Rodrigo Formigal

Abreu Advogados, Lisbon

rodrigo.formigal@abreuadvogados.com

João Carvalho

Abreu Advogados, Lisbon

joao.carvalho@abreuadvogados.com

Introduction

In October 2020, the Bank of Portugal (‘BoP’) approved a preliminary draft of the new Portuguese Banking Activity Code, which, if passed, will replace the current legal framework governing banking activities and the provision of financial services in Portugal. The draft underwent a public consultation procedure, with several stakeholders, from banks to government agencies, to law firms, offering their insights to the proposed draft. Given the extensive participation, the BoP ended up extending the deadline twice until January 2021, and the final report of the consultation was only issued in April last year. The final legislative proposal has not yet been released. Nonetheless, we expect the proposal to be brought forward to the Portuguese Parliament during the course of this year.

The proposal for a Banking Activity Code represents a significant change to the banking landscape for financial companies and banks doing business from and to Portugal. Almost 30 years have passed since the enactment of the general framework applicable to credit institutions and financial services that is currently in place – the Regime Geral das Instituições de Crédito e Sociedades Financeiras, known for its Portuguese acronym, ‘RGICSF’. Major changes have since occurred both from a regulatory standpoint and from a market perspective. Portugal saw a major privatisation wave in its banking sector, joined the Eurozone, suffered a serious financial crisis, saw the downfall of four relevant commercial banks, and participated in the development of the single banking market. In the meantime, the RGICSF was time and again amended to keep up with those changes, while multiple scattered legislative acts for the banking sector were continuously enacted.

The government and BoP’s joint decision to put forward a Banking Activity Code addresses most of these issues. The draft aims to consolidate, in a single piece of legislation, the framework for banking activities in Portugal. It also proposes to introduce legislative changes that reflect the recent developments in the Portuguese banking sector, while taking the opportunity to transpose the European Union directives that make up the so-called Banking Package, especially the Capital Requirements Directive (CRD V)[1] and the Bank Recovery and Resolution Directive II (BRRD II)[2].

In this article, we highlight the key changes expected to be introduced by the enactment of the Banking Activity Code. In the second part, we provide a brief overview of these changes on six selected topics and in the last and final part, we take a closer look at the draft Banking Activity Code’s proposals regarding cross-border operations, taking into account how these may impact market players doing business to and from Portugal on a transnational basis.

Key changes at a glance

Spanning across almost 700 provisions, the draft Banking Activity Code establishes a comprehensive and systematic framework for banking and financial activities in Portugal. In this section, we summarise the main changes proposed by the draft, in comparison to the framework currently in force.

In-scope entities

From the outset, the draft proposes the adoption of a single type of financial company, which shall encompass (and therefore extinguish) all existing subtypes, such as factoring companies or leasing companies. The purpose of each financial company will be determined by the scope of its authorisation, as filed with the BoP. The Code’s list of permitted activities for financial companies now specifically includes the provision of payment services. Prudential requirements on share capital and own funds will likewise vary based on the financial company’s specific purpose. Generally speaking, the Banking Activity Code will maintain the regulatory framework for financial companies aligned with that of credit institutions, so as to ensure a level playing field and to safeguard market stability. In contrast, investment companies will be left out of the scope of the Code, which are, since February 2022, under the sole supervision of the Portuguese Securities Exchange Commission. Nevertheless, large investment companies that perform investment banking activities (with over €30bn in assets) may request an authorisation to operate as credit institutions.

Qualifying holdings

Under the current RGICSF, the framework applicable for qualifying holdings is essentially comprised of the following:

• prior communication to the BoP;
• ex ante evaluation by the BoP of the acquisition project;
• the BoP’s ability to determine that a certain holding is qualifying; and
• the BoP’s power to determine the suspension of voting rights attached to qualifying holdings in case of violation.

For the most part, this regime will remain fairly the same. But the initial draft of the proposal contained two important additions. First, it proposed that the BoP also have powers to order the temporary suspension of voting rights of qualifying holdings, on a precautionary basis, where the influence of their holders might undermine the sound management of the institution/company. Second, the preliminary draft added that the BoP could also order the total or partial sale of the qualifying holding when certain risks arise in connection with the shareholders or the shareholder structure.

Following the public consultation, the proposal for the compulsory sale of qualifying holdings was dropped from the draft. In return, the power to determine the precautionary suspension of voting rights was broadened to every shareholder right attached to qualifying holdings, including inter alia the right to dividends.

Conflicts of interests and related parties

The draft Code sets forth new rules to enhance transparency, deal with conflicts of interest and govern transactions with related parties, with a whole chapter specifically dedicated to this topic.

First, supervised entities will be required to adopt appropriate internal policies on the prevention and mitigation of conflicts of interest and on transactions with related parties. Furthermore, the Code prohibits credit granting, in any form, to entities whose beneficial owner is unknown, in line with anti-money laundering/counter financing terrorism (AML/CFT) policies. Credit granting is also prohibited to shareholders (≥ two per cent stake), as well as to members of the corporate bodies and to persons holding key positions in the entity (though certain exemptions do exist). Lastly, institutions are prevented from lending for the purpose of acquiring equity or debt instruments issued by the entity itself (‘financial assistance’), as well as from marketing instruments issued by shareholders (≥ two per cent stake) to retail investors (‘self-placement’). The initial draft provided for an extensive ban on self-placement, which was significantly reviewed after the public consultation procedure, following concerns over banks’ funding sources, gold-plating, and gains for retail investors in terms of pricing.

Corporate governance and organisational culture

The draft Banking Activity Code sets forth new rules concerning the internal organisation and governance of supervised entities, including on matters relating to organisational culture, corporate governance, fit and proper, internal procedures and remuneration practices and policies.

To highlight just a few things, a clear separation between the Chief Executive Officer and the Chair is established, as well as the need for an adequate number of independent members in management. Remuneration, evaluation, and appointment risk committees will become mandatory for relevant credit institutions, while for others proportionality will remain the rule. As for fit-and-proper assessment of members of corporate bodies, the BoP’s position will be one of opposition/non-opposition towards the appointment and the official 30-day assessment deadline has been extended to three months. Persons holding key positions in institutions will also be subject to ex ante fit-and-proper tests, an addition to the current framework.

Subcontracting

The draft Code deals specifically with the issue of subcontracting by institutions. In a nutshell, outsourcing is expressly permitted under the Code, with the exception of core tasks regarding activities that only credit institutions may carry out. In any case, subcontracting entities must define and adopt a supervision policy, in addition to appointing a person responsible for managing the risks arising therefrom. Aside from liability for compliance with legal requirements, the Code establishes the subcontracting institution’s joint and several liability for damages caused by the outsourced entity.

Regulation and supervision

With regard to supervision, the draft Code expressly provides for the BoP's power to issue generic recommendations addressed to all supervised entities with a comply-or-explain mechanism. In addition, the BoP will be able to apply compulsory pecuniary measures, a kind of daily fine, for non-compliance with decisions requiring the adoption or cessation of a certain conduct.

As regards asset composition under the Code, credit institutions may only hold shares in excess of 20 per cent in non-financial companies for up to three years. Furthermore, credit institutions are prevented from holding real estate assets, and must adopt an internal plan for their sale – which the BoP may order, on a case-by-case basis, in a certain timeframe. In the initial draft, the proposal included a duty to communicate to the BoP any transaction evaluated in or over 20 per cent of the institution’s balance sheet, giving the BoP power to oppose it. This provision has been left out of the final draft, which in turn expands on the BoP’s current power to notify the credit institution to refrain from executing a transaction whenever it may entail a violation of prudential requirements or the rules of sound management.

As far as prudential requirements go, the draft Code essentially transposes the provisions set forth in CRR and CRD V.

Cross-border framework for foreign institutions

As a general remark, the draft Code does not represent a major shift in the Portuguese banking framework. For the time being, Portugal will remain a jurisdiction where a banking (or financial) licence is required for granting credit on a professional basis – which will continue to encompass more than sheer lending.

For credit institutions headquartered abroad and wishing to operate in Portugal, the framework remains roughly the same.

Credit institutions located in an EU Member State (‘MS’) or in a European Economic Area (EEA) country may operate either by establishing a branch or under the freedom of services (‘FoS’) regime. The establishment of a branch in Portugal requires a notification from the home MS authority to the BoP, which shall then notify the institution that it may initiate its activities in Portugal. Local branches must have at least two persons responsible for dealing with all matters relating to local business, and behavioural rules set forth in the draft Code shall apply to the Portuguese branch. Alternatively, EU or EEA-based credit institutions may carry out banking activities in Portugal based on the FoS regime, without a local branch, provided the BoP is notified by the home MS competent authority.

For credit institutions based in third countries, the draft Code introduces important changes for establishing local branches. These are subject to authorisation from the BoP in similar terms to those required for the incorporation of a credit institution in Portugal. New conditions for granting authorisation to third country institutions include the following:

• reciprocity conditions: the home jurisdiction must allow for the establishment of branches by Portuguese-based institutions;
• equivalent jurisdiction: the home jurisdiction must be listed in the EU lists regarding the equivalence of supervisory and regulatory requirements for the treatment of exposures under CRR; and
• exchange of information: there must be effective mechanisms for exchanging information between the BoP and the home supervisory authority.

Furthermore, the draft Code provides for the need to disclose the (foreign) institution’s shareholder structure, particularly the identification of shareholders with qualifying holdings.

Local management will remain subject to fit-and-proper assessment by the BoP, and capital requirements shall apply in identical terms to those applicable to credit institutions of the same kind headquartered in Portugal. Another important change is the BoP’s power to limit the branch authorisation to certain activities in order to manage risks regarding financial stability and customer protection, as well as the power to limit or prevent the transfer of liquidity.

Lastly, authorised third country institutions must report annually to the BoP a full set of information, as if their head office were located in Portugal – pursuant to the amendment introduced by CRD V.

Although the draft Code does not expressly provide for the reverse solicitation exemption, the provision of cross-border financial or banking services at the client’s own exclusive initiative has been a tolerated practice from the Portuguese regulator, provided the requirements are met on a case-by-case basis.

Finally, the draft Code sets forth new rules governing transactions with foreign entities. Institutions are prevented from dealing with entities located in foreign jurisdictions where there are obstacles, legal or otherwise, to the exchange of information with the BoP, specifically for the purpose of risk evaluation by the Portuguese regulator. A list of said countries may and is expected to be included in a regulation of the BoP. Furthermore, when a credit institution carries out operations in a third country where there are restrictions on the transfer of capital, the BoP may apply the measures it considers necessary to mitigate the risk.