Transparency. in our actions. A principle to which we are fully. committed, and which we. consider a key pillar in our. performance.

Transcription

1 Transparency in our actions A principle to which we are fully committed, and which we consider a key pillar in our performance.

2 New Regulations The evaluation made by the International Monetary Fund and the World Bank found that more than 80% of the principles of effective banking supervision set out by the Basle Committee are being met in Chile. 73

3 New Regulations The new capital framework has been sub-divided into three pillars or sections, integrated one with the other, that seek to measure, manage and supervise the risks assumed by banks, and therefore establish suitable capital safeguards. 74

4 Basle Committee The SBIF distributed to banks the directives that the sector should follow for converging on the adoption of the new capital measures and rules established by the central bank chairmen and bank supervisory heads of the group of ten developed countries comprising the Basle Committee in Switzerland. The new agreement or capital framework adopted by the Committee in June 2004 has been called Basle II and is expected to come into force in Chile in 2007, replacing the agreement on capital requirements of the same Committee issued in 1988, known as Basle I, which were recognized by the General Banking Law in Chile in its reform of One of the first comments of the SBIF in the document distributed recently states that the evaluation made by the International Monetary Fund and the World Bank found that more than 80% of the bank supervision principles announced by the Basle Committee are being met in Chile. The new capital framework has been sub-divided into three pillars or sections, integrated one with the other, seeking to measure, manage and supervise the risks assumed by banks and therefore establish suitable capital safeguards. The first Pillar is an extension and update of Basle I, focused mainly on credit risk and includes operating risk for the first time. It establishes the requirements for minimum effective capital, analogous to the effective equity contemplated in Chile's General Banking Law, i.e. the equivalent of the total of basic capital, subordinated bonds and voluntary provisions. The SBIF refers especially in this section to the safeguards for covering the risks of loss, adding that estimated losses be covered by provisions while unanticipated losses are covered by capital. Basle II considers provisions similar to those put into effect by the SBIF in January 2004, grouping them in provisions for loans to normal-risk debtors, debtors with deteriorated loans and additional provisions. The SBIF reiterates that the additional provisions are to safeguard banks' loan and investment portfolio risks in the event of adverse macroeconomic perspectives or circumstances, sometimes very difficult to foresee, that can affect a sector, industry or groups of debtors. It adds that additional provisions can be interpreted as quasi-capital and thus could form part of banks' effective equity up to the present limit of 1.25% of risk-weighted assets. It introduces the concept of a standardized focus on credit risk, characterized by the application of pre-determined risk-weighting mechanisms on bank assets based on external qualifications by credit-rating agencies. It includes mainly loans or credits, bonds and other securities issued by nations, banks and corporations, with risk weightings ranging from 0% to 150%, depending on the type of instrument and the rating assigned by the external agencies. For loans whose debtors do not have external credit ratings, Basle II determines minimum risk weightings, subject to certain conditions, that may be set as higher percentages at the discretion of the national regulatory authorities. In their position as investors, banks should weight the risk of credit instruments in their financial investment portfolios as a function of the long and short-term credit ratings given to the respective instruments, applying weightings 75

5 New Regulations ranging from 20% to 100% in the short term and from 20% to 350% in the long term. Instruments with low or no credit ratings, including those held by banks in their position as underwriters, should be deducted from effective equity. The first Pillar also considers adjusting capital to market risk, taking into account the risks of losses in the face of adverse movements in interest and exchange rates, under a standardized focus, or applying internal value at risk models, subject to meeting various qualitative and quantitative standards and the authorization of the SBIF. Finally, the first Pillar is concerned about measuring operating risk, to which the SBIF has assigned special significance, considering that the businesses of commercial and retail banking normally represent more than 90% of the gross margins of banks operating in Chile. systems. The second Pillar also establishes four basic principles for the supervision of bank risks. It requires banks to prepare and test strength models and the supervisory authority to give its point of view regarding its reliability. The evaluation of bank management and solvency established in the General Banking Law acquires importance in these aspects, whose features will be considered in the Basle II framework. These are the following: provisions for credit risk; capital structure and assignment; tests of strength, adequacy and maintenance of capital; internal organization, management and control including important risks not considered in capital adequacy; corporate governance and direction; and financial transparency and market discipline. 76 In July 2004, the SBIF complemented its instructions regarding evaluation of bank management, incorporating as a benchmark the definition of operating risk provided by the Basle Committee, comprising potential losses resulting from a lack of adaptation or a fault in processes, by staff and in internal systems or even caused by external events, including legal risk. It also incorporated so-called technological risk into the definition of this risk. The second Pillar refers principally to supervision of capital adequacy and pursues the idea that banks' regulatory capital is in line with their economic capital. The new capital framework places a large responsibility on the directors and senior management of banks for the introduction of internal evaluation processes of their staff and capital targets, in line with the risk profiles of their businesses and their internal management and control The third Pillar grants an outstanding role to financial transparency in order to actively incorporate market discipline as a bank solvency monitoring factor in addition to that of the regulatory authority. This section of the new capital framework seeks that bank investors, whether depositors, creditors or shareholders, exercise market discipline through the analysis and followup of the risks and of bank financial situations. It makes a bank's board responsible for defining an information publishing policy, according to its degree of materiality. Information qualifies as material if its omission or erroneous provision can change or affect the evaluation of its users in taking economic and financial decisions.

6 Enforceability copies of Invoices Following several years of intensive parliamentary debate, Law N was promulgated on 15 December 2004, which regulates the transfer and grants enforceable status to copies of invoices issued by suppliers of goods and services in Chile. The prolonged absence of specific legal regulations for the invoice and the assignment of the credit it contains, implied that the financing method based upon it, known as factoring, has to submit to the regulations governing the assignment of nominative credits set out in the Civil Code and the Commercial Code. The additional provisions are to safeguard the risks of banks' loan and investment portfolios in the face of adverse macroeconomic prospects or circumstances. However, commercial practice made it evident that the regulations governing the transfer of personal or nominative credits did not reflect the nature of the invoice, nor the characteristics that this mercantile document had acquired through its years in use. The need to give more agility to the assignment of the credits container in invoices, together with the difficulties faced by the creditor in collecting them due to our legislation not contemplating an expedite mechanism for it, gave rise to a new law that specifically granted a system of assignment of the credit container in an invoice which will facilitate its collection from the debtor through a more agile procedure. The new law establishes a sole and generally applicable system for transferring or assigning the credit arising from an invoice, whether as holder or in collection, to a third party. The law gives enforceability for its collection to the copy of the invoice, i.e. its payment may be demanded by a very fast judicial procedure, provided of course that the essential requirements are met including an annotation of the receipt of the merchandise or service provided, and establishing a fine for non-compliance. The invoice until now was considered as a tax control document but is today thus transformed into a freelycirculating document as the legislator provided that any stipulation that prohibits, restricts or limits the transfer of 77

7 New Regulations Consumer Rights a credit contained in the invoice is void. In addition, it will allow businessmen to obtain liquidity from their accounts receivable in a more secure way as the debtor or the obligor to pay them cannot object to the assignment of credits. The law contemplates the obligation to issue a new copy of the invoice, called assignable credit. This will imply adapting the exiting tax documentation until the new law comes into effect, on 15 April The precepts for the application of electronic invoices are being coordinated, constituting a new technological innovation in Chilean legislation, thinking of a sale of assets made by virtual means. The strengthening of the factoring industry is shaped not only on the lower risk due to the perfectioning of the business but because judicial proceedings will take considerably less time. Before the coming into effect of this law, this followed lengthy ordinary proceedings whereas now it will follow a more agile and brief executive proceeding. We can conclude that these legislative advances are effectively facilitating the financing of small businesses, factoring being one of the most expedite means for obtaining funds against invoices. Law was published on 14 July 2004, substantially modifying Law of 1997 for the Protection of Consumer Rights. It is of particular interest to elucidate whether these rules are applicable or not to banking. Despite the tendency of jurisprudence our courts of justice when it has to give judgment on this matter, and the concrete circumstance that this regulation is only applicable to bank customers when these behave as consumers, it is worthwhile considering at least the following elements. Clause 2 bis of the law states that it shall not apply to the production, manufacture, import, construction, distribution and commercialization of goods or provision of services regulated by special laws, as might be the banking activity. But the same clause establishes an exception when such special laws do not deal with a particular matter. The SBIF referred to the application of the consumer law in its Circular 3,273 of 27 May 2004, pointing out the need to take into account these regulations, particularly with reference to basic commercial and publicity information and with respect to offers and promotions. With the publication of the law, the SBIF sent to banks a special communication warning them of the convenience of adopting measures for the due application of the new legislation. It made special mention of aspects related to publicity and information about banking products and joining agreements. The law refers to the following, among other conditions: Joining Agreements 78 Regarding these agreements (i) the small print is eliminated by establishing that such agreements should be written legibly in letters no smaller than 2.5 millimeters; (ii) clauses that, against good faith, leave the consumer

8 in an important unfair position with respect to their counterparty in the rights and obligations deriving on both parties (called abusive clauses) are void; but, in any event, stipulations that have been revised and approved by some regulatory entity shall not be void; and (iii) in contracts appointing an arbitrator, a clause must be included informing the consumer of their right to reject the arbitrator without giving reasons and request the appointment of another by the competent judge. Electronic contracts and offers made by remote means Consent in these types of transaction shall be understood not to exist if the consumer has not previously had clear, understandable and unmistakable access to the general conditions of the contract and the possibility of storing or printing them. A simple visit to the internet site offering access to certain services does not impose any obligation on the consumer. In contracts offered by electronic means or those in which an offer is made by catalogues, advertisements or other form of remote communication, the supplier should inform the steps to be followed for their completion and inform, when applicable, whether the electronic document formalizing the contract will be filed and whether it will be accessible to the consumer. Undesired advertising and promotions The law sanctions the sending of undesired advertising by mail, fax, calls or telephonic messaging services or electronic mail, called spam. All promotional or advertising communication sent by electronic mail should indicate the subject or matter to be seen, the identity of the sender and contain a valid address or expedite form to which the receiver can ask for the suspension of the sendings, which shall then be prohibited. Misleading advertising The fines for misleading advertising sent over social communication media are increased from 500 to 750 Unidades Tributarias Mensuales (an official inflationindexed monetary unit). Class actions The new legislation facilitates consumer groups to channel class actions to the local police courts, and groups of 50 people or more may also bring legal actions jointly. This implies transcendental process reforms for this kind of judicial actions with the consequent equity impact that could affect the defendant. This refers in any case to a procedure of an exceptional nature and will only proceed when the requirements of the law are met in the event that traditional instruments are insufficient to achieve due legal protection. 79