Actualidad Spain

Corporate Governance in Basel III

Circular 2/2016, Bank of Spain

This Circular on supervision and solvency came into force on 10th February, approved by the Bank of Spain as the final tranche of the adaptation of Spain’s legal framework to the European regulation generated by the Basel III agreement.

The Circular has nine chapters, containing innovations such as the introduction of additional permanent regulatory options for the Bank of Spain, the implementing standards on capital buffer requirements and the regulations applicable to the differential treatment accorded to certain risk categories. It also sets forth the statutory regimes applicable to bank branches and to free service provision in Spain and to credit entities headquartered in non-EU member states. In addition, certain aspects of the additional supervision applicable to financial holdings have now been regulated.  

With regard to the information about the supervision and solvency of credit institutions, chapters 4 and 8 are particularly important, addressing key issues of corporate governance such as new provisions for the internal organisation of institutions and remunerations policy. They also set out the regulations on transparency and requirements to inform the market.

Chapter 4, internal organisation, regulates areas that were introduced in Act 10/2014 on organisation and supervision and Royal Decree 84/2015 with measures implementing the Act. It determinates thus that institutions will have to create an Appointments Committee and a Remunerations Committee, which may be one single Committee in the case of those institutions with a total asset volume in their own right of less than EUR 10 million at the close of the two preceding financial years.

The legislation requires institutions to have a dedicated risk management unit or organ. Entities must therefore create a risks committee or, in the case of those with a total asset volume in their own right of less than EUR 10 million at the close of the two preceding financial years, their audit committee may take on the risk management role.

In any event, all the committees cited must comprise at least three non-executive members, while at least a third of these must be independent, including the chairperson.

Furthermore, entities must have regulatory compliance and internal audit departments and should define robust and appropriate procedures for fulfilling these functions.

The chapter also defines the suitability and evaluation requirements for board members, CEOs and similar posts in credit institutions and financial holding companies, both mixed and otherwise. To this end, institutions and companies must apply specific and appropriate internal procedures for the selection and continuous assessment of these positions. In all cases they should ensure that their members have recognised commercial and professional probity, together with the necessary know-how and experience to carry out their roles. Furthermore, in the case of board members, they are to ensure that they behave honourably, with integrity and independent criteria, such that they are in a position to exercise good governance.

As a novelty, all this information must be disclosed to the relevant authorities, which will assess, before the member is included in the Senior Officers’ Register, whether the suitability requirements for the position have been satisfied.

Finally, there is a section in the Circular covering remuneration for board members, senior management and employees whose professional activities have a significant impact on the entity’s risk profile, according to the criteria laid down in articles 3 and 4 of the Delegated regulation (EU) 604/2014. Regulations 37 and 39 of this section set the specifications for institutions’ remuneration policy, and establish their obligation to carry out an annual internal assessment of the policy and to report it to the relevant authority.   

Chapter 8 gives the market disclosure requirements incumbent on credit institutions, specifically with regard to the information their websites must include regarding corporate governance and their remuneration policy. This information must be comprehensive, clear, comparable and up to date, as well as accessible from the website’s homepage in a section titled “Corporate governance and remunerations policy”. The contents should be structured and hierarchical; headings should be clear, concise and meaningful; the tone should be appropriate, avoiding as far as possible the use of industry jargon and abbreviations.

Entities will have three months grace in which to publish this information on their websites, as specified in the Circular’s Seventh Transitional Provision.