Practice Areas: Finance

The draft Banking Activity Code

On the 29th October the Bank of Portugal put a draft of the Banking Activity Code to public discussion (BAC).[1]

According to the sector regulator there are three principal objectives to the BAC:

  • To consolidate, in a single legal instrument, the legal framework of banking activity in Portugal;
  • To introduce legislative changes resulting from the most recent developments;
  • To transpose European directives with regard to the so-called banking package, particularly CRD V[2] and BRRD II[3].

It is expected that the BAC will be approved during 2021, replacing the “old” General Regime of Credit Institutions and Financial Companies (RGICSF) and several different sector laws.

In this Newsletter we highlight some of the main novelties proposed by the Bank of Portugal draft.

Abreu’s Banking & Finance team has prepared a new service that aims to ensure compliance with these new rules that are expected to be implemented in our market, including not just the drafting and review of necessary documentation, but also the training of legal and compliance teams and key officers in the relevant business areas.

“Constant and successive changes have made the RGICSF (current banking legislation compilation) more and more difficult to interpret and apply. It’s also important to consider changes to current regimes, taking into account the accumulated practice and experience of supervision and the needs of the current banking system.”

Main Novelties

1. Single type of financial company

An adoption of a single type of financial company is proposed from the start, with the current autonomous subtypes having to undergo conversion. At the same time, investment companies are no longer categorized as financial companies and will be, in general, outside the scope of application of the BAC.


2. Crossborder transactions

The draft contains important changes to the regime of crossborder activities with countries outside the European Union (EU).

Entities headquartered in Portugal that exercise activity via branches and subsidiaries in third countries must ensure that (i) they have an adequate governance and control system in place, (ii) there aren’t impediments to supervision or access to information by the Bank of Portugal, (iii) there aren’t obstacles to the transfer of capital in that country and (iv) the branches or subsidiaries are self-sufficient in terms of liquidity.

In addition, operations with entities headquartered in countries considered non-cooperative, to be listed by Bank of Portugal regulation, is prohibited.

Together, these changes may lead to the need for supervising authorities to carry out extensive due diligence when crossborder transactions are involved.

The regime with regard to the establishment of branches in Portugal by credit institutions headquartered in a third country is also altered, with new requisites added that will have to be observed, namely that the country of origin allows for the establishment, in conditions of reciprocity, of branches of credit institutions headquartered in Portugal, with the branch also obliged to fulfil extensive reporting obligations to the Bank of Portugal.


3. Qualified holdings and voting rights

The draft provides, in an innovative way, for the possibility of the Bank of Portugal to determine the provisional inhibition of voting rights held by those with qualified holdings.

Beyond this, the supervisor will be able to determine the sale, total or partial, of the qualified holdings, in situations that generate elevated risks of finance or failure to comply with legal obligations.


4. Transparency, conflicts of interest and related parties

The express provision that supervising entities have a duty to adopt adequate internal policies of (i) prevention and mitigation of conflicts of interest and over (ii) transactions between related parties, is highlighted from the outset.

Furthermore, the possibilities for prohibiting the granting of credit are extended, among those, in the case in which the effective beneficiary is unknown. The distribution of instruments issued by the entity itself to non-professional investors is also prohibited (self placement).


5. Subcontracting

Subcontracting by supervised entities becomes particularly regulated in the BAC. The duty of the entities to define and adopt a subcontracting supervision policy is enshrined, naming a responsible party for the management of the risks stemming from this.


6. Regulation and Supervision

In the area of supervision, the power of the Bank of Portugal to issue generic recommendations directed to the group of supervised entities is expressly provided for, in agreement with the comply or explain approach. At the same time, the Bank of Portugal will be able to apply compulsory monetary measures, i.e., a type of daily fine, in the case of non-compliance with decisions that impose the adoption or ending of a determined conduct.

In relation to prudential regulation, the changes introduced correspond essentially to the transposition of Directives CRD V and BRRD II.

[1] The draft can be consulted here.

[2] Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019

[3] Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 as amended by Directive (EU) 2019/879 of the European Parliament and Council, of the 20th May 2019

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