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PORTUGAL: An Introduction to Banking & Finance

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Portuguese market 

For the first time in Portuguese democracy, Portugal has had a budget surplus – set at nearly 0.2%. Unemployment is at its lowest level in 15 years and the interest on the public debt is also at its lowest figure – in early 2020, Portugal issued debt at an interest rate 4 times lower than the interest rate compared with the same period last year, at around 0.4%.

From a political standpoint, the Socialist Government remains stable and managed to approve the Budget, despite the termination of the left-wing parties’ 5-year alliance.

The Budget shows that, in 2019, Portugal recorded a 599 million euro deficit, which represented a 1643 million euro improvement compared with 2018. This represents a GDP deficit of 0.3% against 1.1% in 2018, and it is forecast that the 0.1% goal set by the European Commission may be achieved.

Figures show that revenue increased by nearly 4%, surpassing public debt by a 2.3% rise. According to the Government, this is due to the increase in revenue from VAT, which was 7% higher compared with 2018, and Social Security revenue increased by 8.6% compared with 2018, caused by a decrease in unemployment.

According to the Bank of Portugal’s statistical data, public debt in absolute figures was set at around 250 million euros, accounting for 118.2% of the GDP. Although still very high, it has decreased from the previous 122.2% in 2018.

For 2020, the tax burden will increase by nearly 0.3%, falling below the expected inflation of 1.2-1.4%, representing nearly 35% of GDP, which will have impact on the purchasing power of taxpayers. Nevertheless, taxes will be slightly relieved for certain groups, notably families with one or more children under 3 years of age and youngsters in their first year of employment. In the corporate sector, Government proposes a lower corporate income tax rate for SME for their first 25,000 euros of taxable income, including for economic activities carried out in the autonomous regions and inland areas. Environmental concerns are expected to play an increasing role, notably in fostering the use of public transport and electric vehicles and biologic agriculture.

The real estate sector is also worthy of attention, as the government was authorised to amend the Golden Visa legislation. The purpose of this amendment is to encourage investments in inland and less populated areas, and in urban regeneration, cultural heritage, environmental and social activities, promoting job creation. At the same time, there is a proposal to increase taxes on certain local accommodation units.

In view of the above, and as long as the international climate remains steady, 2020 will likely be a year of stability for the Portuguese market.

The Banking Sector in 2019 

2019 was a year of consolidation and stability in the Portuguese banking sector. After the challenges of recent years with the resolution of several Portuguese banks, in 2019, banks have had a steady growth.

The banking consolidation trend is expected to continue, with Spanish players strengthening their positions in the Portuguese banking sector – after CaixaBank acquired BPI, and Santander the two banks in distress, Banif and Banco Popular; Bankinter, the Portuguese commercial bank Barclays, in 2019 Abanca acquired the private banking operations of Deutsche Bank PCC in Portugal, and will most likely acquire Eurobic in 2020.

Following recapitalisation, the State-owned bank – Caixa Geral de Depósitos (CGD) – recorded a 57% growth, mostly due to the sale of Banco Caixa Geral in Spain and Mercantile Bank in South Africa. Further consolidation is not off the table, notably, the sale of Novo Banco by the American fund LoneStar which is expected to occur in 2021. The credit market maintains its trend of growth, recording an 8.1% increase compared with last year, in the amount of 10.63 million euros in the housing sector, due to low interest rates and rent increases generating real estate speculation. This trend led Bank of Portugal to approve new limitations on consumer credit, excluding certain sectors such as housing, in terms of credit period, to mitigate risks for the financial system and borrowers’ exposure to longer credit periods.

Portuguese banks seem to be responding well to the challenges created by the negative interest rates and development of fintech. Banks are updating and developing their digital channels and creating synergies with the fintech companies in an environment of co-operation. The challenges were also felt by the regulators – in 2018, the Bank of Portugal, Securities Market Commission and Insurance Supervisory Authority, ASF created a platform, Portugal Finlab, opening a direct communication channel with the new players in the Portuguese finance market, which is now on its second edition for pitching new participants.

From a regulatory standpoint, 2019 was a year of implementation and adjustment of the banking system to the extensive regulation that came into force – MiFID II, MiFIR and PSD2, with the relevant regulators issuing legal acts implementing such changes. In addition, certain new areas were subject to new regulations that are worth mentioning. First, the entry into force of Law 69/2019 laying down the legal framework for securitisation, transposing EU Regulation 2017/2402. In addition, Decree-Law 42/2019 on the regulation of mass asset transfers, a relevant and promoted instrument for decreasing the indebtedness of Portuguese companies, and which is applicable when the assignee is a credit institution, financial company or securitisation company. Also, outsourcing by banking entities has been subject to new guidelines issued by the European Banking Association (EBA/GL/2019/02), which led the Bank of Portugal to issue a circular on the terms and timing of compliance expected to take place in 2020.

Overview of the Banking Sector for 2020 

From a market trend perspective, we expect to see in 2020, as it occurs around Europe and throughout the world, the fast-growing adoption of financial technology, changing customer expectations regarding their relationship with the financial players and changing traditional banking business models, structures and operations, including the delivery of financial services. The adoption of such financial technology will, in many cases, be supported by co-operative strategies between banks and third party fintech service providers and, in other cases, by newcomers competing with more traditional players.

We can also expect the launching of new financial products or services by large globally active technology firms (BigTech), conquering significant global market shares in financial markets, thus triggering several competition law issues, or the rise of collaborative strategies between incumbents and BigTech. In any case, we expect the large-scale adoption of data-driven business models in the financial sector to expand the concept of open banking to the broader concept of open finance and the increasing interconnectivity of ICT systems between market players.

In this vein, from a supervisory perspective, we expect strong supervision of the banking sector on the following matters:

1. Monitoring of compliance requirements, especially the AML/CFT obligation to have appropriate AML/CFT monitoring processes in place whenever financial institutions enter into economic relationships or process transactions supported by innovative and technological enabled solutions, such as digital onboarding or crypto assets.

2. Monitoring of compliance risk with regard to data privacy. The risk of not complying with data privacy rules will necessarily increase with the development of data-based business models, more outsourcing due to tie-ups with fintech firms, and the associated competition for ownership of the customer relationship. The reputational risk due to data breaches and non-compliance with data protection regulation cannot be underestimated since in many cases it might constitute a threat to the existence of the institution. It is very likely that the supervisory authorities of the financial sector will co-ordinate with the Data Protection Authority (CNPD) to address this particular risk, probably in the context of supervising the operational and cyber-security risks.

3. Monitoring of outsourcing risk: since more parties will be involved in offering financial products and services, ambiguity can arise regarding the responsibilities of the various actors in the value chain, increasing the occurrence of operational incidents. As far as banks are concerned, innovative products and services offered by third parties can increase operational complexity and risks, if supervision fails to keep pace; particularly with respect to the outsourcing of critical or relevant operations. In line with regulatory intervention in this area, we can expect greater supervision of outsourcing operations, especially of ICT systems.

4. Monitoring of cyber-risk: Cyber-risk will be at the heart of supervisory intervention. New technologies and business models can increase cyber-risk if supervision does not keep pace with change. Increased interconnectivity can amplify security risks. The increasingly reliance on APIs, cloud computing and other technologies facilitating interconnectivity of IT systems can potentially make the banking system more vulnerable to cyber-threats, and expose large volumes of sensitive data to potential breaches, possibly with systemic impact.

With regard to capital markets, the Portuguese Securities and Market Commission (CMVM) has published a document with action priorities for 2020 across the various fields of its intervention, which includes some supervisory priorities: (i) promotion of a simpler, more focused and more proportionate supervision; (ii) strengthening the supervision of the supervised entities’ governance, in particular concerning fit and proper evaluation processes; (iii) reinforcing measures that prevent bad practices, as well as the penalties applied; (iv) contributing to further sustainable development and monitoring financial innovation.

From a regulatory perspective, 2020 will be marked by the ongoing effort of banking and financial organisations to ensuring compliance with the requirements of important regulatory initiatives that have taken place since 2018, such as the transposition of MiFID II/MiFIR, the transposition of the 4th AML Directive; the transposition of PSD2 and its regulatory technical standards; the transposition of the insurance distribution Directive; the GDPR; the PRIIPs Regulation; the implementation of product governance frameworks; and the implementation of whistleblowing frameworks.

One of the main initiatives in 2020 will be the amendment of the Bank of Portugal’s Notice 5/2008, of 25 July and Notice 11/2011, of 29 December, setting out a new framework on corporate governance; risk culture and business conduct; internal control framework and mechanisms; remuneration policies and practices.

This new Notice will be applied together with (i) the guidelines on internal governance under Directive 2013/36/EU (EBA/GL/2017/11); (ii) the EBA guidelines on sound remuneration policies under Articles 74(3) and 75(2) of Directive 2013/36/EU and disclosures under Article 450 of Regulation (EU) No 575/2013 (EBA/GL/2015/22); (iii) the Joint ESMA and EBA guidelines on the assessment of the suitability of members of the management body and key function holders under Directive 2013/36/EU and Directive/65/EU (EBA/GL/2017/12); and (iv) the guidelines on the revised common procedures and methodologies for the supervisory review and evaluation process (SREP) and supervisory stress testing (EBA(GL/2018/03), implying a structural assessment and revision regarding the whole internal governance framework of banking institutions.

Another important trend will be the implementation of internal policies and procedures with the aim of ensuring compliance with EBA guidelines on outsourcing arrangements (EBA/GL/2019/02) applicable from 31 May 2020, under the circular letter of Bank of Portugal CC/2019/00000065, of 15 October 2019. The Portuguese government proposal for the transposition of the 5th AML Directive was already approved, starting the legislative process in that respect. In 2020, we also expect the transposition of Directive (EU) 2019/1160, of the European Parliament and of the Council, of 20 June 2019 and Regulation 2019/1156, with the aim of facilitating cross-border distribution of UCITS and Alternative Investment Funds.

In view of all the above, the main challenge financial players will face in 2020 will be the timely adjustment to and strengthening of their internal governance, organisational culture, alignment of interest mechanisms; internal control frameworks and other requirements matching the increasingly higher regulatory and supervisory expectations on the identification and management of risks associated with their business, in particular with regard to the use of technology and adoption of new business models and management of risks associated with the new trends that are transforming the financial sector throughout the world. On the other hand, the main challenge for businesses will be the adjustment to a new competition environment with the entry in the financial sector of non-traditional third party providers and the increase of cross-border competition.