AAA Partner Vitor Pereira das Neves and Counsel Miguel Calado de Moura respond to Q&A (Portuguese chapter) for Legal 500 Banking & Finance Comparative Legal Guide 2019
The article is featured at The Legal 500: Banking & Finance 2nd edition Country Comparative Guide
1. What are the national authorities for banking regulation, supervision and resolution in your jurisdiction?
Banco de Portugal (www.bportugal.pt) is the national competent authority for banking regulation, over-sight and resolution.
2. Which type of activities trigger the requirement of a banking license?
Under Portuguese Law, a bank is a credit institution the business of which is to take deposits or other repayable funds from the public and to grant credits for its own account.
Some activities of credit institutions are subject to a principle of exclusiveness triggering a requirement of a banking authorisation granted by European Banking Authority/Banco de Portugal:
a) lending, including the granting of guarantees and other commitments, financial leasing and factoring;
b) payment services;
c) issuing and administering other means of payment not covered by the foregoing subparagraph, e.g. paper cheques, paper travellers’ cheques and bankers’;
d) trading for own account or for account of customers in money market and foreign exchange instruments, financial futures and options, exchange and interest rate instruments, goods and transferable securities;
e) participation in securities issues and placement and provision of related services;
f) money broking;
g) portfolio management and advice, safekeeping and administration of securities;
h) portfolio management in relation to other assets;
i) issuance of e-money.
3. Does your regulatory regime know different licenses for different banking services?
The banking services provided by credit institutions are subject to a single authorisation.
4. Does a banking license automatically permit certain other activities, e.g., broker dealer activities, payment services, issuance of e-money?
A banking authorisation automatically allows the following activities:
a) acceptance of deposits or other repayable funds;
b) lending, including the granting of guarantees and other commitments, financial leasing and factor-ing;
c) payment services;
d) issuing and administering other means of payment not covered by the foregoing subparagraph, e.g. paper cheques, paper travellers’ cheques and bankers’;
e) trading for own account or for account of customers in money market and foreign exchange in-struments, financial futures and options, exchange and interest rate instruments, goods and trans-ferable securities;
f) participation in securities issues and placement and provision of related services;
g) money broking;
h) portfolio management and advice, safekeeping and administration of securities;
i) portfolio management and advice in relation to other assets;
j) advice to undertakings on capital structure, corporate strategy and related questions and advice as well as services relating to mergers and the purchase of undertakings;
k) dealings in precious metals and stones;
l) acquisition of holdings in companies;
m) insurance mediation;
n) credit reference services;
o) safe custody services;
p) leasing of movable property, under the terms authorised to financial leasing companies;
q) provision of the investment services and investment activities;
r) issuance of e-money.
5. Is there a “sandbox” or “license light” for specific activities?
At present, there is no “sandbox” or “license light” for certain activities. However, for FinTech related activities the Portuguese supervisors for the banking, financial markets and insurance sectors (respectively, Banco de Portugal, Comissão de Mercado de Valores Mobiliários and Autoridade dos Seguros e Fundos de Pensão) have entered into a protocol for the creation of a platform designated “Portugal FinLab – where regulation meets innovation”. The objective of the platform is to foster the development of RegTech, InsurTech and FinTech businesses by creating direct dialogue channels with the supervisors to help companies navigate through the regulatory framework.
6. Are there specific restrictions with respect to the issuance or custody of crypto currencies, such as a regulatory or voluntary moratorium?
There is no specific regulation for crypto currencies per se, including for their issuance and custody, except that where a crypto currency befalls on the category of securities, financial markets and securities laws will apply by default.
7. What is the general application process for bank licenses and what is the average timing?
Overall, the general application process for the issuance of a banking license is divided in two phases: (i) authorisation phase and (ii) registry phase.
Firstly, the interested party shall fill out an application form with the following elements (inter alia):
a) characterisation of the type of credit institution to be set up and a draft of the articles of association;
b) programme of operations, including the type of operations to be carried out, geographical location, internal organisation, as well as material, technical and human resources to be used and prospective accounts for each of the first three business years;
c) identity of the founding shareholders, indicating the amount of capital subscribed by each of them;
d) reasoned explanation on the adequacy for the shareholder structure to the stability of the credit institution;
e) statement of commitment to the effect that on the date of setting-up and as a prerequisite of the same, the amount of capital stock required by law has been deposited with a credit institution;
f) robust corporate governance arrangements;
g) identification of the members of the management and supervisory bodies, accompanied by a justification from the applicants of their suitability to ensure the sound and prudent management of the credit institution.
Additional information may be required by the European Banking Authority and Banco de Portugal. The applicants must be notified of the decision within 6 months of the receipt of the application or, where applicable, of receipt of the additional information required, but in any case, within twelve months from the receipt of the initial application – the lack of notification implies refusal of the application.
The authorisation may be expressly refused, whenever:
a) the application for authorisation is not accompanied by all the required information and documents;
b) the application file contains inaccuracies or false statements;
c) the credit institution to be set up does not conform with some legal requirements;
d) Banco de Portugal is not satisfied that all the shareholders fulfil the necessary requirements as to ensure a sound and prudent management of the credit institution;
e) the credit institution does not have sufficient technical means and financial resources for the type or volume of transactions which it intends to carry out;
f) the effective supervision of the institution to be set up is prevented due to close links between the credit institution and other natural or legal persons;
g) the effective supervision of the credit institution to be set up is prevented or severely ham-pered by virtue of laws or regulations of a third country governing one or more of the persons with which the credit institution has close links, or of difficulties involved in their en-forcement;
h) the members of the management and supervisory bodies do not comply with the reputation, professional qualification, independence or availability requirements set out by appli-cable law;
i) the company does not demonstrate its capacity to comply with the duties set out by applicable law.
The authorisation lapses if the credit institution fails to commence its activity within a period of twelve months. In addition, there are circumstances where the authorization may be withdrawn by Banco de Portugal/EBA.
Credit institutions shall not commence their activity without being subject to a special registry before Banco de Portugal, which covers the following items:
a) company or business name and, where applicable, the brand or trade name;
b) corporate object;
c) date of setting-up;
d) location of head office;
e) capital stock;
f) paid-up capital;
g) identity of the shareholders with qualifying holdings, as well as of their beneficial owners;
h) identity of the members of the management and supervisory bodies as well as of those who chair the general meeting of shareholders;
i) delegation of management powers, including the allocation of responsibilities or executive functions to the members of the management bodies;
j) date of commencement of activities;
k) provision of services;
l) location and date of the setting-up of branches, subsidiaries, agencies and representative offices;
m) identity of the managers of branches and representative offices established abroad;
n) inter-shareholder agreements.
The registry is considered to have been made if Banco de Portugal raises no objection within 30 days of the date on which the application was properly filed or, if it asked for supplementary information, within 30 days of receipt thereof.
The process for granting the authorisation shall not exceed a year.
8. Is mere cross-border activity permissible? If yes, what are the requirements?
Mere cross-border is allowed under the European principle of freedom to provide services, applicable to credit institutions authorised to pursue banking activities in the Union.
When Portugal is the home Member State: a credit institution with its head office in Portugal and which intends to provide banking services in another EU Member State shall previously notify Banco de Portugal, specifying the activities which it proposes to carry out in that Member State.
When Portugal is the host Member State: a credit institution authorised in their home Member State to provide banking services is allowed to provide such services within Portuguese territory, even if they are not established in Portugal. As a prerequisite for the commencement of the provision of services in Portugal, the credit institution shall notify the competent authority of the home Member State.
Banking services allowed under the European principle of freedom to provide services are those listed in Annex I to Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013.
9. What legal entities can operate as banks? What legal forms are generally used to operate as banks?
Only legal entities adopting the legal form of a limited company (“sociedade anónima”) can operate as banks. Their object shall only be restricted to banking activities.
10. What are the organizational requirements for banks, including with respect to corporate governance?
As a general rule, credit institutions shall have, at least, management and supervisory bodies, who, within the scope of their competences, shall oversee and be responsible for the implementation of governance arrangements that ensure effective and prudent management of the credit institution, including the segregation of duties in the organisation and the prevention of conflicts of interest.
Credit institutions that are significant in terms of their size, internal organisation and the nature, scope and complexity of their activities shall establish a nomination committee composed of members of the management body who do not perform any executive function, or members of the supervisory body.
A report on corporate governance shall be annually prepared by the management body and published alongside with the credit institutions’ financial statements.
11. Do any restrictions on remuneration policies apply?
Portuguese law requires that credit institutions shall have in place remuneration policies for all their staff:
a) Members of the management and supervisory bodies;
c) Risk takers;
d) Staff engaged in control functions;
e) Employees receiving total remuneration that takes them into the same remuneration bracket as the above categories, whose professional activities have a material impact on the institution’s risk profile.
The implementation of the remuneration policy shall be subject to central and independent internal review by the remuneration committees (if existing), by the non-executive members of the management body or the members of the supervisory body, at least on an annual basis. Remuneration committees are mandatory in credit institutions that are significant in terms of their size, internal organisation and the nature, scope and complexity of their activities.
The remuneration policy of credit institutions shall comply with five principles in a manner and to the extent that is appropriate to their size, internal organisation and the nature, scope and complexity of their activities:
a) to promote sound and effective risk management and not to encourage risk-taking that exceeds the level of tolerated risk of the institution;
b) to be in line with the business strategy, objectives, values and long-term interests of the institution, and to incorporate measures to avoid conflicts of interest;
c) staff engaged in control functions to be independent from the business units they oversee, have appropriate authority, and be remunerated in accordance with the achievement of the objectives linked to their functions, independent from the performance of the business areas they control;
d) to establish that the remuneration of the senior officers in the risk management and compliance functions is directly overseen by the remuneration committee or, if such a committee has not been established, by the management body in its supervisory function;
e) to make a clear distinction between criteria for setting basic fixed remuneration, which should primarily reflect relevant professional experience and organizational responsibility as set out in an employee’s job description as part of the terms of employment, and variable remuneration, which should be based on sustainable and risk-adjusted performance as well as fulfillment of tasks beyond what is required as part of the terms of employment.
Therefore, the remuneration practices and policies of credit institutions must be flexible and they should reflect the financial situation of the institution.
The rules on remuneration practices and policies shall not be waived, particularly through hedging mechanisms.
Credit institutions shall set the appropriate ratios between the fixed and the variable component of the total remuneration of their staff, where the fixed component represents a sufficiently high proportion of the total remuneration to allow the operation of a fully flexible policy on variable remuneration components. This may include the possibility to pay no variable remuneration component. As a general rule, the variable remuneration component shall not exceed the total amount of the fixed component for each staff member.
In the case of credit institutions that benefit from extraordinary public financial support, the remuneration policy shall be subject to the following principles during the intervention period:
a) no variable remuneration is paid to members of the management body of the institution unless there are serious and objective reasons that would justify such payment;
b) remuneration shall be restructured in a manner aligned with sound risk management and long-term growth of the credit institution, including establishing limits to the remuneration of the members of the management body;
c) variable remuneration is strictly limited as a percentage of net revenue where it is inconsistent with the maintenance of a sound capital base and timely exit from extraordinary public financial support
Credit institutions have the duty to inform Banco de Portugal of the number of staff members who receive the remuneration of EUR 1,000,000.00 or more per financial year, including their job responsibilities, the business area involved and the main elements of fixed and variable remuneration and contributions to discretionary pension benefits.
The remuneration policy shall be publicly available at the credit institution’s website.
12. Has your jurisdiction implemented the Basel III framework with respect to regulatory capital? Are there any major deviations, e.g., with respect to certain categories of banks?
Basel III framework regarding regulatory capital was implemented in Portugal through European legislation.
In this regard, Directive 2013/36/EU, of the European Parliament and of the Council (CRD IV) was transposed into national law through Decree-Law 157/2014, of 23 October, which amended the Legal Framework of Credit Institutions and Financial Companies (Decree-Law 298/92, of 31 December). In addition, European implementation of Basel III rules was also executed, at Union level through Regulation (EU) 575/2013 (CRD) – this Regulation has direct application in national law.
13. Are there any requirements with respect to the leverage ratio?
The requirements concerning the leverage ratio derive directly from Regulation (EU) 575/2013 and indirectly from the recommendations issued by the European Banking Authority. For instance, the leverage ratio shall be calculated as an institution’s capital measure divided by that institution’s total exposure measure, expressed as a percentage, and where the capital measure shall be the Tier 1 capital.
Credit institutions shall have policies and practices in order to identify, manage and monitor the risk of excessive leverage. They shall address the risk of excessive leverage in a precautionary manner by taking due account of potential increases in the risk of excessive leverage caused by reductions of the institution’s own funds, and shall be able to withstand a range of different stress event.
Banco de Portugal shall review and evaluate the exposure of credit institutions to the risk of excessive leverage as reflected by indicators of excessive leverage, taking into consideration the business model of credit institutions when assessing the adequacy of their leverage ratio and of the arrangements, strategies, processes and mechanism implemented by institutions to manage the risk of excessive leverage.
14. What liquidity requirements apply? Has your jurisdiction implemented the Basel III liquidity requirements, including regarding LCR and NSFR?
Banco de Portugal shall assess whether any imposition of a specific liquidity requirement is necessary to capture liquidity risks to which a credit institution is or might be exposed, taking into account:
a) the particular business model of the institution;
b) the credit institution’s arrangements;
c) the outcome of the review of the arrangements, strategies, processes, and mechanisms implemented by credit institutions and risk evaluation carried out by Banco de Portugal
d) systemic liquidity risk that threatens the integrity of the financial markets of the EU Member States concerned.
Banco de Portugal may apply administrative fines or accessory sanction, including prudential charges, the level of which broadly relates to the disparity between the actual liquidity position of a credit institution and any liquidity and stable funding requirements established at national or Union level.
Liquidity Coverage Ratio is implemented in Portugal since 2015. Net Stable Funding Ratio would be implemented during 2018.
15. Do banks have to publish their financial statements? Is there interim reporting and, if so, in which intervals?
Under Portuguese Law, credit institutions are obliged to make publicly available their financial statements (including consolidated financial statements). Banks are subject to a quarterly (interim) financial report.
16. Does consolidated supervision of a bank exist in your jurisdiction? If so, what are the consequences?
Banco de Portugal is the national competent authority for the supervision of credit institutions on a consolidated basis.
Credit institutions under such supervision are obliged to submit to Banco de Portugal all information required for supervision and relating to undertakings in which they own holdings. Hence, undertakings in which institutions own holdings are obliged to provide those credit institutions with all necessary information for the purpose of supervision on a consolidated basis.
In addition, when the parent undertaking of one or more credit institutions is a financial holding company, a mixed-activity holding company or a mixed financial holding company, these and their subsidiaries, including those not included in the framework of supervision on a consolidated basis, shall provide Banco de Portugal with any information and clarification relevant for the purpose of supervision. Subsidiaries of a credit institution, financial holding company or mixed financial holding company not included in the scope of the supervision shall provide Banco de Portugal with all the relevant information.
Where deemed necessary for the supervision on a consolidated basis of credit institutions, Banco de Portugal may carry out on-the-spot inspections of financial holding companies, mixed-activity holding companies or mixed financial holding companies and their subsidiaries, as well as in ancillary services companies.
17. What reporting and/or approval requirements apply to the acquisition of shareholdings in, or control of, banks?
Any individual or legal entity who intends to own, directly or indirectly, a qualifying holding in a credit institution shall inform, in advance, Banco de Portugal of such intention.
Banco de Portugal shall be provided with several information, such as the identity of the proposed acquirer, and information related to the nature of the acquisition, including the acquisition’s financing method.
Disposal of qualifying participations are also subject to a duty to communication.
18. Does your regulatory regime impose conditions for eligible owners of banks (e.g., with respect to major participations)?
Banco de Portugal may oppose the plan to acquire or increase a qualifying holding if it considers that it has not been demonstrated that the proposed acquirer has provided incomplete information or fulfills the conditions to ensure the sound and prudent management of the credit institution – it shall assess:
a) the suitability of the proposed acquirer,
b) the reputation, professional qualification, independence and availability of the members of the management body of the credit institution, to be appointed as a result of the proposed acquisition;
c) the financial soundness of the proposed acquirer, in particular in relation to the type of business pursued or envisaged in the credit institution;
d) whether the credit institution will be able to comply and continue to comply with the applicable prudential requirements and, in particular where it belongs to a group, whether the group has a structure that makes it possible to exercise effective supervision, effectively exchange information with the competent authorities and determine the allocation of responsibilities among the competent authorities;
e) whether there are reasonable grounds to suspect that, in connection with the proposed acquisition, money laundering or terrorist financing is being or has been committed or attempted, or that the proposed acquisition could increase the risk thereof.
19. Are there specific restrictions on foreign shareholdings in banks?
There are no specific restrictions on foreign shareholdings in Portuguese institutions.
20. Is there a special regime for domestic and/or globally systemically important banks?
Banco de Portugal is responsible for the identification of globally systemically important banks (G-SIIs) on a consolidated basis and other systemically important banks (O-SIIs) on an individual, subconsolidated or consolidated basis (where applicable).
G-SIIs are identified according to a methodology based on the following criteria:
a) size of the group;
b) interconnectedness of the group with the financial system;
c) substitutability of the services or of the financial infrastructure provided by the group;
d) complexity of the group;
e) cross-border activity of the group.
G-SIIs are allocated into five different sub-categories. Each G-SII shall maintain (on a consolidated basis) a G-SII buffer consisting of Common Equity Tier 1 Capital which, in its turn, shall correspond to the sub-category to which the G-SII is allocated.
O-SIIs are identified according to an assessment based on at least one of the following criteria:
b) importance for the economy of the European Union or of Portugal;
c) significance of cross-border activities;
d) interconnectedness of the credit institution or group, as applicable, with the financial system.
Banco de Portugal may require each O-SII to maintain an O-SII buffer consisting of Common Equity Tier 1 capital of up to 2% of the total risk exposure amount. When requiring an O-SII buffer to be maintained, Banco de Portugal shall review that requirement annually and ensure that it does not entail disproportionate adverse effects on the whole or parts of the financial system of other Member States or of the Union, forming or creating an obstacle to the functioning of the internal market.
21. What are the sanctions the regulator(s) can order in the case of a violation of banking regulations?
Fines and accessory sanctions may be applied to individuals or legal entities who commit administrative offenses concerning banking law and regulations.
Fines are set, inter alia, taking into account the gravity of the breach and the nature of the infractor (if he/she is an individual or legal entity) – from EUR 1,000.00 up to more than EUR 5,000,000.00.
In addition to fines, accessory sanctions may also be applied:
a) loss of the benefit of the breach;
b) loss of the object of the breach and goods belonging to the offender which are related to the breach;
c) publication of the final decision;
d) where the infractor is an individual, prohibition from being a member of a corporate body, as well as from holding top-, mid- or lower-level management positions in any entity subject to supervision by Banco de Portugal, for a period from six months to three years or from one year to ten years;
e) suspension from exercising voting rights conferred on shareholders in any entity subject to supervision by Banco de Portugal, for a period from one year to ten years.
22. What is the resolution regime for banks?
Under national law, a resolution action may occur where Banco de Portugal has indicated that a credit institution is failing or likely to fail and there is no reasonable prospect that the failure can be prevented within a reasonable time frame through recourse to measures carried out by the credit institution itself or, for instance, the application of corrective measures. Before taking resolution action, Banco de Portugal shall appoint an independent entity, at the expense of the credit institution under resolution, in order to ensure that a fair, prudent and realistic valuation of the assets and liabilities and off-balance-sheet items of the institution in question is carried out.
Where the requirements are met, Banco de Portugal may apply up to four resolution actions:
a) partial or total sale of the business;
b) partial or total transfer of the business to bridge institutions;
c) separation and partial or total transfer of the business to asset management vehicles;
As a general rule, the members of the management and supervisory bodies of the credit institution under resolution and the respective statutory auditor shall cease functions and they shall be substituted by members appointed by Banco de Portugal.
The national legal framework of resolution measures follows these objectives:
a) to ensure the continuity of critical financial services for the economy;
b) to avoid adverse effects on financial stability, in particular by preventing contagion, including to market infrastructures, and by maintaining market discipline;
c) to safeguard the interests of taxpayers and protect public funds, minimising reliance on extraordinary public financial support;
d) to protect depositors and investors;
e) to protect the client funds and client assets held by credit institutions in their name and on their behalf and the provision of related investment services.
The costs incurred from the application of resolution actions and the required financial support shall be proportionate and appropriate to the objectives of these measures:
a) the shareholders of the credit institution under resolution bear first losses;
b) the creditors of the credit institution under resolution bear losses after the share holders in an equitable manner, in accordance with the order of priority of their claims;
c) no shareholder or creditor of the credit institution under resolution shall incur greater losses than would have been incurred if the institution had been wound up;
d) depositors shall not bear losses from deposits guaranteed by the Deposit Guarantee Fund in accordance.
23. How are client’s assets and cash deposits protected?
Cash deposits are protected by the Deposit Guarantee Fund, and it guarantees the repayment of the overall value of the cash credit balances of each deposit holder, up to a limit of EUR 100,000.00 per credit institution.
With regard to financial instruments, the investor’s assets are protected by the Investor Compensation Scheme that guarantees the repayment of the credits linked to investment operations, up to a limit of EUR 25,000.00.
24. Does your jurisdiction know a bail-in tool in bank resolution and which liabilities are covered?
Bail-in tool may apply as a resolution measure in order to restore the credit institution under resolution with the ability to comply with the conditions for authorisation and to continue to carry out its activity. Therefore, the following measures may be applied by Banco de Portugal:
a) write down the nominal value of the claims which are liabilities of the credit institution under resolution that are not own funds instruments and which are not excluded from the application of bail-in;
b) recapitalisation through conversion of eligible claims by issuing ordinary shares or other instruments of ownership of the credit institution under resolution.
In some circumstances Banco de Portugal may also convert the eligible claims of the credit institution under resolution into share capital of the bridge institution by issuing ordinary shares and write down the nominal value of the eligible claims of the credit institution under resolution to be transferred to the bridge institution. National law establishes a list of exemptions. For instance, and generally, these measures shall not be applied to claims on the provision of goods and services that are critical to the daily functioning of the credit institution, deposits that are guaranteed by the Deposit Guarantee Fund, claims for which there is collateral, claims on tax and local authorities, claims on employees in relation to accrued salary, pension benefits or other fixed remuneration.
25. Is there a requirement for banks to hold gone concern capital (“TLAC”)?
Portugal adopted Total Loss Absorbing Capacity (TLAC) as well as Minimum Requirement for own funds Eligible Liabilities (MREL) – the latter does not apply only to G-SIIs – in order to prevent or mitigate long-term non-cyclical systemic or macroprudential risks.
26. In your view, what are the recent trends in bank regulation in your jurisdiction?
Since Portugal is Member of the European Union and that Banco de Portugal is part of the Eurosystem and the European System of Central Banks, there is no room left for innovation by the Portuguese Legislator (as well as Banco de Portugal) for establishing new trends. Portuguese banking regulation only imitates, reflects, absorbs or mimics European legislation and instructions from the European Banking Authority.
27. What do you believe to be the biggest threat to the success of the financial sector in your jurisdiction?
The biggest threat to the success of the financial sector in Portugal derives from excessive banking regulation. In comparison with the remaining European Member States, the financial sector in Portugal is relatively small. Hence, excess of regulation may hinder a proper fluidity of the domestic market and an adequate oversight may be at risk: furthermore, there is a risk that formal requirements may prevail over substantial matters.