions of the private financial system, their directors, and major shareholders, shall not be holders, directly or indirectly, of shares and participations in companies unrelated to financial activity; That, Articles 424, 425, and 426 of the Magna Carta establish the normative hierarchy that norms and acts of public power must maintain; That, Article 9 of the Organic Code of Monetary and Financial Matters, Book I, establishes the duty of regulatory and control bodies to coordinate actions to fulfill their purposes and make effective the enjoyment and exercise of rights recognized in the Constitution; That, Article 13 of the aforementioned Code created the Financial Policy and Regulation Board as part of the Executive Function, responsible for the formulation of credit, financial, securities, insurance, and prepaid comprehensive health care services policy and regulation; That, Article 14, numerals 1 and 2 of the Organic Code of Monetary and Financial Matters, regarding the scope of action of the Financial Policy and Regulation Board, mandates: “1. Formulate credit, financial, including insurance policy, prepaid comprehensive health care services, and securities policy; 2. Issue regulations that allow maintaining the integrity, solidity, sustainability, and stability of the national financial system (...) To fulfill these functions, the Financial Policy and Regulation Board shall issue norms in matters within its competence, without altering legal provisions. The Financial Policy and Regulation Board may issue regulations by segments, economic activities, and other criteria.”

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That, Article 14.1 in its numbers 1 and 9 ibidem, states: “For the performance of its functions, the Financial Policy and Regulation Board must comply with the following duties and exercise the following powers: 1. Regulate the creation, constitution, organization, activities, operation, and liquidation of financial entities, securities, insurance, and prepaid comprehensive health care services; (...) 9. Issue the non-prudential regulatory framework for all financial entities, securities, insurance, and prepaid comprehensive health care services, which will include, among others, norms on accounting, transparency and information disclosure, market integrity, consumer protection; (...)”; That, the Organic Law for Economic Development and Fiscal Sustainability after the Covid-19 Pandemic reformed Articles 143 and 417 of the Organic Code of Monetary and Financial Matters, Book I, which define financial activities as “operations and services linked to financial flows or risks; and which are carried out habitually by entities that make up the financial, securities, and insurance systems, prior authorization of control bodies, (...)” and that: “A financial group shall be understood as one formed by more than one entity that provides a financial service or carries out financial activities or is auxiliary to the financial system. A financial group must be integrated by at least one bank. (...)”, respectively; That, the Fifty-Fourth Transitional Provision added to the Organic Code of Monetary and Financial Matters by the Organic Reformatory Law to the Organic Code of Monetary and Financial Matters for the Defense of Dollarization, prescribes: “Transitional Regime of Resolutions of the Codification of the Monetary and Financial Policy Board. The resolutions contained in the Codification of Monetary, Financial, Securities, and Insurance Resolutions of the Monetary and Financial Policy Board and the norms issued by control bodies, will remain in force until the Monetary Policy Board and the Financial Policy and Regulation Board resolve what corresponds, within the scope of their competencies.”; That, the Technical Secretariat of the Financial Policy and Regulation Board, through Memorandum No. JPRF-SETEC-2022-0080-M of November 15, 2022, submits to the President of the Board the following reports: (i) Technical Report No. JPRF-CT-2022-0039 of November 15, 2022, through which the Technical Secretariat proposes to reform Section I “NORM FOR THE FORMATION OF FINANCIAL GROUPS AND THE OPERATIONS THEY MAY CARRY OUT BETWEEN THEM” Chapter XXXIV “PRIVATE FINANCIAL SECTOR” of Title II “NATIONAL FINANCIAL SYSTEM”, of Book I “MONETARY AND FINANCIAL SYSTEM” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, in concordance with the reform of Articles 143 and 417 of the COMYF, in line with Basel Principles (International Best Practices) and as observed in comparative regulation of countries applying Basel III; (ii) Legal Report No. JPRF-CJ-2022-0046 of November 15, 2022, establishes that the Financial Policy and Regulation Board, as responsible for the formulation of credit and financial policy and regulation, has legal competence to issue secondary regulation related to the formation and organization of entities that provide a financial service or carry out financial activities or are auxiliary to the financial system in Financial Groups, in accordance with Articles 14, 14.1 numbers 1 and 9, 62, and 78 of the Organic Code of Monetary and Financial Matters, Book I. It also indicates that the Financial Policy and Regulation Board also has competence to issue secondary regulation related to the duty of coordination of control bodies to facilitate the fulfillment of their attributes, in accordance with Articles 14 and 14.1 numbers 1 and 9 of the Organic Code of Monetary and Financial Matters, Book I;

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That, the Financial Policy and Regulation Board, in ordinary session convened by technological means on November 22, 2022, and held via video conference on November 25, 2022, reviewed Memorandum No. JPRF-SETEC-2022-0080-M of November 15, 2022, issued by the Technical Secretariat of the Board; as well as Technical Report No. JPRF-CT-2022-0039 and Legal Report No. JPRF-CJ-2022-0046, issued by the Technical Coordination and Legal Coordination of the aforementioned Board and the corresponding draft resolution; That, the Financial Policy and Regulation Board, in ordinary session convened by technological means on November 22, 2022, and held via video conference on November 25, 2022, reviewed and approved the following Resolution; and, In exercise of its functions, RESOLVES: SINGLE ARTICLE.- Substitute the text of Chapter XXXIV “PRIVATE FINANCIAL SECTOR” of Title II “NATIONAL FINANCIAL SYSTEM”, of Book I “MONETARY AND FINANCIAL SYSTEM” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:

“CHAPTER XXXIV: NORM FOR THE FORMATION OF FINANCIAL GROUPS AND THE OPERATIONS THEY MAY CARRY OUT BETWEEN THEM SECTION I: DEFINITIONS Art. 1.- For the purposes of this norm, the following definitions are considered:

1. Affiliate.- It is that company with its own legal personality, in which a private national bank has a shareholding, direct or indirect, less than fifty percent (50%) and not less than twenty percent (20%) of the subscribed and paid capital of the company or in which it exercises influence in its management by the presence of common shareholders, directors, administrators, or employees.
2. Subsidiary.- It is that company with its own legal personality, in which a private national bank has a shareholding, direct or indirect, equal to or greater than fifty percent (50%) of the subscribed and paid capital of the company.
3. Financial Group.- It is the one formed by more than one entity that provides a financial service or carries out financial activities or is auxiliary to the financial system. A financial group must be integrated by at least one private national bank, which will act as the group head. Foreign financial entities, subsidiaries or affiliates of a private national bank, or branches of foreign insurance or securities companies established in the country, shall also be part of financial groups.
4. Head of Financial Group.- It is the private national bank that has direct or indirect shareholding participation in one or more subsidiaries and affiliates that make up the financial group.

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SECTION II: FORMATION OF THE FINANCIAL GROUP Art. 2.- In accordance with what is provided in Article 417 of the Organic Code of Monetary and Financial Matters, Book I, a financial group shall be integrated by at least one national bank that acts as the group head and that possesses one or more entities that provide financial services or carry out financial activities or are auxiliary to the financial system. In addition, foreign financial entities, subsidiaries or affiliates of a national bank, or branches of foreign insurance or securities companies established in the country, shall be part of financial groups. Art. 3.- The entities that are part of the financial group, including the national bank head of the group, their directors, and their shareholders with property ownership and influence, shall not be holders, directly or indirectly, of shares and participations in companies unrelated to financial activity. Art. 4.- The control body shall presume the existence of a financial group when between a private national bank and one or more entities that provide financial services or carry out financial activities or are auxiliary to the financial system, or foreign financial entities or the subsidiaries and affiliates of the private national bank or branches of foreign insurance or securities companies, there are business relations, dependence of at least twenty percent (20%) of operations, management, or indirect ownership, or others, with the entity of the private national financial sector or with its major shareholders or administrators. When such presumptions are configured, said national or foreign companies or entities shall automatically become members of the financial group that has the private national bank as its head. The control body shall determine the criteria for the presumption of the existence of a financial group. Art. 5.- The entities that are part of the financial group and their shareholders with property ownership and influence, including the private national bank, head of the group, shall not act as settlors, adhering settlors, or beneficiaries of a commercial trust whose purpose is to administer or acquire shares of other entities of the national financial system, other than those belonging to the financial group to which they belong; nor of commercial legal entities unrelated to financial activity. Art. 6.- The entities that are part of a financial group shall not accept the subscription and payment of their shares by a natural or legal person who, in turn, has obtained the resources from the product of direct, indirect, or contingent credits granted by another entity that is part of the same group. Non-compliance with this prohibition established in the second numeral of Article 255 of the Organic Code of Monetary and Financial Matters, Book I, will entail the imposition of the sanctions provided for in the same legal body.

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SECTION III: OPERATIONS AND ACTIVITIES BETWEEN ENTITIES OF A FINANCIAL GROUP Art. 7.- The entities that are part of a financial group may carry out between themselves the operations established in the Organic Code of Monetary and Financial Matters, according to the nature of each entity and its corporate object; except for the acquisition of fixed-income securities issued, guaranteed, or guaranteed by the entity or the companies that make up its financial group under conditions different from market conditions. Art. 8.- The limits established in Article 210 of the Organic Code of Monetary and Financial Matters shall apply to active and contingent operations carried out between themselves by the entities that are part of the same financial group. Art. 9.- The entities that are part of the same financial group, to carry out between themselves the operations permitted by the Organic Code of Monetary and Financial Matters, must comply with the following minimum requirements:

1. They shall not be carried out under preferential terms of time, prices, rates, amounts, guarantees, and commissions to those used in similar operations with third parties;
2. Credit operations shall be qualified according to the risk category and the lending entity shall constitute the corresponding provisions, according to the applicable regulation;
3. It shall at least maintain a normal risk rating, according to the provisions that the Financial Policy and Regulation Board has issued on the matter;
4. Any commercial trust contract of those that are permitted involving two or more entities of a financial group, shall require prior authorization from the Superintendency of Banks; and,
5. The entity that is part of a financial group that must cancel obligations to another entity that is part of the same group, may do so in the forms provided for in the current legal provisions, but the creditor entity shall prefer cash payment, when the debtor has sufficient liquidity. Art. 10.- The private national bank that is the head of a financial group shall be responsible for the property losses of the entities that are part of the group, in accordance with what is provided in Article 421 of the Organic Code of Monetary and Financial Matters, Book I. Art. 11.- The private national bank that acts as the head of the group shall submit to the Superintendency of Banks, with the same periodicity and together with the consolidated and/or combined financial statements, the detail of the operations carried out between entities of the same financial group, in accordance with the instructions determined by circular by the control entity. Art. 12.- The financial group shall be subject to the supervision and control of the Superintendency of Banks under the terms provided in the Organic Code of Monetary and Financial Matters, as well as the norms that the aforementioned control body issues for this effect.

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The Superintendency of Banks may request, through the Superintendency of Companies, Securities, and Insurance, any type of information from securities firms, fund administrators, and trusts, and insurance and reinsurance companies, without the stock secrecy or any other being opposed to it. The Superintendency of Companies, Securities, and Insurance may request, through the Superintendency of Banks, any type of information related to financial groups, without the banking secrecy being opposed to it. Information subject to banking secrecy and reserve, or stock secrecy, as appropriate, shall be transferred with the same protection of secrecy and reserve. For this effect, the aforementioned control bodies shall sign the respective Mutual Cooperation Agreements. SINGLE GENERAL PROVISION.- Cases of doubt in the application of this chapter shall be resolved by the Superintendency of Banks.” TRANSITIONAL PROVISION.- Within five (5) months, the Superintendency of Banks shall adapt its control regulation in accordance with the content of this chapter and the current legal framework. FINAL PROVISION.- This resolution shall enter into force from the present date, without prejudice to its publication in the Official Register, and shall be published on the institutional website of the Financial Policy and Regulation Board within a maximum term of two days from its issuance. NOTIFY.- Given in the Metropolitan District of Quito, on November 25, 2022. THE PRESIDENT, Mgs. María Paulina Vela Zambrano The resolution above 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 November 25, 2022.- I CERTIFY. TECHNICAL SECRETARY Dr. Nelly Arias Zavala