Published and draft legislation - Spain

Recovery and resolution of credit entities and investment servicers

Law on the recovery and resolution of credit entities and investment firms, 18th June 2015

The publication of this law regulates recovery and resolution procedures for financial institutions and companies providing investment services (known as ESIs) established in Spain. It also regulates the legal status of the Fund for the Orderly Restructuring of the Banking Sector (FROB) and the guidelines for its activities.

Essentially European dimension

This law brings together the principles reflected in the earlier Law 9/2012, 14th November, on restructuring and resolution of credit entities, which it partially repeals, introducing various new aspects from the transposition onto the Spanish lawbook of Community regulation (Directive 2014/59/EU and 2014/49/EU). These include the following:

  • It extends the scope of application of the law to investment firms, except those whose share capital is less tan EUR 730,000 or whose scope of operations is limited.
  • It reinforces the preventative stage of resolution, requiring all entities have a resolution and recovery plan (and not just non-feasible entities). This plan must:
    1. Be prepared and approved by the preventative resolution authority (Bank of Spain/European Central Bank or CNMV), following a report from the FROB and the supervisory body responsible for its oversight;
    2. Reflect the resolution actions to be applied should the entity cease to be feasible;
    3. Not presuppose the existence of public financial support or the injection of emergency liquidity.
  • It incorporates a resolution procedure other than the traditional bankruptcy proceedings. The procedure is to be overseen by the FROB, which means that rather than going through the courts, the general government sector supervises it. This is intended to help companies stay in business and to minimise the impact of their non-feasibility on the economic system and the public coffers.
  1. It increases the scope of the bail-in mechanism to all kinds of creditors (whereas the previous law limited it to subordinated creditors), configuring new ways to recapitalise the company which the FROB may implement: (i) repayment or (ii) conversion of capital instruments and (iii) internal recapitalisation. It also offers a new regime providing maximum protection to depositors in the entities that are moving into the resolution stage.
  2. It creates the Domestic Resolution Fund: a body without legal personality that will pay the resolution measures, which will be administered by the FROB and financed with contributions from the private sector.
  3. It establishes the legal framework for the FROB: it determines its composition –incorporating a member of the CNMV because of the extension of its scope to apply to investment firms; it increases the number of seats on its Governing Board, and defines the role of its president as the highest level of representation, in charge of ordinary management and direction, with an unextendable term in office of five years.

Additional and final provisions

In the additional provisions, the law describes the regime applicable to deposits should the credit entity enter into bankruptcy proceedings. It also includes a modification of the legal regime for the Deposit Guarantee Fund, harmonising the way it works in Spain with the way it works Europe-wide.

Its final provisions adapt Spanish legislation, amending earlier laws on the securities market, on bankruptcy proceedings and on corporate enterprises.

Mitigating the impact on financial stability

In all cases, article 6.8 of the law states that the recovery plan must be considered a corporate governance procedure, for the purposes of article 29 of Law 10/2014, 26th June, on planning, supervision and insolvency”.

The regulations in this law constitute a mechanism to mitigate the impact caused by the resolution of an entity to the country’s financial stability, thereby reinforcing market confidence.

Applicability

The law came into force last June, although the rules on internal recapitalisation will become effective as of 1st January 2016.