/ Guidelines for a Financial Conglomerates Law

The CMF proposes legal changes to adequately regulate financial conglomerates in Chile, following international standards and recommendations from the International Monetary Fund. This includes supervision, corporate governance requirements and adequate equity.

Francisca Donoso F.
Associate Attorney
Alessandri Abogados

Considering that the conglomeration of entities that offer different financial products and services may trigger contagion between entities within them as a consequence of the interconnection of rights and liabilities, the existence of shared assets, the exchange of liquidity flows between companies, the materialization of reputational risks, among others, the Financial Market Commission (“CMF”) proposes the need for a legal change in order to fully implement in Chile an adequate regulatory and supervisory framework for financial conglomerates (“FCL”), taking into account what has already been stated by the International Monetary Fund and the World Bank and the best practices of regulation and supervision of financial conglomerates developed by the Joint Forum (tripartite group of banking, insurance and securities supervisors, represented by the Basel Committee on Banking Supervision, IAIS and IOSCO). The CMF suggests defining a financial conglomerate in the FCL as a set of companies of an economic group that contains an entity whose activity is prudentially regulated (in accordance with current legislation) and, in addition, a second entity whose line of business corresponds to any other financial business (regardless of whether the latter is regulated or not). Specifically, the financial conglomerate would correspond to the group of companies belonging to a business group as defined in Article 96 of the Securities Market Law, which, among the entities that comprise it, has at least one prudentially regulated financial entity of those mentioned below, and any other entity engaged in financial activities (regulated or unregulated), including activities abroad of companies belonging to local conglomerates: Insurance companies of any group, banks, credit card Issuers, debit card issuers, broker dealers, registered fund managers, pension fund managers (AFPs) and severance fund managers (AFCs).

The aspects related to financial conglomerates that the CMF intends to recognize in the Financial Conglomerates Law are, in summary, the following.

• Financial conglomerates operating in Chile would be subject to legal regulation and supervision by the CMF, with such regulator being able to exclude certain conglomerates from supervision based on prudential criteria established by general rules (NCGs) issued by the CMF itself.
• Business groups should be involved in at least one prudentially regulated financial business and in any other financial activity.
• Financial conglomerates should establish a parent company domiciled in Chile with the characteristics of an SAE (i.e. a special corporation/corporation subject to special reporting obligations).
• In the case of foreign conglomerates, it would be required that their countries of origin have a regulatory structure that allows monitoring risks at the conglomerate level. Likewise, they must establish the parent company mentioned in the previous point.
• The controllers and/or founders of the financial conglomerate should comply with requirements equivalent to those of moral suitability currently established for banks in the General Banking Law, on a permanent basis.
• Conglomerates should maintain, on a permanent basis, sufficient equity to face the risks derived from the businesses in which they participate.
• Conglomerates should have corporate governance appropriate to the complexity of their strategy and the businesses in which they engage, focusing exhaustively on the conglomerate’s risk and capital management, as well as on the mitigation of  conflicts of interest that may arise between their companies and executives.
• Financial conglomerates should have risk management standards for concentration, liquidity and market risks, intra-group exposure and consolidated indebtedness, among others.
• Financial conglomerates should publish consolidated financial statements in compliance with current regulations, with particular emphasis on the disclosure of information of interest to the market that is associated with the organization as a conglomerate.

With respect to the powers that would be granted to the CMF, it should be noted that, under the FCL, the CMF would have a supervisory role, a regulatory role with sanctioning powers and a coordinating role with regulators of foreign conglomerates.

The implementation of the FCL would contemplate a transition period of 7 years to fully enforce the provisions on conglomerate regulation. The process would be developed as follows.

• During the first 24 months the following regulations would be developed: (i) solvency requirements, regulatory limits, structure; (ii) corporate governance requirements and standards; and (iii) design and publication of reports required from conglomerates.
• Once the above deadline has been met, the formal implementation of the regulation would begin, with a compliance schedule for conglomerates that would consist of a total extension of 5 years. The first of these would be dedicated to the process of identification and delivery of initial information to the CMF. It would be expected that after 3 years the adjustment of organizational structures and corporate governance design would be completed to allow for the initial licensing. On the other hand, compliance with capital and solvency requirements, concentration, transaction and intra-group exposure limits, risk policy requirements and other types of protocols would be enforceable after year 5 from the publication of the regulations in general.

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