Banking Regulation

The Ecuadorian Constitution stipulates that the objective of the monetary, credit, exchange and financial policy is to define the levels of overall liquidity to guarantee adequate financial safety margins and to direct liquidity surpluses towards investment required for the country’s development. This is done through financial organisations from the public, private, public-private and people’s and solidarity financial sectors. They facilitate domestic production for its consequent strategic insertion in both the regional and global economy. Financial activities are deemed to be a public service performed by the public, private, and people’s and solidarity financial sectors. Each sector has its own specific rules and different oversight entities in charge of preserving the sector’s security, stability, transparency and soundness. The Executive Branch has the exclusive power to formulate monetary, credit, exchange and financial policies and regulations.

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The Organic Monetary and Financial Code (COMF) regulates the monetary and financial systems of all sectors. Furthermore, it includes the framework for policies, regulations, supervision, oversight and accountability prevailing in the monetary and financial systems, the exercise of their activities and the relationship with their users. The primary objectives of the COMF are:

• to ensure the economy’s liquidity levels for contributing to the execution of the economic programme;
• to procure the sustainability of the national financial system and to guarantee that each sector and the entities forming it comply with obligations;
• to mitigate systemic risks and to reduce economic fluctuations; and
• to safeguard the rights of users of financial services.

Furthermore, the COMF includes the institutions that regulate and oversee the financial sector, including banks, and sets certain parameters for the incorporation, merger, takeover merger, intervention, dissolution and liquidation of financial institutions. It also defines the minimum requirements to be met by the entities of the financial sector with regard to their administration, legal banking reserve, appointment of directors and officers, and so on.

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The Monetary and Financial Policy and Regulation Board is in charge of drafting and directing public policies for the financial, insurance and stock market sectors. It supervises the aforementioned sectors and issues the regulations that will govern financial activities carried out by the national financial system, among them the monetary, credit, exchange and financial regulation.

Central Bank of Ecuador (Central Bank) instruments the monetary, credit, exchange and financial policies of the state.

The Superintendency of Banks, a technical entity, is in charge of supervising, auditing, intervening in, overseeing and monitoring the financial activities carried out by the public and private entities of the national financial system.

The Superintendency of the People’s and Solidarity Financial Sector, an oversight entity, is in charge of supervising, auditing, intervening in, overseeing and monitoring the people’s and solidarity financial sector.

The Superintendency of Companies, Securities and Insurance, a technical entity, oversees the activities of insurance companies and the stock market in Ecuador.

The Financial Analysis Unit (UAF), the operational entity of the National Anti-Money Laundering Council, analyses unusual and unjustified financial operations or transactions and, if necessary, reports them to the Prosecutor’s Office.

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Ecuador has a Deposit Insurance Corporation (COSEDE) and a Liquidity Fund and Private Insurance Fund. The Deposit Insurance Corporation guarantees the savings and deposits in financial institutions. Private financial institutions must contribute a fixed premium and risk-adjusted premium to the COSEDE. The amount of contributions is established by the COSEDE board of directors.

The amount protected by deposit insurance with respect to each individual or company varies according to the insured financial sector:

• for deposits in banks and financial institutions overseen by the Superintendency of Banks, the amount is US$32,000;
• for deposits in financial entities from the first segment of the people’s and solidarity financial sector, it is twice the income tax-exempt base fraction in effect, but cannot be less than US$32,000; and
• for the remaining segments of the people’s and solidarity financial sector, it is the income tax base fraction in effect, presently US$11,270, but may be revised.

There are two liquidity funds that are independently administrated and managed. One of the funds corresponds to the private financial sector overseen by the Superintendency of Banks; and the other to the people’s and solidarity financial sector, which is overseen by the Superintendency of the People’s and Solidarity Financial Sector. These two funds are managed independently through two commercial trusts. Although both the resources and commercial trusts forming them are private, they cannot be seized and cannot be affected by the debt of the parties contributing to the fund, except for paying discount window operations and domestic investment from liquidity surpluses.

The monthly contribution that private financial sector entities must make to the liquidity fund is 8 per cent of the average of their deposits subject to the previous month’s legal banking reserve; the goal is to reach 10 per cent of deposits subject to the reserve.

The treatment is different in the case of people’s and solidarity financial sector entities:

• each month, savings and loan associations for housing must contribute a sum equal to 5 per cent of the average of the deposits subject to the previous month’s legal banking reserve (again, the goal is to reach an amount equal to 10 per cent of deposits subject to the reserve);
• savings and loan cooperatives from the first segment and central funds have to contribute to the trust each month. Their contribution must equal 0.5 per cent of the average of their liabilities to the public in the previous month and will be increased by 0.5 per cent in the month of January each year. The goal is to reach an amount equal to 7.5 per cent of their liabilities to the public; and
• savings and loan cooperatives not included in the second point above make their contributions depending on the respective segment and pursuant to the rules issued from time to time.

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Public and private financial entities in Ecuador are barred from carrying out lending, borrowing, contingent and service operations with individuals or legal persons connected directly or indirectly with the institution’s administration or ownership. Financial institutions can make capital investments in other companies from the financial system that provide financial services or auxiliary financial services in order to turn them into their subsidiaries or affiliates. They cannot, however, carry out lending, borrowing, contingent and service operations with those companies. Although the prohibition is strongly enforced, the following are permitted for operations with institutions from the people’s and solidarity financial sector:

• financial institutions can, on their own account or for others, purchase, keep and sell securities issued by the public finances governing entity and by the Central Bank;
• they can receive sight and term deposits;
• they can perform cash and treasury services;
• they can receive and keep objects, movable goods, valuables and documents under consignment for their custody in the safety boxes rented out for the safekeeping of valuables; and
• within the limits, and in compliance with the rules established by the Monetary and Financial Policy and Regulation Board, they can engage in loan operations with their employees who are not part of the entity’s administration.

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The COMF has ascribed greater transparency to the financial sector and has asserted more control over the sector’s services, resulting in transparency and public protection in general. Nonetheless, it has conferred a series of powers to regulation and oversight entities which, if unchecked, could alter the sector’s stability.

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Financial services are public services. Therefore, users’ rights are protected by the Constitution and the Consumers’ Defence Law or the Constitution and the COMF. Although users are able to take civil and criminal action, regulation and oversight entities have the power to define the manner in which users’ rights are respected and to place the fines in the case of non-compliance. Other aspects that are regulated and have been checked are:

• quality of services;
• minimum information and publicity requirements so that the contents and characteristics of advertisement are clear and not misleading;
• information and credit reports, which must be accurate and updated;
• information about the existence of conflicts of interests regarding activities, operations and services offered to customers;
• personal information, which must be kept confidential and protected;
• service charges, which must be expressly accepted or, otherwise, the financial institution could be demanded to return unaccepted charges; and
• damage, which must be cured.

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The Monetary and Financial Policy and Regulation Board has broad lawmaking powers for directing monetary, credit, exchange and financial policies. Furthermore, it is possible to amend secondary rules applicable to the financial sector. Through resolutions and regulations, it is possible to modify, and/or establish regulations for, among others:

• the legal banking reserve rate as a mechanism for planning, regulating and monitoring the economy’s liquidity levels;
• management, solvency and prudence to which financial entities should be subjected; and
• directives for the credit and investment policy and, in general, for lending, borrowing and contingent operations of the entities of the national financial system.

In addition to the latest COMF amendments, greater safety for investments in the financial sector is procured to attract international institutions doing business in the financial sector.

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Within the sphere of their competences, oversight entities and financial institutions have broad powers for supervising, auditing, intervening in and monitoring public and private entities forming part of the national financial system. The law dictates three levels of supervision:

• preventive: applies to entities with adequate financial business management and, in the opinion of the oversight agency concerning stable economic-financial control, with good corporate governance and good risk management, implying a lesser risk;
• corrective: applies to financial entities with a medium risk profile, understood as entities with an economic-financial condition, corporate governance quality or risk management displaying moderate to significant weaknesses in terms of the size and complexity of their operations, thus warranting a strict follow-up on the oversight entity’s recommendations; and
• intensive: applies to financial entities with a high and critical risk profile. In other words, entities with an economic-financial condition, corporate governance quality, risk management and so on, proving to be inadequate to deficient for the size and complexity of their operations. They require significant improvements, are highly likely to fail to meet the minimum solvency requirements or have already failed to meet such requirements. This same intervention applies to financial entities with good solvency levels, but with losses reported in the last two quarters or with business projections indicating that they may fall below the minimum technical equity in the next two quarters.

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When it deems appropriate, the oversight agency may exercise the power to:

• audit;
• inspect;
• intervene in financial institutions when deemed necessary;
• demand that overseen entities define and adopt corrective and recovery measures;
• order overseen entities to increase their subscribed and paid-in capital in cash;
• order the liquidation of financial institutions; and
• initiate administrative processes and, if the case, start civil and criminal processes against the appropriate entities. For collecting debts and penalties, the oversight agency has the power to initiate enforced collection procedures, besides other things.

The resolutions passed by the oversight authority cannot be suspended if a claim or remedy is either accepted for processing or heard.

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The most common reasons for control measures to be initiated are listed below. Such measures include requesting additional information after the institution has been audited, ultimately leading to the mandatory liquidation of the financial entity. The reasons are:

• liquidity gap;
• inadequate risk management resulting from insufficient assurances, among other things;
• capital shortfall;
• technical equity gap;
• legal banking reserve shortfall;
• inconsistent balance sheets; and
• administrative shortfalls resulting from a lack of knowledge on the part of the directors and administrators.

Normally, if the problem is not recurring, a warning and monetary fine will be issued to the institution; for repeated failure, the oversight entity will intervene and ultimately the financial institution will face mandatory liquidation. Lately, charges for services not directly provided by financial institutions or, if provided by financial institutions, the service charge is considered high, are being subjected to control.

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In order to guarantee the proper operation of financial institutions, oversight entities are required to permanently supervise them either on-site or off-site.

Although the oversight agency may intervene in a financial institution at any time, normally it will do so when intensive monitoring has been ordered. This is explained in the answer to question 9. The controller must ensure that the institution follows its restructuring plan, called an intensive monitoring plan, which includes commitments, debt and time periods of the institution with respect to its officers, shareholders and directors. The time periods for recovery cannot be more than 370 days, when intervention is because of equity shortfalls, or two years in other cases. If the financial institution’s problems have not been solved or the equity shortfall persists during the recovery period, the institution will be forced into liquidation.

Payments derived from the mandatory liquidation of a financial entity must be made in the following order:

• deposits up to the legally insured amount covered by deposit insurance;
• payments owed to workers for salaries, severance, profit-sharing, reserve funds and employer-paid retirement pensions, up to the amount stated in the calculations performed pursuant to worker protection laws, as well as liabilities with the Ecuadorian Social Security Institute that are derived from employment relationships;
• discount window lending and domestic investment of liquidity surpluses;
• deposits for sums exceeding the insured amount of priority groups served, up to 50 per cent in addition to the insured amount;
• other deposits for sums exceeding the insured amount;
• other liabilities resulting from funds raised by the financial entity;
• sums paid by the Deposit Insurance Corporation and Liquidity Fund;
• payments owed for taxes, imposts and contributions;
• court costs arising in the common interest of creditors;
• payments to suppliers of the financial entity, up to an amount equal to the deposit insurance; and
• other liabilities.

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When a financial institution enters into mandatory liquidation, the oversight agency will issue a resolution ordering the suspension of operations, the exclusion and transfer of assets and liabilities, and the appointment of a temporary administrator by the oversight agency. The temporary manager fulfils the duties of the administrators and exercises the legal representation of the financial entity, safeguarding its goods. The financial institution’s administrators and directors who were in charge of the institution up to the time it entered into mandatory liquidation will no longer fulfil their duties, but will be subject to administrative, civil and criminal liability with respect to their actions and inactions leading to the financial institution’s liquidation.

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In a mandatory liquidation, the administrators and directors automatically forfeit their positions and are not entitled to claim indemnification even if they are in a relationship of employment with the entity. Likewise, the assets of controlling shareholders, related third parties and administrators, including directors, cannot be sold.

Shareholders in an entity from the financial sector are liable for the entity’s solvency up to an amount equal to their stockholding. However, in the case of the mandatory liquidation of a financial entity, shareholders who directly or indirectly are persons with influential equity, administrators, officers or employees and related third parties, who have incurred in negligence, gross negligence or ordinary negligence, will be liable, even with their personal property. If, during the liquidation, it is established that a crime or quasi crime was committed due to an action or inaction, documentation must be provided to the prosecutor for the investigation. In addition, civil action may be started.

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The Monetary and Financial Policy and Regulation Board is the regulatory entity and, therefore, defines the minimum requirements for the subscribed and paid-in capital of financial institutions. The oversight agency may order a cash increase in subscribed and paid-in capital. In the incorporation of a financial institution, contributions in kind cannot be made for capital increases. If, however, it is stipulated that the capital increase is to be made in cash, a contribution in kind may be made with the approval of the oversight agency. The asset must be usable in the institution’s line of business.

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Entities from the public and private financial sectors must create a legal reserve fund in an amount equal to at least 50 per cent of their subscribed and paid-in capital. For this purpose, at least 10 per cent of their annual earnings must be allocated to the fund. Furthermore, they have to comply with the rules regarding financial, liquidity, capital and equity indicators determined by the Monetary and Financial Policy and Regulation Board. These are set depending on the type and complexity of the financial entity and the economic area in which it operates, as well as the internal control systems and risk management demanded from them.

Entities from the national financial system must keep sufficient reserves that are commensurate with their business in order to address the following, among other things: instantaneous liquidity, structural liquidity, liquidity reserves, domestic liquidity and liquidity gaps; and solvency and technical equity as needed and sufficient for backing the entity’s current and future operations. They must also cover losses not protected by risk asset provisions and have sufficient capital for an adequate macroeconomic performance. In addition, the financial institutions overseen by the Superintendency of Banks and the financial institutions from the first segment of the people’s and solidarity economic sector must always keep a bank reserve of at least 9 per cent. The Monetary Board sets the amount for the other segments of the people’s and solidarity economic sectors.

In order to cover the money withdrawn by customers, entities from the public and private financial sectors are obligated to maintain a legal banking reserve for the deposits and fund-raising they undertake. Presently, the legal banking reserve is 5 per cent for financial institutions with assets over US$1 billion and 2 per cent for all others. The legal banking reserve is deposited at the Central Bank and does not bear interest in favour of the financial institution that made the deposit. Should a state-owned or private financial entity fail to meet the stipulated legal banking reserve percentage, the Superintendency of Banks will order it to immediately contribute the funds needed to cover the shortfall.

The solvency of foreign financial entities in which an Ecuadorian financial entity has a stockholding equal to more than 20 per cent of capital will be determined by the countries in which they are located. In no case, however, can it be below the higher of either the 9 per cent bank reserve, which is calculated employing the method applied to financial groups in Ecuador, or the minimum established by the Board.

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The oversight agency will order a capital increase and, if the capitalisation is not made within the granted term, the entity will enter into mandatory liquidation.

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When an institution is declared to be in mandatory liquidation, as described in the answers to questions 14 and 19, among others, and its administrators can no longer fulfil their duties, a receiver will be appointed ex officio. In addition to the civil and criminal action that may be taken against administrators and shareholders, precautionary measures may be implemented. These measures will be kept in place until the liquidation is over.

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If a bank becomes insolvent, all the levels of supervision analysed in question 9 must be exhausted. For this purpose, the oversight entity will initiate a series of corrective measures prior to issuing a resolution to liquidate the bank, not only to safeguard the bank’s equity, but also depositors’ rights and financial stability. Only if the problem cannot be cured will the bank go into liquidation, and the Superintendency of Banks will issue a resolution ordering the liquidation of the bank and appoint a liquidator. The liquidator will be in charge of the entire liquidation process.

Once the bank stops operating, the creditors will be notified and all the bank’s senior management, including the board of directors, will be cancelled. In addition, all the procedures to collect credit in favour of the bank will begin. Among other things, these include selling the bank’s assets and collecting all debts owed to the bank.

The liquidator will request the money to make payments as part of the guaranteed deposits, pursuant to the answer to question 4. Furthermore, the bank’s creditors will be notified and rated in order of prevalence according to the type of debt:

• labour (employees and debts with the Ecuadorian Social Security Institute);
• taxes;
• debts owed by the bank to third parties for which the bank has mortgages or pledges as collateral; and
• creditors in general.

After the credit is paid following the above-mentioned order, any creditor not related to the bank’s shareholders and exiting management will be paid. The balance, if any, will be paid to the shareholders as well as any debt to management.

In the case of civil liability, relevant action will be taken against management, including among them directors, auditors and commissioners, as well as the shareholders, and other allegedly responsible parties. In the case inappropriate management is detected, the Ecuadorian prosecutor’s office will be requested to intervene to analyse whether there is any criminal liability.

The bank’s management may judicially appeal the resolution by the Superintendency of Banks, but cannot suspend the effects of the resolution ordering the bank’s liquidation.

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Although no changes are expected with regard to adequate capital, an obligation has been included for the public financial sector to form a fund for the development of the people’s and solidarity financial sector. State-owned banks are obligated to contribute up to 50 per cent of their profits to the fund.

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An individual or company has direct controlling interest when one of the following conditions is met: they own 6 per cent or more of subscribed and paid-in capital or capital stock; or even when the 6 per cent condition is not met, they have shares in an amount equal to or greater than 600 times the income tax-exempt base fraction, presently US$11,270.

Controlling interest resulting from an indirect relationship exists in the case of:

• a spouse, common-law spouse or relative up to the fourth degree of blood relation or second degree of family relation with the administrators of the financial institution or a company has influential power in the financial institution;
• a shareholder has at least a 1 per cent stockholding in the financial institution’s subscribed and paid-in capital or, when the stockholding is less, the subscribed and paid-in contribution is equal to or greater than one hundred times the income tax-exempt base fraction;
• a spouse, common-law spouse or relative within the second degree of blood relation or relative up to the first degree of family relation with shareholders who are persons with a controlling interest, administrators of a financial entity or officers of a financial entity who approve credit operations; and
• companies in which the spouse, common-law spouse or a relative within the second degree of blood relation or first degree of family relation with administrators or officers who approve credit operations, owns shares representing 3 per cent or more of the entity’s capital.

Persons related by presumption are anyone:

• who has received a loan in preferential conditions in terms of time periods or interest rates or who do not have to provide security or who have provided security that is disproportionate with respect to the borrower’s equity or ability to pay;
• who has received a loan without providing adequate security, has no loan history or is domiciled abroad, and there is no available information about that person;
• who has received a loan because of reciprocity with another financial entity;
• who receives preferential treatment in lending operations; and
• is deemed to be related by presumption, subject to the general rule issued by oversight entities.

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Foreign individuals or legal persons, including foreign financial entities, may incorporate financial entities or establish branches or representation offices in Ecuador, without any limits on investment, although subject to the same rules governing domestic investment. When a foreign financial institution operates through a branch or representation office, the parent company is jointly liable for the obligations of the branch or representation office in Ecuador.

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The regulation and oversight entities listed in point 3 above have broad regulating and oversight powers in the financial sector. Within their scope of action, they may, among other things:

• regulate the maximum interest rates and the credit, exchange, financial, insurance and securities policy;
• define the mechanism for instrumenting and executing the policies and regulations of the monetary, exchange and credit policy;
• monitor, audit, intervene in, oversee and supervise all financial institutions; and
• review unusual economic operations or transactions.

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The shareholders, administrators, including directors, officers or employees, internal and independent auditors, qualified risk firms, appraisal experts and others providing services supporting the supervision of the financial institution, must ensure the correct management of the financial institution, as well as its strict compliance with the legal rules governing it, and are jointly liable for the financial institution’s actions and inactions. Liability may be administrative, civil and criminal.

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Anyone with direct or indirect control will be jointly liable for the financial institution’s actions and inactions. Liability may be administrative, civil and criminal. If proven that certain employees of the oversight entity knew about the bank’s problems but failed to inform their superiors or negligently failed to order intervention or other measures aimed at recovering from intervention, such employees shall be jointly liable with the bank’s management and will bear the same liability as the financial institution’s administrators and shareholders.

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Any change in the ownership of capital implying the direct or indirect taking of control of the financial institution requires the prior approval of the oversight entity. Control exists when an investment results in the direct or indirect control of a financial entity.

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There is no difference between nationals and foreigners. Foreigners, however, require additional documentation regarding the legal existence of the company and the representation of the individual or company is required. If an acquisition is involved that could lead to the consolidation of a concentration of financial entities, the prior authorisation of the Superintendency for Market Power Control will be required.

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In general, oversight agencies will check any change of control of the institution, as well as the origin of the funds used for the incorporation or acquisition of the financial institution. Consequently, before new shareholders are approved, the following must be submitted in addition to all identification documents, in the case of an individual, or certificate of legal existence, in the case of a company, whether national or foreign:

• a certificate stating that such shareholders have not been administrators, shareholders, or controlling shareholders, whether directly, indirectly or otherwise, in financial institutions in or out of the country that were declared to be in mandatory liquidation or otherwise bailed out with public resources or through deposit insurance systems, in the past 10 years. A controlling shareholder is a shareholder having asserted significant and decisive influence in the decisions or administration of such institutions;
• a sworn statement that the resources are their own and come from lawful activities. For this purpose, they must provide information about their financial situation over the last five years;
• a sworn statement that they are neither the direct nor indirect title holders of stock in companies unrelated to the financial business, with presence or business in the Ecuadorian market; and
• for companies, a list of the shareholders representing more than 2 per cent of capital stock. The list must include all shareholders until the natural persons representing them are ultimately identified in the chain of ownership. If the company is listed on the stock exchange, a certificate from the stock exchange and a certificate from those persons with dominant power or influence in the company will be required.

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Generally, taking control of a financial institution requires authorisation from the Superintendency of Banks. It could also require the approval of the Superintendency for Market Power Control when the direct or indirect acquisition of ownership or other right over shares in capital or bonds or interest in the capital of a financial institution leads to either a horizontal or vertical economic concentration. This is also the case when a stock purchase produces a connection through the common management or other agreement or act or a factual or legal transfer of the assets of an economic operator to a person or economic group or grants them control or decisive influence in the decision-making by the financial institution’s regular or special administration.

To request authorisation from the Superintendency of Banks for the stock purchase, proof of the integrity and economic solvency of the shareholders must be provided in the terms and conditions described in the answer to question 27.

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If approval from the Superintendency for Market Power Control is not needed, the authorisation could take 30 to 60 working days after all documents have been submitted. Approval from the Superintendency for Market Power Control, when required, could take between six and eight months, which means that the entire process could take between 10 to 12 months.

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The COMF now allows the public and private national financial sector to take over the Central Bank’s management of electronic payment means. Furthermore, the controls to be undertaken by the Superintendency of Banks and the Central Bank’s clearinghouse duties with respect to the different stakeholders of the domestic financial sector are in the process of being agreed upon and regulated.

Ever since September 2014, when the COMF entered into effect, several changes have been made to correct errors and to avoid discretion and abuses by certain sectors of the state, which could even have affected the sector’s stability. The key amendments include:

• the Central Bank is barred from acquiring titles and obligations issued by the entity governing public finances;
• the Monetary and Financial Policy Board will now set interest rates for encouraging the grant of loans to the agricultural and livestock sectors;
• registration of loan data will be undertaken by the Superintendency of Banks and the individuals authorised by said Superintendency for such a purpose;
• a security fund is created for encouraging production in the people’s and solidarity sector; and
• payments by electronic means that were to be done through the Central Bank will now be channelled through the domestic financial system, subject to the oversight entity’s supervision.

The state has declared that it will continue to make changes as necessary to ascribe legal stability to the economic and financial sector and to attract foreign investment.

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