The beginning of 2015 imposed a tight schedule requiring banks to harmonise their operations with all of the changes made to banking & finance regulations. By the end of March, banks are required to comply their general terms of business and individual agreements with customers with the amendments of the Financial Services Consumer Protection Act, as well as to commence procedures for the implementation of the new Law on Payment Services, which applies as of 1 October 2015.
Furthermore, by the end of March 2015, banks should provide their customers with annexes to housing loan agreements indexed in CHF and provide a recalculation of previous interest paid on foreign currency loans in accordance with the recent Decision of the National Bank of Serbia (NBS) on Measures for Protection of Financial System Stability regarding Loans Indexed in Foreign Currency.
In parallel with the introduction of the above mentioned regulations, at the beginning of February 2015, the National Assembly of the Republic of Serbia adopted amendments (the "Amendments") to the Law on Banks (the "Law"). The Amendments entered into force in mid February 2015, however, their implementation has been delayed until 1 April 2015. Banks are required to harmonise internal general acts with the Amendments by 1 July 2015, with the exception of the recovery plan which should be submitted to the NBS by 30 September 2015. These Amendments should be followed by a set of new NBS bylaws for which no deadline has been prescribed. The discrepancy between the date when the Amendments will become automatically applicable (1 April 2015) and the deadline for the harmonisation of internal acts (1 July 2015) has created an operational requirement for banks to find an appropriate model for how to overcome the transitional period of three months during which the rules imposed by the Law will apply while the bank's internal acts will not have yet been fully harmonised. The absence of a clear cut deadline for the NBS to issue relevant bylaws adds to the complexity of the situation, hence cautious planning of an internal approach and steps is advisable in order to pass the transitional period in the most efficient manner.
The main purposes of the Amendments may be defined as: establishing a legal framework for restructuring problematic banks, providing more efficient control instruments to the NBS, better cooperation between the competent authorities and harmonisation with the relevant EU Directives and Basel Committee recommendations. Below is a summary of the most important changes introduced by the Amendments.
Daily Operations of the Bank
The first material change in the Law that influences the daily operations of each bank relates to the related person definition. The notion of related persons was narrowed in order to address issues faced thus far in practice due to the previous overly broad definition, while the broadening of the definition was made only in respect to family members. In order to avoid abuse in practice, it is now explicitly prescribed that any delivery of resolutions and other documents by the NBS to a bank in the process or control or restructuring is deemed as delivery to members of the managing bodies and it is not possible to prove otherwise. Also, data secrecy provisions were broadened to include data related to restructuring and a wider scope of persons (such as Deposit Insurance Agency, Ministry of Finance, bank, other persons etc.).
Apart from the changes of the capital adequacy ratio and risk weighted asset rules, a new type of risk has been introduced – related to real estate investments by a bank. The rules on distortion of competition have been removed from the Law and the NBS is no longer the competent body in this area, which finally solves the divided competence issue that existed in practice thus far between the NBS and the Commission for the Protection of Competition.
Since the Amendments are particularly focused on preventive actions, an obligation of the bank to prepare, submit and update a so-called recovery plan to the NBS has been introduced. The banks have certain obligations related to monitoring indicators from the recovery plan and informing the NBS of such indicators. The top parent company in the banking group, which the NBS controls on a consolidated basis, is also bound to prepare a recovery plan for the group.
It is additionally prescribed that banks are now obliged to apply international accounting standards from the date which the competent international body determines for their application (i.e. prior to their local translation). The new possibility for the NBS is to require a bank (or member of a banking group) to procure an external audit when it is needed for the NBS' control function.
Bank Management Organisation
The respective changes were provided regarding all three main bodies of the bank: the banks' assembly, the managing board (upravni odbor) and the executive board (izvršni odbor). The bank assembly competencies were specified as, among others, the obligation to define business goal for a three year period in business policy and strategy of the bank.
Various responsibilities of the members of the managing board and executive board were further specified. Also, the representatives of the NBS will have the right to attend meetings, not only of the managing board, but also of the executive board, audit committee, credit committee and assets and liabilities management committee.
The main reason why the responsibilities of the managing board were specified is in order to provide for clearer separation to those of the executive board. Among other changes, the managing board adopts the rulebook of its operation and for the audit committee, the credit committee and the assets and liabilities management committee but no longer for the executive board. The latter is now in the exclusive domain of the executive board.
The system of internal controls in the banks has now been changed to be more in line with Basel recommendations. It is accordingly prescribed that the bank should implement an efficient system of internal control which enables continuous monitoring of risks through three main functions: risk management, activity compliance and internal audit.
Supervisory control of the NBS
Generally, the control functions of the NBS have been further strengthened, which is illustrated by the new form of control introduced, which has been named diagnostic review. In parallel, the possibility of the NBS to prescribe the obligation for banks to pay remuneration for its control in certain cases has also been introduced. The latter, so far objected, rule is said to be transposed from other comparative systems.
The scope of the NBS corrective measures was narrowed with the removal of two measures –ordering letter and receivership. Both measures were adequately replaced or subsumed within the Law. In order to harmonise with the EU Directive on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms No. 2013/36/EU, the NBS may now enforce various early intervention measures in cases where a bank acted against the Law or it is predictable that due to certain indicators a bank could act against the Law in the future.
The NBS may now dismiss members of managing bodies in cases of significant decline in the financial state of the bank or a severe breach when it finds that temporary measures do not suffice. Furthermore, the provisions regulating the possibility of imposing monetary fines to the bank by the NBS are amended and made more stringent.
The possibility of entering into an agreement on financial support within the banking group is now closely regulated, with a view to preserve financial stability of the group but without deteriorating liquidity or solvency of the support provided.
The Law now clearly sets the competences of the NBS within the bank restructuring procedure and provides detailed procedural steps. The NBS should therefore prepare a restructuring plan for each bank which on the date of entry into force of the Amendments has a banking license from the NBS. Within its competences, the NBS may request or order a bank to take certain measures if the NBS identifies that significant obstacles for restructuring exist. Moreover, the bank and its employees and shareholders are obliged to enable representatives of the NBS to access all required data for the restructuring procedure.
Prior to initiating restructuring, the NBS has right to perform a write-off or conversion of adequate elements of capital of the bank, if certain conditions are met. It is expressly prescribed that the legal transactions entered into before of the commencement of restructuring remain in force.
The Law sets out a new concept – the concept of eligible obligations, which introduces an obligation for the banks to maintain the prescribed minimum requirements for capital and eligible obligations. Further details of this requirements are to be prescribed by the NBS.
Finally, the Law sets out an obligation for banks to include foreign law governed contracts for creditor consent to write-off/ conversion of claims in cases where the NBS takes measures under the Law.