The Banking Regulation Review: Portugal
The Portuguese financial system is fully integrated with the international and European financial markets. The Portuguese banking regulator, the Bank of Portugal (BOP), joined the European System of Central Banks (ESCB) on 1 January 1999. As a result, the definition and implementation of the country's monetary and exchange rate policy, the management of official currency reserves, the efficiency of the payment systems and the issuing of banknotes are now controlled by the ESCB. Likewise, the Portuguese regulatory system governing credit institutions and financial companies is identical in broad terms to the legal framework in force in other EU Member States.
Since the conclusion of the Financial and Economic Assistance Programme in 2014, the Portuguese economy has been slowly improving and has been growing in the past few years, even though this growth has been slowing and there are still some uncertainties as to the financing conditions Portugal may face in the foreseeable future.
Regarding the political context, the left-wing government has maintained the necessary majorities in Parliament and, as at the end of 2019, had concluded the fourth and last year of its mandate following the 2015 elections. The 2019 elections saw a reinforcement of the representation of the Socialist Party in Parliament, which was also repeated in the recent elections of January 2022. With this result, the left-wing bias of the Portuguese Parliament was strengthened, and the course of the policies enacted during the previous mandate is expected to remain constant in the forthcoming years. In respect of state-owned enterprises, following a few years of intense privatisation of state-owned companies, 2016 was the first year of the century without privatisations in Portugal, and no new major transactions were carried out by the government in 2021.
In respect of the banking sector itself, following the period after the conclusion of the Financial and Economic Assistance Programme, in which the BOP determined the application of resolution measures to Banco Espírito Santo (BES) and Banco Internacional do Funchal (Banif), the past few years have been marked by the sale of some of the largest banks in Portugal and the recapitalisation of other major banks.
Notwithstanding the foregoing, the list of the top five largest banks in Portugal (by gross assets and in no particular order) has not seen any changes, and still comprises Caixa Geral de Depósitos (a state-owned bank), Banco Comercial Português, Banco BPI, Banco Santander Totta and Novo Banco (the bridge bank created in the context of the resolution measure applied to BES).
As for its key financial indicators, by the end of the first semester of 2021, they showed that the banking industry had a total asset value of €435.7 billion,2 and that the value of credit granted to customers amounted to a total of €243.99 billion3 and the value of deposits amounted to a total of €295.4 billion.4
The regulatory regime applicable to banks
The regulatory regime applicable to credit institutions and financial companies is set out in the General Framework for Credit Institutions and Financial Companies, enacted by Decree-Law No. 298/92 of 31 December 1992, as amended (RGICSF). In turn, payment institutions are subject to the Legal Framework of Payment Institutions and Payment Services, enacted by Decree-Law No. 91/2018 of 7 November 2018, which implemented the second Payment Services Directive5 into Portuguese law.
As credit institutions must take the legal form of companies limited by shares and have their registered offices located within the Portuguese territory, they are also subject to the general principles and rules of company law further to the banking regulations.
Banks are a central part of the Portuguese financial system not only because of the sheer volume of their business but also because of their involvement in every segment of the Portuguese economy. They may provide a full range of banking services for corporate and private customers, including lending, taking deposits and other repayable funds from the public, granting credit on their own account to third parties in general, and collection and payment services within or outside Portugal (either through foreign branches or on a freedom to provide services basis). Foreign credit institutions may also pursue their banking activity in the territory under the right of establishment rules or on a freedom to provide services basis (this latter structure is reserved for credit institutions of other EU Member States only) provided that the relevant passporting requirements are duly fulfilled.
The BOP is the Portuguese central bank, being responsible for the prudential and market conduct supervision of credit institutions, financial companies and payment institutions, to ensure the stability, efficiency and soundness of the financial system, as well as compliance with the rules of conduct and transparency requirements towards bank customers, thereby ensuring the safety of deposits and depositors, and the protection of consumer interests.
In addition to the RGICSF, credit institutions, financial companies and payment institutions are also required to comply with the notices, instructions and circular letters issued by the BOP.
By the same token, whenever credit institutions or financial companies also pursue financial intermediation activities, they will be subject to the supervision of, and regulations issued by, the Portuguese Securities Market Commission (CMVM). The same applies to the insurance intermediation activities that may be pursued by banks, which are also subject to the supervisory powers of the Portuguese Insurance and Pension Funds Supervisory Authority, and are required to comply with the regulations or circular letters issued by the latter.
In view of the foregoing, credit institutions may ultimately be subject to the supervisory powers of the three above-mentioned Portuguese regulatory authorities, in addition to the European Central Bank (ECB), as a result of the introduction of the Single Supervisory Mechanism (SSM) in 2014.
i Relationship with the prudential regulator
Given its participation in the SSM, the BOP qualifies as a national competent authority, which implies that Portuguese credit institutions considered as significant are supervised by the ECB, while those deemed less significant are directly supervised by the BOP and indirectly by the ECB.
Four groups of banks supervised by the SSM are considered significant.
The main means of supervision by the BOP are as follows:
- issuance of notices and recommendations regarding rules of conduct for the management of banks;
- establishment of rules of conduct for banks ensuring transparency of information during the pre-contractual and contractual stages (including the verification of maximum rates and charges for banking services rendered by credit institutions);
- assessment of complaints presented by banks' customers;
- analysis of the information regularly reported by banks;
- assessment of banks' exposure to risks, and of the adequacy of banks' strategies, mechanisms and procedures to mitigate those risks;
- analysis of the results of the stress tests imposed on banks;
- evaluation of systemic risks; and
- on-site inspections.
The BOP has the power to enforce Portuguese banking laws and regulations through:
- fines and ancillary penalties;
- injunctions for the fulfilment of certain duties;
- seizure of documents and valuables;
- special audits through on-site inspections; and
- withdrawal of a bank's authorisation.
Following the 2008 financial crisis, Portuguese banks were required to increase their own funds and restructure their capital to meet the new requirements on minimum capital, in addition to providing information on complex financial instruments and implementing new depositors' protection rules. The rules applicable to the recovery and resolution of credit institutions also went through a major review and change.
On-site inspections on a permanent basis became a normal practice. The CMVM is the relevant supervisory authority for the financial intermediation activities pursued by Portuguese credit institutions and financial companies and their activities in the stock markets. It is entrusted with the task of supervising and regulating securities and other markets in financial instruments, as well as the activities of all those who operate within said markets.
The supervision carried out by the CMVM includes the following:
- constant supervision of the acts of individuals and entities that operate in capital markets for the purpose of detecting unlawful acts, particularly in stock market trading;
- monitoring compliance with rules;
- detection of criminal offences;
- punishment of infringers, namely by the imposition of fines;
- granting registrations of individuals and transactions to check compliance with the applicable rules; and
- information disclosure, particularly on listed companies, through its website.
ii Management of banks
The board of directors of a credit institution (with at least three members) has prominent powers to manage the operations and financial matters of the entity. Members of the management and supervisory boards and senior management must comply with the requirements set forth in the RGICSF, and the regulations issued by the BOP on suitability, professional qualifications, independence and availability. Additionally, members of the management and supervisory boards of credit institutions that are significant in size may not hold more than four non-executive positions simultaneously, or one executive position with two non-executive positions, with the exception of positions in management and supervisory boards of entities included in the same banking supervision consolidated scope. The RGICSF requires credit institutions to put corporate governance arrangements in place that are sound and proportionate in view of the risks taken by the institution.
Significant attention has been devoted to remuneration policies during the past few years, as has been the case at both European and international levels. In particular, the RGICSF includes the provisions of the Capital Requirements Regulation (CRR)6 and the Capital Requirements Directive (CRD IV),7 both of 26 June 2013, relating to the obligation of credit institutions to put in place remuneration policies that are consistent with their risks. In summary, these provisions relate to the obligation to make a clear distinction between the criteria used for setting fixed remuneration and variable remuneration; the obligation that the remuneration policy is subject to the approval of the shareholders' general meeting; and the principles that will apply to variable elements of remuneration.
iii Regulatory capital and liquidity
The rules on capital adequacy requirements have undergone deep reform with the entry into force of the CRD IV package, which created a single rule book throughout the European Union in this domain.
Portuguese law establishes minimum share capital requirements for each type of credit institution – including banks – and financial companies. For instance, banks are required to have a minimum share capital of €17.5 million, and investment firms are in general required to have a minimum share capital of €5 million.
In addition, since 1 January 2014, the rules on regulatory capital adequacy requirements have been harmonised throughout the European Union. Hence, banks and other credit institutions as well as investment firms must meet the rules on regulatory capital and liquidity established by the CRD IV package.
Under the CRR, institutions must maintain a Common Equity Tier 1 (CET1) capital of at least 4.5 per cent of their risk-weighted assets (RWAs), a Tier 1 capital of at least 6 per cent of their RWAs, a total capital of at least 8 per cent of their RWAs and a leverage ratio of 3 per cent.
As at the third quarter of 2020, the CET1 ratio of the Portuguese banks stood at 15.2 per cent measured as a percentage of the RWAs.
The BOP is entitled to demand that credit institutions and financial companies promptly adopt the measures or take the action necessary to overcome any non-compliance by them with the rules regulating their business, including the capital adequacy guidelines.
Among the powers granted to the BOP for this purpose is that of suspending or substituting one or more members of the management and the supervisory corporate bodies of a credit institution, and the power to appoint both a provisional board of directors and a supervisory committee or a sole supervisor.
If a credit institution becomes undercapitalised, the BOP may apply corrective measures over the entity in distress, which may consist of, notably, the presentation by the entity of a restructuring plan setting out:
- measures such as a share capital increase, a reduction thereof or the disposal of shareholdings or other assets;
- the suspension or substitution of one or more members of its management and supervisory corporate bodies; or
- making certain acts or transactions subject to the prior approval of the BOP.
Where the corrective measures applied are not sufficient for the credit institution to recover, or they are deemed insufficient for the purpose, the BOP may also choose to appoint a provisional board of directors, to apply a resolution measure (in certain circumstances) or even to repeal the authorisation of the credit institution in Portugal, causing its dissolution and winding-up.
Further changes are expected, most notably those resulting from the adoption of the acts implementing the CRD IV and the CRR, which are to be enacted in the near future.
iv Recovery and resolution
The BOP is the competent regulatory authority for the purposes of approving and implementing resolution procedures in this jurisdiction.
The BOP may apply certain resolution measures in the event that a bank is in a situation where it may need to cease to be duly authorised for the pursuit of a banking activity (or presents a serious risk of non-compliance), which may consist of either the disposal, in part or in whole, of the business of the credit institution to another credit institution, or the transfer, in part or in whole, of its business to one or more transition banks, to be funded by the Resolution Fund, which shall be supported by contributions from Portuguese banks. Among others, the RGICSF establishes three situations deemed as a serious risk of non-compliance: when a bank's losses surpass its share capital; when its assets are lower than its obligations; or when it is unable to fulfil its obligations.
The resolution measure must be adequate and proportional in terms of its possible (or likely) consequences on the financial soundness of the institution, the interests of its depositors and, generally, the effects of the resolution on the stability of the financial system. Since 2010, we have witnessed the resolution of four banks: Banco Privado Português, Banco Português de Negócios, BES and Banif.
With the enactment of the Banking Recovery and Resolution Directive (BRRD),8 the EU Member States created a harmonised framework to address certain financial institutions that are failing or likely to fail, with the intent of preventing their insolvency or to minimise the negative consequences arising from insolvency. Hence, Portuguese law, in line with the BRRD, establishes an order of priority regarding liability for the losses of an institution: first, the shareholders are held liable for the losses, and only subsequently are the creditors held liable. No creditor can be put in a worse situation resulting from a resolution measure than it would be in a standard winding-up procedure.
The conditions that may evidence the existence of risks that jeopardise the ability of a credit institution to comply with its legal obligations and therefore trigger a resolution procedure are the following:
- risk of non-compliance with the minimum mandatory legal requirements regarding capital adequacy ratios;
- existing difficulties in maintaining a stable liquidity situation, which can lead to non-compliance with the legal duties imposed on credit institutions;
- the system of governance in place or the management corporate body of the credit institution can no longer provide adequate assurances of sound and prudent management undertakings; and
- the accounting organisation or the internal control system of the credit institution presents serious deficiencies that prevent a proper evaluation of the financial situation of the institution.
Under such circumstances, since 1 January 2016, the BOP, with the ECB, is allowed to directly intervene in a failing credit institution or investment firm and apply certain measures called resolution tools, which are as follows:
- partial or total transfer of the business to another authorised institution;
- partial or total transfer of the business to a bridge bank;
- segregation and partial or total transfer of the business to asset management vehicles; and
- bail-in procedures (imposing direct losses on creditors – bondholders and depositors – of the institutions).
When addressing a failing institution, the regulatory authorities are entitled to adopt one or more resolution tools as they deem appropriate for each case.
Whenever adopting these measures, the BOP must follow certain general principles, such as shareholders bearing the first losses and creditors bearing losses thereafter in accordance with the priority of their credits, as well as creditors of the same class being treated in an equitable manner.
Whenever a resolution measure is applied, the members of the management and supervisory corporate bodies (as well as the certified public accountant or the company responsible for the legal certification of the entity's accounts) are dismissed, unless otherwise determined by the BOP. In such an event, the BOP shall appoint new members to the management and supervisory corporate bodies. In this scenario, the members of the management corporate body will have full capacity as recognised by law and by the articles of association to both the shareholders' general meeting and the management corporate bodies. However, that capacity may only be exercised under the guidance of the BOP.
Each deposit-taking institution must have in place a recovery and a resolution plan. These plans must be submitted to the BOP and must be drafted in accordance with the applicable legal requirements. The recovery plan has the purpose of identifying the measures that must be applied when an institution is in a situation of financial imbalance (or, at least, when there is a risk of getting into such a situation). In contrast, the resolution plan must ensure that all the relevant information is provided to the BOP to allow an orderly resolution of the bank through the application of resolution measures.
With the exception of certain definitions concerning the ranking or priority of creditors, local insolvency rules (e.g., insolvency procedures and clawback rules) shall not apply.
Portuguese law first enacted resolution measures in 2012 (the first version of the BRRD dates back to 2011), and the BRRD was fully implemented in Portugal by August 2015, although certain measures only entered into force on 1 January 2016.
Conduct of business
Credit institutions operating in Portugal, whether domestic (i.e., those whose registered office is located in Portugal) or foreign entities providing cross-border services in Portugal (either through a branch or on a freedom to provide services basis), must comply with Portuguese law (including rules on banking secrecy, data protection and conflicts of interests), notably legal provisions governing the implementation of monetary policies and the reporting of information on their activity within the Portuguese territory, and the decisions and measures taken on monetary, financial and foreign exchange policies, as well as those that must apply in the interest of the general good.
This concept of the general good is not crystal clear, and presents some difficulties regarding its interpretation. While Portuguese law does not provide a definition of the general good, it is generally acknowledged that the concept includes, inter alia, rules dealing with:
- protection of recipients of services;
- protection of workers;
- consumer protection;
- preservation of the good reputation of the national financial sector;
- prevention of fraud; and
- protection of intellectual property.
Furthermore, rules of general good must not have a discriminatory nature, and shall be mandatory to protect the general good, as well as proportionate to pursue that goal.
The above-mentioned institutions must also comply with legal requirements on marketing (i.e., the prohibition of misleading or subliminal advertising, aggressive commercial practices) and other consumer protection-related requirements.
According to Portuguese law, consumer protection rules are applicable to banks in regard to information duties, marketing requirements, pricing and interest rates. Banks are required to:
- provide detailed pre-contractual information;
- assess the creditworthiness of a consumer before granting a loan; provide specific information throughout the duration of the loan agreement;
- grant a mandatory cooling-off period; and
- allow for early repayment of the loan.
There are also specific rules applicable to mortgage credit, consumer credit, deposits and packaged retail investment and insurance products.
Banks must inform the BOP about the pricing that applies to their services, which is publicly available on the supervisor's website.
Maximum interest rates on loan agreements entered into by banks and consumers are determined by the BOP and regularly updated.
Domestic credit institutions and foreign institutions carrying out their activity within the Portuguese territory through a branch are also subject to Portuguese legal requirements on anti-money laundering and the financing of terrorism.
In addition, credit institutions are required to establish several internal departments in respect of, for example, audit, risk management, complaints handling and compliance. In this context, they must have an internal organisation structure that is well defined, transparent and that may be perceptible, giving support to the pursuit of their activity; and must implement an internal compliance system that is adequate and effective in ensuring that the management and control of transactions carried out is done in a prudent manner.
The facts and elements concerning the contractual relationship between a credit institution and its clients are subject to secrecy (even if the holder of that data is no longer a customer of the institution). These facts and elements include, in particular and without limitation, clients' names, details of their bank accounts and respective movements further to other banking transactions. These elements may only be disclosed to third parties if the client has authorised disclosure (unless the third party is the BOP, the CMVM, the Deposits' Guarantee Fund or the Investors' Indemnity System, within the scope of their respective attributions or while assisting the tax or enforcement authorities).
Portuguese credit institutions may fund their activities in different ways, including by gathering retail deposits from the public, debt issuance and other market instruments.
There are no restrictions on the issuance of such instruments, but they are subject to the securities market regulations and must be verified by the BOP to confirm they meet the conditions established by the bank solvency regulations.
On the one hand, the main funding source for Portuguese credit institutions continues to be the deposits taken from their customers, which remained stable in line with previous years by the end of the third quarter of 2021. On the other hand, the funding of Portuguese banks by the Eurosystem (i.e., the ECB and the national central banks of the eurozone) registered a major increase as at the third quarter of 2021.
Control of banks and transfers of banking business
i Control regime
In terms of regulatory approvals, the acquisition of a significant stake in a Portuguese credit institution would entail the need to file several communications and obtain several authorisations (or non-objection decisions) by both the buyer and the seller, in line with the Acquisitions Directive, which has been implemented into Portuguese law by Decree-Law No. 52/2010 of 26 May 2010.
Under Article 2-A, Paragraph ee of the RGICSF, a significant stake means a direct or indirect holding of at least 10 per cent of the share capital or voting rights of the target entity, which for any reason makes it possible to exercise a significant influence over the management of the target entity.
By the same token, prior notice must be given to the BOP, and approval must be granted by the regulator regarding acts that involve the increase of a qualified holding whenever the proportion of the voting rights or of the share capital held would reach or exceed, as applicable, 10 per cent, 20 per cent, 33 per cent or 50 per cent of the share capital or voting rights in the target company, or as a consequence of which the credit institution would become an affiliate of the buyer (as defined by law).
The seller would need to notify the BOP of its decision to sell its stake in the Portuguese credit institution and the subsequent loss of control of the entity. This notification must be made once the decision to sell is made, and in any case prior to closing.
The potential buyer, with cooperation from the seller, would have to obtain approval (a non-objection decision) from the ECB to acquire a significant stake in the Portuguese credit institution. This authorisation would be obtained through the following procedure:
- the application is submitted by the buyer to the ECB (through the BOP, the point of entry into the SSM);
- the BOP acknowledges receipt of the file within a maximum of two business days, and either confirms that the filing is complete or requests further information until it is satisfied with the level of disclosure of the buyer. The 60-business-day term for the ECB to issue its non-objection decision will start once the filing is deemed complete;
- during this term, if additional information is requested by either the BOP or the ECB, the period for a decision may be suspended for up to either 20 or 30 business days, the latter if the applicant (the buyer) is not a financial regulated entity within the European Union;
- the BOP shall send the ECB a preliminary decision of objection or non-objection to the acquisition within 45 business days of the date it confirmed the filing was complete, and the ECB shall then either accept the preliminary decision of the BOP or reject and amend that decision, issuing a final decision within 15 business days of receiving the preliminary decision from the BOP, even if the BOP did not spend the full 45 business days it had to prepare the preliminary decision;
- in the event that the 60-business-day period referred to above lapses without a decision being issued by the ECB, the ECB will be deemed to have granted its non-objection to the acquisition; and
- finally, as of the date of issuance of the non-objection decision (or the lapsing of the term for its issuance), and unless instructed otherwise therein (which may occur in an asset disposal carried out within a recovery scenario), the parties may complete the envisaged transaction within a period of up to one year.
The target Portuguese credit institution itself must then notify the BOP immediately after the transaction is closed.
The contents of the above-mentioned applications, including the information to be provided therein, are set out in BOP Notice No. 6/2021.
In the event that the proposed acquisition triggers a change of control in the target credit institution or a control relationship is established, the proposed buyer must deliver a business plan containing, among other matters, information on the strategic development plan relating to the acquisition, forecasts (including provisional pro forma accounts of the target entity, on an individual and consolidated basis), for a period of three years, and details of the main changes to be introduced in the target credit institution. Antitrust authorisations may be also required, depending on the buyer.
The acquisition of a significant stake is also subject to special registration with the BOP, and the application for that registration should be filed within 30 days of the relevant regulatory authorisation for the acquisition being granted.
Failure to notify the BOP, carrying out the acquisition or increasing a qualifying shareholding during the decision period available to the BOP, or non-compliance with a refusal of the proposed transaction by the BOP, without prejudice to the application of other sanctions, may determine the blocking of the acquired voting rights.
Furthermore, any acquisition of a holding equal to or higher than 5 per cent of the voting rights or of the capital of a credit institution is also required to be notified to the BOP within 15 days of the acquisition of that holding so that the BOP can assess whether it is to be considered a qualifying shareholding.
General statutory limitations, rules on financial assistance, capital maintenance and other similar principles established by Portuguese law may limit the ability of a Portuguese bank to grant security interests for the obligations of a purchaser to repay acquisition finance, or may require that the guarantee or security be limited to a specific amount.
ii Transfers of banking business
Under Portuguese law, there are essentially two options for the transfer of the business of a bank: a demerger or partial spin-off, or an asset deal or direct transfer (sale) of business. As explained below, the consent of customers or any other third party9 may not be necessary in the event of the transfer being structured pursuant to the first option.
Demerger or partial spin-off
Using this option, the bank would undergo a partial spin-off by demerger to segregate the business and incorporate it into another entity. The requirements and corporate procedure applicable to this demerger shall be governed by Portuguese law as the personal law of the Portuguese bank. The business to be transferred within the spin-off should constitute an autonomous business unit capable of pursuing a productive process.
As regards the need to obtain the consent of customers or any other third party in a spin-off, and although not on an indisputable basis, certain Portuguese scholars argue that the consent of the affected counterparties is not required for a business transfer following a demerger governed by Portuguese law. Following this line of reasoning, this alternative appears to be more attractive than the one described below, as it offers a simpler and more straightforward means of transfer from the perspective of the need to obtain the consent of customers or any other third party.
Asset deal or direct transfer (sale) of business
Under Portuguese law, if a business is transferred from one party to another as a stand-alone commercial establishment (thus integrating certain elements that form an autonomous business unit within the seller's activity capable of pursuing a productive process), the acquisition thereof shall be qualified as a transfer of business as a going concern.
A transfer of business as a going concern could be governed by a single master sales agreement governing the transfer of each of the assets and liabilities (or classes of assets and liabilities) of the business of the transferor bank to be transferred. Note, however, that a transfer of agreements with (or liabilities to) the customers and third parties of the Portuguese bank that are part of the transfer of business as a going concern shall require, as a general rule, the consent of the customers and contractual counterparties, except for certain particular situations (e.g., a transfer of employment contracts or the leased premises or equipment of the Portuguese bank).
Pursuant to Portuguese law, a contractual position in any agreement with mutual undertakings (also named bilateral agreements, such as swaps) may only be assigned to a third party if the counterparty of the agreement consents to the assignment.
Although consent in these situations is mandatory, it may be granted either before (e.g., in the agreement itself concluded between the parties that is being assigned) or after the execution of the relevant assignment agreement. If this consent is granted prior to assignment, it shall only be deemed effective once the counterparty has been notified or the assignment is acknowledged as having occurred.
Consent for the assignment of a counterparty's contractual position in any agreement with mutual undertakings may be either explicit or tacit.
As a general rule, if no express objection is received, it may be construed that the relevant customer or third party has consented to the transfer whenever it has carried out certain actions that correspond in practice to an express consent (e.g., if any outstanding amounts due pursuant to the assigned agreement are paid by the transferee instead of the transferor).
In turn, whenever the assigned agreement does not have mutual undertakings but only one of the parties thereto is required to fulfil certain obligations or undertakings (e.g., the payment of a bank overdraft), the assignment of the other party may be carried out without that party's consent (this rule applies, for example, whenever an assignment of receivables is involved). Notwithstanding the validity of this assignment, notice would have to be given to the counterparty for the assignment to be enforceable against it.
If consent is required but not obtained (either the affected counterparty does not give explicit consent or does not engage with the transferee, thereby implying tacit consent), the transferor will remain formally and legally bound under Portuguese law, thus bearing the economic exposure towards the affected counterparty.
The foregoing is a general description of the legal regime under Portuguese law for the transfer of assets and liabilities. However, specific analysis of each asset and of the terms of each agreement to be transferred would still need to be carried out. By way of example, change of control provisions could be triggered as a result of a transfer of business. On the other hand, a transfer of real estate property or other movable assets subject to registration may determine the need to comply with certain formal requirements and to update the relevant registers. Issues relating to, inter alia, a transfer of direct debit mandates, bank guarantees issued by a bank and positions of such a bank in syndicated loans may also be triggered as a result of a transfer of business as a going concern.
The year in review
At the end of the third quarter of 2021, banking institutions' return on assets (ROA) increased compared with December 2020, standing at 0.46 per cent. Return on equity suffered a major increase of 0.5 per cent on December 2020 to 5.4 per cent in September 2021. Moreover, banking institutions' efficiency continued to register a year-on-year decrease, as measured by the cost-to-income ratio, which decreased from 57.8 per cent registered at the end of the third quarter of 2019 to 53.3 per cent in September 2021.
As at September 2020, the percentage of loans from central banks as a percentage of total assets increased 3.4 percentage points compared with the value in December 2019, to 7.8 per cent. The non-performing loan ratio stood at 4 per cent at the end of the third quarter of 2021, a decrease when compared to the ratio registered at the end of 2020, of 4.9 per cent.
Portuguese banks are taking steps to enhance their capital ratios and are trying to attract fresh equity.
In the context of banking law and the coronavirus pandemic, the Portuguese government approved a moratorium, valid until 31 December 2021, which ensures the continuity of the credit lines in force, and the extension or suspension of credits, until the end of this period, pursuant to the terms provided in Decree-Law No. 10-J/2020 of 26 March 2020. The moratorium included a set of measures to protect and support liquidity and treasury, and its purpose is to defer beneficiaries' obligations to the financial system.
2021 was marked by the approval of several new legal frameworks with significant impacts on the financial sector law.
First, Law No. 78/2021 of 24 November was enacted, establishing a complementary framework of consumer protection against the offer of products and goods, and the provision of financial services, by a person or entity not authorised to carry out the activity.
Second, Decree-Law No. 109-H/2021, of 10 December approved the Legal Framework for Investment Companies, thus separating the prudential framework for investment companies from the framework for credit institutions, with the exception of the situations provided for in European Union law. The new regulatory framework aims, in summary, to improve the supervision of these entities, with the purpose of: (1) increasing the certainty, adequacy and proportionality of the applicable rules; (2) adequately addressing the characteristics and specificities of investment firms; and (3) establishing a balance that avoids disproportionate regulatory burdens, while safeguarding the safety and soundness of investment firms.
Furthermore, Decree-Law No. 109-F/2021, of 9 December has amended the General Framework of Collective Investment Undertakings. In particular, it introduced changes regarding: (1) notifications and communications to competent authorities; (2) cross-border marketing and pre-commercialisation; and (3) financial sustainability. This Decree-Law entered into force on 10 December 2021, with exception to the rules concerning the integration of sustainability risks only entering into force on 1 August 2022.
Finally, on 29 October 2020, the BOP issued a draft of the Banking Activity Code (BAC). Although the draft was released for public consultation, it is expected to be approved during 2022 and to replace the RGICSF. The three main objectives of the BAC are to:
- consolidate, in a single instrument, the legal framework of banking activity in Portugal;
- introduce legislative changes resulting from the most recent developments; and
- transpose European directives, particularly CRD V10 and BRRD II.11
Its key innovations are: (1) the adoption of a single type of financial company; (2) important changes to cross-border transactions; (3) new transparency and conflict of interest policies; and (4) new regulatory and supervisory powers for the BOP.
Outlook and conclusions
While the Portuguese economy continued to recover, the coronavirus pandemic, which emerged in the first quarter of 2020, introduced a number of real economic, political and social problems, while also affecting the Portuguese banking industry. Although there has been a decrease in risk premiums and the sovereign debt rating stands at BBB (high) with a positive outlook,12 the country still remains vulnerable to shocks, namely those associated with changes in the risk perception of investors. Budgetary consolidation, high indebtedness levels, the banking sector itself and the implementation of structural reforms pose some downside risks to a sustainable recovery.
Apart from recovering from the covid-19 crisis, the banking system's main challenges remain weak asset quality, thin capital buffers, low profitability and relatively high exposure to Portuguese sovereign debt.
With regard to trends in the banking sector, there has been a notable intensification of the prudential banking requirements and supervision through the action of the SSM. We believe this trend will continue to set the pace of the Portuguese banking industry in the coming years.
Notwithstanding the above, as fears in relation to covid-19 start to reduce the fears in relation to the impacts of the invasion of Ukraine by Russia are taking their place.
Finally, the past year has shown an increase of the number of payment institutions acting within the Portuguese market, which provides new challenges to banks to update some of their products.
1 Pedro Ferreira Malaquias is a partner and Domingos Salgado is an associate at Uría Menéndez – Proença de Carvalho
2 Reference date June 2021.
5 Directive (EU) 2015/2366 on payment services in the internal market.
6 Regulation (EU) No. 575/2013 on prudential requirements for credit institutions and investment firms, as amended.
7 Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, as amended.
8 Directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions and investment firms.
9 References to a third party in this chapter do not include any kind of corporate approvals, such as shareholder approval.
10 Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019.
11 Directive (EU) 2019/879 of the European Parliament and of the Council of 20 May 2019.