This country-specific Q&A provides an overview of the legal framework and key issues surrounding banking and finance law in Ecuador including national authorities, regulation, licenses, organisational requirements, supervision and assets.
This Q&A is part of the global guide to Banking & Finance.
For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/banking-finance/
What are the national authorities for banking regulation, supervision and resolution in the jurisdiction?
The Monetary and Financial Political and Regulation Board, which is part of the Executive Power, is in charge of the formulation of public policies, the monetary, credit, exchange, financial, insurance and securities regulation and supervision.
It is composed by the maximum authorities of: i) Ministry of Economy and Finance; ii) the Ministry of Production; iii) The Secretary of the National Secretariat of Planning and Development (Secretaría Nacional de Planificación y Desarrollo); and, iv) a delegate of the President of the Republic. The representatives of the following entities are able to participate in the deliberations of the Board, with voice but without vote: The Superintendents of Companies, Banks, Popular and Solidary Economy (the popular and solidary economy is the form of economic organization, where its members organize and perform process of production, exchange, commercialization, financing of goods and services, based in the relationship of solidarity, cooperation and reciprocity. These activities are performed in a specific community (Art. 1, Ley Orgánica de la Economía Popular y Solidaria y del Sector Financiero Popular y Solidario)), the General Manager of the Central Bank and the Chairman of the Deposit, Liquidity Fund and Private Insurance Fund Corporation (Corporación de Seguro de Depósitos, Fondo de Liquidez y Fondo de Seguros Privados).
The Central Bank is a legal entity of Public Law, that is part of the Executive Power, with administrative, financial and organizational autonomy. Its activity is to establish monetary, credit, exchange and financial policies for the State.
The Superintendence of Banks is a technical body of Public Law, that is part of the transparency and social control power (in Ecuador there are five types of state branches: the executive, judicial, legislative, electoral and transparency and social control) with administrative, financial and organizational autonomy. Its main purpose is to monitor, audit, intervene, control and supervise the financial activities that perform public and private entities of the National Financial System.
Article 74 of COMF states that the Superintendence of Popular and Solidary Economy is a technical body of Public Law, that is part of the transparency and social control power with administrative, financial and organizational autonomy. Its main purpose is to organize, control and monitor the popular and solidarity financial sector.
As per article 78 of COMF states that the Superintendence of Companies is a technical body of Public Law, that is part of the transparency and social control power with administrative, financial and organizational autonomy. Its main purpose is to monitor, audit, intervene, control and supervise the corporate matters of the companies of the securities market, insurance sector and of the non-financial legal entities.
Which type of activities trigger the requirement of a banking licence?
COMF states that any entity engaged in “financial activities” will require a banking license/authorization, defining financial activities as the operations and services facilitating the circulation of money and performing financial intermediation; those activities shall have among their purposes the safeguarding of deposits and meeting the financing requirements for the country's development objectives.
Does the regulatory regime know different licenses for different banking services?
COMF considers as financial activities the operations and services that are performed by offerors, seekers and clients, that allow the circulation of money and perform financial intermediation. For the private financial sector there are different services: i) specialized banks which are authorized for an specific credit segment with limited value operations, the general banks which are authorized to participate in two or more credit segments; ii) the financial services of general warehouses, currency exchange houses, corporations for the development of the secondary mortgages market; iii) the ancillary services of the financial system such as banking software, values transportation, ATM networks, accountancy, among others. These types of activities require an independent authorization to be granted by the Superintendence of Banks.
The following activities that are performed at the popular and solidary sector require different licenses, such as: i) credit unions; ii) second-level financial institutions for credit unions (Caja Central); iii) associate or solidary entities, communal house, community bank and saving banks; iv) the ancillary services of the financial system such as banking software, values transportation, ATM networks, accountancy, among others; and v) the Savings and Credit Mutual Societies for housing.
Does a banking license automatically permit certain other activities, e.g., broker dealer activities, payment services, issuance of e-money?
Each banking license/authorization shall determine the type of activity or service the entity is allowed to provide in Ecuador, COMF mentions they could be active, passive, contingent and other financial services operations, in accordance with the entity’s corporate purpose, line of business, specialties, capabilities and other requirements and conditions established by the Monetary and Financial Policy and Regulation Board. A banking license does not automatically permit other activities, like broker dealer activities, payment services, issuance of e-money.
What is the general application process for bank licenses and what is the average timing?
COMF states that the Superintendence of Banks is the governmental body in charge of the approval of any new financial entity including banks. Once the bank is duly incorporated, the Superintendence of Banks will confirm that the shares are 100% paid by the shareholders and will grant a term of 6 months in order to fulfill all the necessary conditions, including the required infrastructure, obtaining the qualification of its directors and legal representative, technological and staff requirements, etc.
The Superintendence of Banks will grant a license depending on the financial activities that will be performed by the bank, based in the active, passive and contingent operations as well as the financial services that it will provide taking in consideration the corporate purpose and the business line of each bank.
The estimate timing for this process is 6 months, with and exceptional term extension of 6 months.
Once the license is granted, the financial entity must notify to the Superintendence of Banks the estimate date for starting its operations.
Is mere cross-border activity permissible? If yes, what are the requirements?
Yes, cross-border activity is permissible in Ecuador, but with some limitations. Any type of publicity or marketing by which any financial service is promoted, by any method (i.e. email, meetings, events, etc.) must obtain the prior authorization of the Superintendence of Banks.
It is allowed the incorporation of branches and offices of representation. However, it is established that the Head Quarters have joint liability with the Ecuadorian branch or representation office.
The main requirements are (Art. 181, COMF):
- Certificate of corporate and legal existence issued by the competent authority of the country of origin;
- Certificate issued by the Ecuadorian Consul of the country of origin, stating that according to the bylaws the company is allowed to incorporate branches or offices abroad;
- Demonstrate that the principal office of the company is not located in a tax haven jurisdiction;
- A legalized and certified copy of the decision of the highest body of the company, in which states the authorization to open the branch of office in Ecuador, the appointment of a legal representative and the assignation of capital;
- An affidavit of the legal representative that states:
- The respect to the internal legislation of Ecuador and its public officers
- The waiver of diplomatic reclamation;
In addition, the registration of foreign loans with the Central Bank of Ecuador is necessary in order for local borrowers to receive certain tax exemptions.
What legal entities can operate as banks? What legal forms are generally used to operate as banks?
Only Stock Corporations (Compañías Anónimas) can be eligible as banks. The minimum stockholders will be two. The corporate purpose must be limited to financial activities.
The Constitution (2008) expressly prohibits media companies to have any direct or indirect relationship, through administrators or shareholders chain with financial activities companies (Article 312).
What are the organisational requirements for banks, including with respect to corporate governance?
8.1. Organizational requirements
COMF states that financial entities, including banks, must be organized as stock corporations with at least two shareholders. The name of the entity shall be previously authorized by the Superintendence of Banks and must include the denominations "bank", "financial corporation", "general deposit entity", "exchange house", "ancillary services of the financial system", "savings and credit cooperatives", " associations of savings and credit for housing", and any other authorized by the Monetary and Financial Policy and Regulation Board.
The requirements to be filed before the Superintendence of Banks for the financial entity’s incorporation are:
(i) Application signed by the promoters (founding shareholders), their agent or representative;
(ii) Documents certifying the identity, suitability, responsibility and solvency of the promoters;
(iii) Document that demonstrates the reservation of the financial entity’s name;
(iv) A technical analysis that contains at least the following: economic-financial feasibility of the private entity to be incorporated and market analysis that demonstrates the viability of its creation and insertion according to the capacity and specialization and its impact on the other entities of the financial system;
(v) The draft of the incorporation deed, which must include the corporate by-laws, specific corporate purpose, in accordance with the regulations issued by the Superintendence of Banks; and,
(vi) Capital integration account, evidencing a payment of at least 50% of the minimum capital required for the incorporation. The minimum subscribed and paid-in capital for the incorporation of a private financial sector entity is: a) for banks USD 11,000,000.00 (eleven million US dollars); and, b) for other entities providing other financial services the minimum capital will be the amount determined by the Monetary and Financial Policy and Regulation Board.
8.2. Corporate governance
The entities of the private financial sector are considered incorporated as legal entities under private law. In the exercise of their operations and the provision of financial services, they will be governed by its own regulations and the regulations applicable to the financial institutions. Private financial entities must have at least two shareholders at all times.
The governance of financial entities will be formed by:
(i) General Shareholders' Meeting;
(ii) Board of Directors; and,
(iii) Legal Representative
Board members and legal representatives will be considered the administrators of the financial entity.
The board of directors will be made up of an odd number of members, with a minimum of 5 and a maximum of 14 directors, elected by the General Shareholders' Meeting for a period of up to 2 years, they may be re-elected indefinitely. The General Shareholders' Meeting will also appoint as many alternate directors as they have, for an equal period of time.
The Superintendence of Banks shall issue the resolution for guarantee the participation of minority shareholders at the Board of Directors. However, this resolution is pending of issuance. There are no legal restrictions for shareholders to become members of the Board of Directors, however, this may be regulated at the by-laws.
The General Shareholders´ Meeting must take place at least once a year, until March 31th, for approving: 1. The reports of the Board of Directors; 2. the financial statements, 3. The profit sharing to the shareholders; 4. Submit to the public bodies the annual reports; 5. To appoint the internal and external auditors.
Every financial institution must have an internal and external auditor, that must be qualified by the Superintendence of Banks. The internal auditor only can be an individual; the external auditor could be an individual or a legal person. The external auditors cannot be appointed for more than three (3) consecutive years, by the same financial institution.
A report and qualification issued by an authorized Risk Rating Agency is also mandatory. This report must be issued on December 31st of each year, and will be reviewed in an quarterly basis.
Do any restrictions on remuneration policies apply?
COMF stablishes that the Monetary and Financial Political and Regulation Board is entitled to regulate the salary and any other economic benefit, compensations and social benefits of the administrators of the financial activities companies, as well as the insurances and securities companies, based in the profitability, the risk, the assets and the capital of the entity in comparison with the rest of the market.
For financial entities with assets higher than USD 750 million (Major), the difference of salaries between the highest administrator or director in comparison with the latest position in the same line, cannot be higher than 40 times. For financial entities which assets are lower than USD 750 million (Medium and Small), the difference of salaries between the highest administrator or director in comparison with the latest position in the same line, cannot be higher than 26 times.
Has the jurisdiction implemented the Basel III framework with respect to regulatory capital? Are there any major deviations, e.g., with respect to certain categories of banks?
Ecuador has implemented the main principles of the Basel III framework through resolutions issued by the Superintendence of Banks, those principles are: minimum capital, capital buffer, counter-cyclical buffer and level of leverage. They have been adapted to the structure of the financial statements of banks in Ecuador.
Are there any requirements with respect to the leverage ratio?
The Ecuadorian legislation does not establish any general regulation regarding leverage ratio for financial institutions. However, this leverage ratio must be considered depending of the type of activity that will perform the financial institution with is clients.
What liquidity requirements apply? Has the jurisdiction implemented the Basel III liquidity requirements, including regarding LCR and NSFR?
The entities of the national financial system, in order to maintain an adequate level of liquidity that promotes growth and work, are obliged to maintain the proportion of the total liquidity determined by the Monetary and Financial Policy and Regulation Board for each type of financial entity.
The entities of the national financial system must maintain sufficient levels of high quality liquid assets free of liens, encumbrances or restrictions, which can be transformed into cash in a certain period of time without significant loss of their value in relation to their obligations and contingent, as it may be determined by the Monetary and Financial Policy and Regulation Board.
The levels and administration of liquidity will be determined by the Monetary and Financial Policy and Regulation Board and will be measured using, at least, the following parameters:
(i) Immediate liquidity;
(ii) Structural liquidity;
(iii) Liquidity reserves;
(iv) Domestic liquidity;
(v) Liquidity gaps.
Do banks have to publish their financial statements?
COMF states that all the entities that are part of the national financial system are obliged to publish their financial statements, including: statements of financial position, profit-and-loss statements, statements of the situation of the technical equity, liquidity ratio, solvency ratio, efficiency ratio and profitability ratio. All of these statements must contain the opinion of an external auditor.
This publication must be performed after December 31 of each year, or when is required by the control entities in a national newspaper and in the webpage of the financial entity (Art. 221, COMF).
Does consolidated supervision of a bank exist in the jurisdiction? If so, what are the consequences?
Yes, it exists. The Monetary and Financial Code establishes that the control agencies will carry out consolidated and cross-border supervision to an entire financial group, through: i) an adequate follow-up of their activities, and ii) the application of prudential guidelines to all the activities carried out by the groups at a local and international level, the transparency of their operations, the treatment of conflicts of interest, the service and the security of the clients and the identification of risks regarding solvency and liquidity matters, individually and at a consolidated level.
The local control bodies will carry out the consolidated supervision of the entity that acts as group head and its members, and will require the information that is necessary, to all the members of the financial group and will determine the requirement of consolidated technical patrimony of said groups.
Consolidated and cross-border supervision may be carried out in cooperation with foreign control entities, on the basis of agreements signed for such purpose, which, under criteria of reciprocity, should facilitate the exchange of information among them.
What reporting and/or approval requirements apply to the acquisition of shareholdings in, or control of, banks?
The Monetary and Financial Code states that the Superintendence of Banks is entitled to authorize the assignment of assets, liabilities and the rights contained in the agreements of the financial entities that are under its control.
The Superintendence of Banks will qualify the solvency and suitability of the assignee in the following cases:
- If the assignment of shares is equal or higher of the 6% of the share capital;
- If the assignment of shares is performed to several assignees, and that based in the criteria of the Superintendence, they have any business, corporate or family relations, that considered individually will not be higher than the 6%, but together they achieve this threshold.
There are restrictions for local financial entities, private and public, to become shareholders of a foreign financial entity. The requirements for requesting the approval of the Superintendence of Banks are: the consent of the local authority of the country in which the foreign financial entity operates; an affidavit of the legal representative stating that the stock acquisition is nor for tax evasion or flight of capital purposes; to submit the current legislation of the country of operation of the foreign financial entity, as well as any other information that allows to evaluate the monitoring and control capacities; the express consent to allow to the Superintendence of Bank to perform audits and for request additional information that considers necessary, without any limitation (Art. 184, COMF).
Does the regulatory regime impose conditions for eligible owners of banks (e.g., with respect to major participations)?
Article 17 of the Resolution No. 271-2016 of the Monetary and Financial Policy and Regulation Board states that the shareholders/promotors of financial institutions must comply with the following requirements:
- Justify economic solvency, which is defined as having a consolidated net worth not less than 1.5 times the contribution of capital that they undertake in the private financial entity;
- Be legally capable;
- Not being involved in the prohibitions established in articles 256 and 399 of the COMF. These are: i) owning, directly or indirectly, shares of companies outside the financial activity, ii) owning shares in (a) companies in other financial entities (b) entities with a corporate purpose related to national communication services, (c) legal entities of the popular and solidary sector; iii) entities with influence in other financial entity; iv) persons who have been charged with crimes of embezzlement, money laundering and financing of crimes such as terrorism.
Individuals or legal entities that acquire a shareholding equal to or greater than 6% of subscribed and paid-in capital, either directly or indirectly, as a constituent and / or beneficiary of trusts or any other legal form, in one of the entities of the financial sector private, will be evaluated by the Superintendence of Banks prior to their qualification regarding their suitability, responsibility and solvency, according to the aforementioned provisions. Said qualification shall be extended to the shareholders, when they acquire additional percentages in the subscribed and paid-in capital whenever their ownership is equal or exceeding 6%.
Ecuadorian laws do not impose requirements to major participations.
Are there specific restrictions on foreign shareholdings in banks?
The applicable legislation does not contain any specific restrictions for foreigners to become shareholders of a financial institution in Ecuador.
Is there a special regime for domestic and/or globally systemically important banks?
No, there is no special regime in the Ecuadorian legislation.
What are the sanctions the regulator(s) can order in the case of a violation of banking regulations?
The Monetary and Financial Code establishes three types of infringement that financial institutions can incur on, the sanction will be imposed depending of the type of infringement. For a Very Serious Infringement, a fine up to 0.01% of the assets of the financial entity can be imposed, the removal of the current administrator and the revocation of the license; for a Serious Infringement, a fine up to 0.005% of the assets of the financial entity can be imposed, the suspension of the administrators up to a 90-day term and a warning; for a Minor Infringement, a fine up to 0.001% of the assets of the financial entity can be imposed. The minimum fine that can be imposed cannot be lower than 30 Minimum Legal Wages (For year 2017 USD 11,250.00)
What is the resolution regime for banks?
COMF establishes an intensive oversight regime applied to the financial entities identified as of high and critical risk profile, understanding such entities as those with poor (i) economic -financial conditions, (ii) quality of corporate or cooperative governance, or (iii) management of risks, among other conditions determined by the control body. The authority also evaluates which entities are considered inadequate to deficient for the size and complexity of its operations, which require significant improvements or that present clear prospects of breaching minimum solvency requirements or have failed to meet them. In such cases a specific supervision program is implemented by the Superintendence of Banks.
The intensive supervision program may be imposed on the entity by the Superintendence of Banks at any time; the program shall be prepared by the respective financial institution and presented to the control entity for approval, within the term established for that purpose. If the financial entity has not submitted the program within the deadline, the control entity will prepare it and impose its implementation. The intensive supervision program will contain the commitments, obligations and deadlines to carry out the activities envisaged therein, in no case may it have a term of more than two years and must detail in a timetable the actions and measures that the entity will take to resolve its situation. The program must be viable, with sustainable assumptions and must be approved by the Board of the oversight entity.
The regime for resolution of disputes between the banks and the public officers is based in the judicial branch, before public courts and judges. However, the regime for resolution of disputes between the banks and their clients can be based in arbitral procedures.
How are client’s assets and cash deposits protected?
In order to protect the assets and cash of the clients, COMF created the Liquidity Fund and Private Insurance Fund Corporation (Corporación de Seguro de Depósitos, Fondo de Liquidez y Fondo de Seguros Privados). This Corporation is a public body governed by public law. It is not considered as a financial entity.
Its board is composed of three members, a delegate of the President of the Republic, who will preside it; the Minister of Finance of Economy; and the Minister of the Economic Policy (nowadays repealed). The chairman of the Superintendence of Banks, the Superintendence of Companies, the Superintendence of Popular and Solidarity Economy and the Central Bank are able to participate in the meetings of the Board with right to be heard but not vote.
All the funds that are deposit in a bank are protected with the Deposit Insurance for an amount of USD 32k by account. The deposit in financial entities of the Popular and Solidarity Economy will vary depending of the segment that are cataloged, and will go from USD 1k to USD 32k.
Does your jurisdiction know a bail-in tool in bank resolution and which liabilities are covered?
A Bail-in tool is included as a preventive measure within the intensive supervision program, such provision must be ordered by the control entity through a resolution before approval of the intensive supervision program or during its implementation. As per Ecuadorian legislation bail-in tools can be used to place the burden on shareholders rather than depositors by writing down existing debt.
Is there a requirement for banks to hold gone concern capital (TLAC)?
The entities of the National Financial System must keep a relation of 9% between the Technical Equity and the weighted sum for risk of its assets and contingents. The Technical Equity is composed by: the sum of the paid-in and the subscribed capital; the reserves, the earnings after the profits sharing and the Income Tax; the legal reserve fund, the accumulated earnings of previous years; contributions for future capitalization and debentures.
In your view, what are the recent trends in bank regulation?
During the years 2016 and 2017 the Monetary and Financial Policy and Regulation Board issued several regulations applicable to the general system of digital currency (e-money) administered by the Central Bank of Ecuador, said regulations establish the legal framework in which Ecuadorian financial entities, public and private, shall participate within the digital currency system. The regulations issued by the Monetary and Financial Policy and Regulation Board establish the creation of virtual digital currency accounts to facilitate flows, savings and transfers in real time, between the different economic agents, through the use of: electronic and mobile devices, fixed devices, smart cards, computers and others of similar technologic nature. Digital money accounts will be recorded as a liability in an account in the Central Bank of Ecuador's balance sheet and will be backed 100% in United States dollars, in deposits and international investments in dollars of the United States of America and/or in gold of the International Reserves of the Central Bank of Ecuador.
It is expected that by the end of year 2017, the National Assembly will approve a bill of law by which the private banks would manage the electronic money system (not cryptocurrency), in coordination with the Central Bank.
This electronic money system in intended to reduce the use of cash in daily transactions, by the use of digital wallets through the cellphone network. This project is similar to the adopted in Kenya.
What do you believe to be the biggest threat to the success of the financial sector ?
The lack of incentives for foreign financial institutions for establishing local branches, minimize the expectation of growth in the financial sector and the access to cheap lines of credit.
One of the biggest issues that may threat the success of the financial sector is the amount of legal banking reserve that is mandatorily deposited in the Central Bank. In past years the Central Banks had used these funds to borrow short term loans to the central government, in order to help with the lack of liquidity of the economy.
Another issue are the interest rates which are higher than any other country that as the US Dollar as a legal tender. This has a direct relation with the status of the national economy, which is growing less that is expected, and the production has significantly reduced.