## 1chlea2020001 - Preface

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### Mission background and contacts
- A joint IMF Legal (LEG) and Monetary and Capital Markets (MCM) Department mission visited Santiago de Chile during September 27–October 10, 2018, to advise on the planned integration of the Superintendencia de Bancos y Instituciones Financieras (SBIF) into the Comisión para el Mercado Financiero (CMF).
- The mission met with:
  - President, Mr. Joaquin Cortez Huerta, the Board and other senior staff of the CMF;
  - Superintendent, Mr. Mario Farren, and other senior staff of the SBIF;
  - Superintendent of Pensions, Mr. Osvaldo Macías;
  - Director of the Financial Integrity Unit (Unidad de Analisis Financiero - UAF), Mr. Javier Cruz;
  - Capital Markets Coordinator of the Ministry of Finance, Ms. Catherine Tornel;
  - Director of the Financial Policy Division of the Central Bank of Chile (BCCh), Ms. Solange Bernstein.
- In its final meeting, the mission presented its main observations and recommendations to the Board of the CMF and the Superintendent and Deputy-Superintendents of the SBIF.

### Executive summary: scope, legal-framework observations, and expected synergies
- Mission scope:
  - Advised on: (i) internal governance structure of the new CMF (the CMF after integration of the SBIF); (ii) internal organizational structure; (iii) the transition process towards the new CMF; and (iv) cooperation arrangements with the Central Bank and other relevant Chilean supervisory authorities.
  - Provided medium-term recommendations on the legal mandates and autonomy of the CMF.
  - The Bills containing the amendments for integration of the SBIF into the CMF were approved on October 3, 2018.
- Legal-framework observations:
  - Approved Bills contain important enhancements to governance and regulatory framework, but several legal aspects would benefit from further clarification, including the mandate, objectives, powers, and governance of the CMF.
  - Short-term measures to address inconsistencies: changes in the CMF’s charter, internal guidelines and operational procedures, a clearly communicated mission statement, and provisions in an omnibus Bill to clarify the delegation framework for the CMF (Annex I contains a drafting proposal).
  - Medium- to longer-term measures: enhancements to CMF autonomy should be incorporated in the respective financial sector laws; definition of the mandate could be streamlined and aligned with the mission statement.
  - Main recommendations of the 2011 FSAP related to consolidated supervision and resolution still need to be addressed in the legal framework (Annexes II and III).
- Expected synergies from integration (core regulatory and supervisory functions):
  - Strengthening conglomerate supervision (e.g., internalizing coordination and data sharing).
  - Broadening the base for developing and efficiently using specialized skills (e.g., cyber risk).
  - Ensuring consistency of regulation across sectors (e.g., corporate governance regulations).
  - Consolidating and strengthening the research function.
  - Strengthening and harmonizing the approach to market conduct supervision across sectors.
  - Building on developed sanctioning processes within the current CMF.
  - Building on and harmonizing the well-established risk-based supervision process in the SBIF.
- Organizational blueprint:
  - A proposed internal “twin peaks” model is presented to help drive synergies (see Section V and Annex IV).
- Integration challenges:
  - The CMF’s collegial Board governance model was only established on January 1, 2018, and the organization and Board are still settling into the new governance structure and decision-making process.
  - Integration does not foresee inclusion of former senior SBIF staff on the Board.
  - Importance of CMF Board developing relationships with SBIF staff and understanding SBIF decision-making processes to ensure seamless integration on “Day One” (the date when the integration is legally realized).
- Transition governance recommendation:
  - Establish a Steering Committee and taskforce with CMF and SBIF involvement on an equal basis.
  - Early communication of the organizational blueprint is useful, but priority is achieving effective integration on Day One; moving to the blueprint in a timely manner becomes the next priority.
  - Relocation of all staff to a single building is recommended to build “esprit de corps” and break down siloes; options and timetable should be established.
  - CMF Board should consider establishing a clear ambition and supervisory strategy for the new organization to guide staff and enhance regulation, prudential supervision, and market conduct supervision in Chile (e.g., conglomerate supervision).
- IMF follow-up:
  - The IMF stands ready to provide follow-up TA, particularly on clarifying mandate and internal treatment of potential conflicts between objectives.

### Key recommendations — forming an integrated supervisory authority (Table 1)
- Recommendations Relating to the Transition Process:
  - 1 Establish a Steering Committee comprising the President of the CMF and the Superintendent of the SBIF to oversee the integration process. ¶54 — ST
  - 2 Establish a balanced (with equal representation) taskforce, to direct and coordinate working groups dealing with “back-office” and other integration issues. ¶53 — ST
- Recommendations Relating to the Organizational Structure of the New CMF:
  - 3 Consider an internal “twin peaks” organizational structure for the new CMF to promote the objectives of integration. ¶30 — ST
  - 4 Setup a consistent and robust delegation framework to address the need for effective and adequate supervision. ¶27, 28, 32–35 — ST
  - 5 The CMF President delegate to a CMF Commissioner the responsibility for developing bilateral relationships with the BCCh and the Superintendence of Pensions, respectively. ¶43, 44 — ST
  - 6 Establish an operational framework providing explicit criteria to manage potentially conflicting objectives. ¶16 — ST/MT
  - 7 Take the necessary decisions and actions at CMF Board level to achieve the agreed structure in a timely manner. ¶53 — MT
  - 8 Relocate all staff in a single building to build an “esprit de corps” and break down siloes in the new organization. ¶55 — MT
- Recommendations for strengthening the mandate, objectives, and powers of the CMF under the current legal framework:
  - 9 Provide a hierarchy of the objectives of the CMF through an internal statement to be made public. ¶15 — ST
  - 10 Create a CMF charter that outlines clearly the mandates, objectives, and powers of the CMF, and elaborates in detail the division of responsibilities between the Board members, the President, and other senior staff. ¶15, 16, 17 — ST
  - 11 Clarify the allocation of responsibilities of the decision-making bodies of the CMF through amendments made by an Omnibus Legislation. ¶27 — ST
- Key Recommendations Needing Amendments to Financial Sector Laws:
  - 12 Introduce amendments to the CMF Law to strengthen the institutional, budget, functional, and personal autonomy of the CMF. ¶19-22 — MT-LT
  - 13 Revisit the need for the BCCh’s involvement in the microprudential regulatory and supervisory tasks of the CMF. ¶21 — MT-LT
  - 14 Adopt the recommendations for strengthening the legal framework for consolidated supervision and the resolution regime of supervised entities. ¶41 — MT-LT
  - 15 Clarify the CMF legal mandates, pertaining to its different supervisory responsibilities, in Financial Sector Laws and provide a hierarchy between them. ¶14 — MT-LT
- Timing legend:
  - ST = Short-Term (0 – 6 months)
  - MT = Medium-Term (6 month – 2 years)
  - LT = Long-Term (> 2 years)

---

### I. Introduction: context and focus
- The CMF requested TA on integrating the SBIF into the CMF; IMF joint LEG-MCM mission visited Santiago during September 27–October 10, 2018.
- The proposal for integration was contained in the Draft Law on Modernization of the Banking Legislation No. 63-365; in parallel, amendments were proposed to the CMF Law aimed at strengthening the collegial powers of the Board.
- The Bill of Law was approved by Congress on October 3, 2018, and was then awaiting promulgation.
- With integration, authorities expect several synergies including advantages versus siloed agencies, better coordination for supervision of capital ratios, a wider perspective over financial markets and supervised institutions, and introduction of a collective decision-making body to perform all functions (including those currently falling within the responsibility of a single person, viz. the Superintendent of Banks).
- Mission focus: (i) internal governance structure of the new CMF; (ii) internal organizational structure; (iii) transition process; (iv) cooperation arrangements with the BCCh and other supervisory authorities. The mission’s observations on consolidated supervision and resolution framework are included in Annexes II and III.

### Legal mandates, objectives, and managing conflicts

### Findings on legal mandate and objectives
- Importance: A well-defined legal mandate is essential to support the supervisory authority’s autonomy and accountability; mandates should define objectives, tasks, and powers.
- Potential conflicts: Multiple legal mandates may become mutually exclusive; legislation should provide mechanisms (prioritization/hierarchy of objectives, discretion to determine relative priority, or different governance structures for each objective).
- CMF Law objectives (as recognized in the organic law): (i) ensure the proper functioning, development, and stability of the financial market, and (ii) facilitate the participation of the market agents and promote the public faith. The law also requires the CMF to maintain “a general and systemic vision” and consider “the interests of investors, depositors, insured, and the public interest.” (See footnotes: Article 1, second paragraph of the CMF Law (as amended); Article 5.30 of the CMF Law (as amended).)
- Shortcomings identified:
  - The provisions do not discriminate between different legal mandates particularly regarding prudential mandate in its two key dimensions: micro- and macropudential aspects.
  - Recognition of the “development of the financial market” as an objective raises questions as to its appropriateness for a supervisory authority and potential conflicts with other objectives.
  - Several provisions refer to objectives in a general manner without identifying which legal mandate they correspond to, suggesting confusion between mandates and objectives (e.g., preventive and corrective measures not linked to a specific objective).
- Specialized laws misalignment: The General Banking Law, Insurance Law, and Securities Market Law do not provide clear objectives or are not coherently aligned with the organic CMF Law.

### Interim and legal reform recommendations to manage conflicting objectives
- Interim measures recommended:
  - Internally and externally communicated statements can mitigate weaknesses pending legal reform.
  - The CMF could elaborate a statement describing its understanding of mandates, objectives for each mandate, and perceived ranking between mandates in case of conflict; communicate this to Ministry of Finance, Parliament, and stakeholders within the CMF’s accountability framework.
- Legal reform recommendation:
  - Each specialized law (banking, insurance, capital markets) should expressly provide its precise objective.
  - The organic CMF Law should be aligned with these specialized laws and provide the different CMF’s legal mandates; it could also provide for its role in contributing to financial stability.

### Operational framework for conflicting objectives (three-pronged approach)
- First level: Treatment of the case by each operational Department according to the sole objective of its mandate (e.g., conduct supervision) without self-censorship; ensure effective factual information communication between departments.
- Second level: Identification of conflicting issues arising from the case; provide a committee-level framework reflecting different departmental responsibilities to propose arbitrage.
- Third level: Decision by the competent decision-making body (Board) which assumes final arbitrage in accordance with prioritization of objectives.
- Overriding objective when reconciling conflicts: maintenance of financial stability.

### Powers, autonomy, and BCCh involvement

### Observations on powers
- Transfer of powers: The necessary legal powers for banking supervision have been transferred to the CMF by replacing the SBIF with the CMF throughout the General Banking Law and in particular in Article 2.
- Legislative technique observation:
  - The organic law of an integrated supervisory agency should include general provisions governing broad and common powers and tools used across legal mandates instead of listing very specific ones related only to a particular mandate (e.g., Article 5 CMF Law).
  - Specific powers and tools should be reserved to the specialized laws (see Articles 112 and following of the General Banking Law).
- Note: A new paragraph is introduced in Article 2 of the General Banking Law: “However, the Commission will maintain the powers conferred by Law No. 21,000, which creates the Commission for the Financial Market, with respect to the supervised entities.”

### Autonomy — assessment and recommendations
- Four elements of robust autonomy: institutional, personal, functional, and financial.
- Improvements observed: Institutional and personal autonomy of the CMF strengthened compared to previous SVS and SBIF setup.
- Shortcomings and recommendations:
  - Institutional autonomy: Provide explicit autonomy for the exercise of CMF functions and prevent instructions from political organs or other bodies except as authorized by law.
  - Personal autonomy of Board members:
    - Tighten appointment criteria to require appropriate knowledge and several years of experience on banking, securities, and insurance sectors for Board members individually, and for the Board collectively to have required skills specific to markets regulated by the CMF.
    - Extend the “double veto” appointment procedure to the President of the CMF.
    - Grant a six-year term of office to the President as is the case for other Board members.
    - Provide the same due process safeguards for dismissal procedure to the President as those recognized to other Board members.
    - Restrict civil liability to cases of bad faith or gross misconduct found against officials for actions or omissions in the exercise of their functions under the law.
  - Financial autonomy:
    - Provide the CMF the power to propose to Congress its own budget adequate to fulfil its mandate, commensurate to (if not benchmarked against) the industry fees, and not subject to any ceiling imposed by the Executive during budget preparation or if so, according to a multiyear planning prepared by the CMF.
  - Secondary legislation could strengthen legal protection (personal autonomy) for CMF senior management and staff (e.g., insurance against liability).

### Functional autonomy and BCCh involvement — issues and options
- Current situation: Continued involvement of the BCCh in adoption of supervisory rules and decisions via prior approval mechanisms or issuing regulations (Banking Law and Central Bank Law prerogatives).
- Historical rationale: Involvement responds to need for checks and balances vis-à-vis SBIF single Superintendent regime, BCCh’s role as lender of last resort, and BCCh providing full guarantee over sight deposits.
- Considerations for reconsideration:
  - The CMF’s collegial Board provides an intrinsic checks and balances mechanism, weakening the historical justification.
  - External control of CMF actions is better addressed via a robust accountability framework to stakeholders.
  - Opinion on regulations related to BCCh macroprudential mandate would be more transparently provided to the CMF through the CEF.
  - Institutional arrangements for the financial safety net in Chile need reconsideration in line with best international practices; BCCh’s guarantee over sight deposits might be better addressed by adopting an effective resolution framework and creating a deposit insurance scheme.
- Practical timing option: Reconsider BCCh prerogatives regarding prudential supervision of banks when the financial safety net and crisis management framework are updated in line with best international practices.

### Organizational structure and the internal “twin peaks” blueprint

### Integration proposal and immediate organizational facts
- Proposal: integrate the SBIF into the CMF to realize a governance model similar to the CMF and achieve synergies and cost efficiencies.
- Staff counts: SIBF (278) and CMF (346) will have in total about 624 staff, with a mandate for prudential supervision, market conduct, and surveillance of all the above-mentioned financial institutions, including banks; and for ensuring the functioning, development, and stability of the financial market.
- Governance timing: The CMF and its collegial Board governance model were established on January 15, 2018, and the organization and its Board are still settling into the new governance structure and decision-making process.
- Integration design caveat: The integration does not foresee any change in Board composition or size to include former senior SBIF staff.

### High-level principles for internal organization (V.A)
- No single “best practice” blueprint for an integrated supervisory authority like the CMF; lessons suggest:
  - Clear separation of activities and accountabilities between prudential supervision and securities market surveillance.
  - A well-defined coordination framework for supervision of financial conglomerates and assessment of financial stability issues.
  - Integration of common procedures and activities (policy proposals, authorizations, research, statistics, financial analysis) to achieve economies of scale and scope (e.g., integrated policy department, integrated financial analysis group).
  - Centralization of all “back office” functions (human resources, finance, IT, etc.) to pursue cost efficiencies.
- Trade-offs between CMF objectives to be the responsibility of the CMF Board; the overriding objective in reconciling conflicts should be the maintenance of financial stability (priority not explicit in mandate of the new CMF but could be clarified in internal rules and a public mission statement; see paragraphs 13–17).

### Twin Peaks model specifics (V — internal “twin peaks” variant)
- Model is an internal “twin peaks” variant (not pure twin peaks because peaks are not fully self-contained):
  - Benefits: organization by objective, explicit assessment of conflicts of interest and trade-offs at highest level, consistency in conduct rules across sectors, efficiency in development of specialized skills.
- Central feature: separation into four distinct groups:
  - Prudential supervision group: front-line prudential supervision activities of bank, insurance and securities markets intendancies (each remaining separate), plus a specialist risk department providing technical assessments and expertise.
  - Market surveillance group: oversight of market conduct and performance, bringing together consumer protection activities currently in separate intendancies.
  - Policy and research group: regulation, research, financial analysis, statistics activities currently duplicated; also processes applications for authorization to operate in the Chilean financial system, working with prudential supervisors.
  - Administrative group: general administrative responsibilities.
  - Small number of specialized units (internal audit, legal, enforcement, cabinet) reporting directly to the Board.

### Internal decision making and coordination (V.B) — Committees and EGMs
- Preserve current discretion to heads of departments within the SBIF and CMF.
- Need for coordination within and between groups to prevent silos and ensure system-wide perspective on emerging risk, conduct and financial stability issues.
- Coordination mechanism: Committee structure between the Board and heads of intendancies, each Committee headed by a Commissioner:
  - Committees serve as “sounding boards” on emerging issues before full Board engagement and ensure timely information sharing.
  - Each Committee would have a Charter and defined intendancy-head-level membership; Committees would not have decision-making authority.
  - Committee examples:
    - Prudential Supervision Committee: heads of the four intendancies in that group, head of regulation, and Chair of the Policy and Research Committee.
    - Market Conduct Committee: heads of the two intendancies in that group, heads of regulation and legal; Chair may attend Prudential Supervision Committee if emerging conduct issues threaten reputational damage.
    - Policy and Research Committee: heads of regulation and research intendancies; includes heads of the four prudential supervision intendancies and Chair of the Prudential Supervision Committee because it is the focal point for financial stability responsibilities.
    - Administration Committee: heads of the three intendancies in that area.
- Advantages of Committee structure:
  - Draw on skills, background, and experience of Commissioners in allocating Committee chair roles.
  - Help avoid duplication and mixed signals by Commissioners in operational matters.
  - Free the Board to focus on high-level policy and strategic issues.
- Potential drawback:
  - Engaging Commissioners in day-to-day running may detract from the Board’s oversight role, which requires distance and objectivity.
- Alternative: layer of Executive General Managers (EGMs):
  - EGMs responsible for performance of respective groups and obligated to cooperate in areas envisaged for the four Committees.
  - EGM layer adds career progression incentive and retention device, but is costly and raises questions on using executive Commissioners’ talents day-to-day.

### Conglomerate supervision, inter-institutional cooperation, and transition governance

### Conglomerate supervision — precedent, gaps, and recommended stance
- Precedent and approach:
  - Case studies prepared under the auspices of the CFS have used a “lead supervisor” model, led by the supervisor in charge of the main financial activity of the conglomerate, to gain better understanding of conglomerate structure, business model, and risks.
- Developments and current practice:
  - Oversight of conglomerates has strengthened since the IMF’s TA report on conglomerate supervision in September 2015.
  - Legislative changes have given supervisors capacity to require financial information from final owners of banks, insurance companies, and pension fund administrators.
  - The SBIF has been developing a methodology to provide a risk rating for conglomerates on three main criteria—solvency, systemic importance, and corporate governance and risk management—and is applying it to 17 bank-dominated conglomerates.
- Legal and authority gaps:
  - The Chilean legal framework does not cover conglomerate supervision; recent legislative reforms did not address this shortcoming.
  - Current legal framework limitations:
    - Supervision authorized only for a financial institution and its subsidiary, not at the conglomerate level.
    - Supervisors lack power to set minimum prudential standards for corporate governance, capital adequacy, liquidity, and risk management for a financial conglomerate.
    - Supervisors lack authority to impose sanctions on or require corrective actions by a financial conglomerate.
  - Note: The lack of powers for consolidated supervision potentially affects compliance with Principle 1 and Principle 12 of the Basel Core Principles.
- Recommended supervisory stance and initial actions for the CMF:
  - The new CMF should establish and use its “moral authority” to pursue conglomerate supervision actively, making maximum use of existing powers.
  - Suggested initial actions:
    - The CMF Board and senior supervisors should meet with the Board at the top of each significant conglomerate to outline supervisory expectations for risk management and emphasize a “no surprises” approach.
    - These meetings should become part of the regular supervisory cycle.
    - Supervisors should adopt a more assertive approach to improving data quality in key risk areas rather than relying only on public data.
- Pragmatic first step recommended:
  - A “lead supervisor” model based on existing intendancies: supervisor of the bank that dominates a conglomerate designated as “lead supervisor” and able to draw on relevant supervisors in other intendancies for group risk assessments.

### Inter-institutional cooperation arrangements
- Microprudential and conduct:
  - Integration of the SBIF into the CMF could replace the CSF with bilateral relationships among BCCh, CMF, and the Superintendence of Pensions.
  - CMF and the Superintendence of Pensions share clear common interest in life and disability insurance regulation; BCCh is not an obvious party to that area.
  - Recommendation: CMF should assign a specific Board member as first point of contact to maintain bilateral relationship and regular meetings with the Superintendence of Pensions.
  - A similar bilateral relationship should be established between the CMF and the BCCh; assign a CMF Board member responsibility for coordinating the relationship with BCCh.
  - CMF and SBIF should set up a mechanism to involve the CMF in the interim period before integration to guarantee strategic continuity on Basel III regulatory framework issuance.
- Financial stability and macroprudential:
  - Integration changes banking supervision representation in the CEF: bank supervision will no longer be separately represented.
  - The CEF Law allows members to be accompanied by persons as required; CMF should consider involving the responsible intendent (or EGM) for Banking Supervision and/or Policy and Regulation in the CEF to assure continuity.
  - The new CMF may be better placed to contribute to CEF analytical work by consolidating and strengthening research, drawing on microprudential data across banking, insurance, and securities markets to develop a more holistic bottom-up view of emerging risks.
  - Consideration should be given to the research function’s position in the internal organization and its priority in the CMF mission statement.

### Transition and integration governance, timeline, and priorities
- Preparations must start quickly after Congress approved amendments on October 3, 2018.
- The mission organized four roundtable discussions involving staff from both CMF and SBIF as initial joint meetings; roundtables covered conglomerate supervision, enforcement, market conduct, and financial stability.
- Roundtable-identified potential synergies for the new CMF:
  - Strengthening of conglomerate supervision (internalizing coordination and data sharing);
  - Broader base for developing and efficiently using specialized skills (e.g., cyber risk);
  - Consistency of regulation across sectors (e.g., corporate governance regulations);
  - Consolidation and strengthening of the research function;
  - Strengthening and harmonizing market-conduct supervision across sectors;
  - Building on developed sanctioning processes within the current CMF;
  - Building on and harmonizing the risk-based supervision process in the SBIF.
- Short-term integration challenges and downside risks to manage:
  a) Timeliness of early supervisory intervention due to:
     - Slower and more formal CMF decision-making processes;
     - Potential loss of continuity in bank supervision knowledge at the highest management level;
     - Increase in issues requiring CMF Board attention due to integration.
  b) Quality of regulatory and supervision functions during transition:
     - Attrition of key supervisory and general administration staff because of lack of transparency and uncertainties;
     - Staff focus shifting to integration at expense of core functions;
     - Decreased authority and effectiveness of SBIF supervision if market participants focus on CMF Board during transition.
  c) Reputational risk from inadequately managed integration or a negative incident at a supervised entity.
- Transition governance, taskforce, and operational priorities:
  - To minimize uncertainty, clearly define and transparently communicate the transition process and integration objectives.
  - Establish a dedicated taskforce separate from business-as-usual processes with equal CMF and SBIF involvement:
    - The mission sees merit in two CMF Commissioners and two senior SBIF staff closely and equally involved in the taskforce.
    - First task: inventory all issues needing resolution and set realistic timelines to achieve de facto integration within a short timeframe with least disruption; assign issues to separate working groups.
    - Priority practical issues: harmonizing employment conditions and integrating IT systems; intention to use specialist consultancies welcomed.
    - After de facto integration, taskforce should shift to fundamental restructuring aligned with the organizational blueprint in Section V.
  - Set up a steering committee to guide the taskforce and take decisions to facilitate smooth transition:
    - Proposed interim steering committee: two-person committee of the President of the CMF and the Superintendent of the SBIF.
  - Though not immediate, co-locating all staff in a single building is essential for building “esprit de corps” and breaking down siloes; options and timetable should be established.
  - CMF Board should consider establishing a clear ambition and supervisory strategy to guide staff and elevate regulation, prudential supervision, and market conduct supervision (e.g., conglomerate supervision).

### Annex II — Legal reform on banking resolution (summary)

### Objectives and recommended scope of reform (2011 FSAP)
- Ensure resolution of both systemic and non-systemic cases:
  - can take place in an orderly manner;
  - do not incur in high fiscal costs;
  - maintain confidence in the banking system while preserving financial stability in Chile.
- Minimum areas recommended for comprehensive legal reform:
  - (i) broadening the available resolution tools, including P&A transactions, bridge banks, recapitalization without preemptive right of shareholders, forced bank debt restructuring;
  - (ii) providing the SBIF with the powers to write down capital as part of a bank restructuring;
  - (iii) strengthening legal protection for officials in charge of resolution;
  - (iv) establishing a clear priority of claims and allow for carve-outs on this basis;
  - (v) lifting legal restrictions for the use of public funds to facilitate cost effective resolution of systemic banks with the appropriate safeguards.

### Implementation efforts and shortcomings
- Good efforts were made to incorporate in the new Law provisions to amend the current bank resolution legal framework.
- However, a number of fundamental shortcomings in these reforms may hamper the effectiveness of the resolution framework.

### Main weaknesses and suggested improvements
- The regularization phase could be further clarified and strengthened:
  - The regularization phase, as established by the new Law, appears to resemble early intervention; some triggers are posed late in a bank’s difficulty and may be more pertinent to early intervention or resolution.
  - Suggested adjustments:
    - (i) provide more clearly as triggers the lack of compliance of prudential requirements;
    - (ii) clarify the range of early intervention tools available to the CMF; an indicative list of measures could be provided in the law to grant ample flexibility to the CMF to address liquidity, capital, profitability, asset quality, governance, shareholder composition, etc.
- Box 1 — Description of the Proposed Bank Resolution Regime in Chile:
  - Three distinct phases: (i) regularization, (ii) appointment of an “inspector” or alternately a “provisional administrator,” and (iii) compulsory liquidation.
  - Regularization triggers (Article 112 of the General Banking Law as modified by the new Law) include a list of ten named triggers and “any other event that could indicate that there is threat to the financial stability of the bank or poor management.”
  - Regularization procedure: failing bank must present a “Regularization Plan” approved by its Board to remedy the situation within the next six months (Article 113); CMF approves, rejects, or requests changes; rejection or expiry may lead to appointment of an “inspector” or “provisional administrator.”
  - Appointment of “inspector” or “provisional administrator” (Article 117): inspector enjoys veto rights on Board decisions; provisional administrator granted same powers as the Board; appointment of provisional administrator requires prior consent of the BCCh’s Board; maximum duration and renewability conditions specified.
  - Compulsory liquidation: can be initiated by the CMF at any phase; triggers for liquidation are insolvency of the bank (Article 30); CMF appoints a liquidator.
- Assessment of intervention and resolution powers:
  - The intervention framework in the new Law may not ensure an effective mechanism for expeditious and orderly resolution: appointment framework lacks adequate triggers, necessary powers to assume absolute control, and a robust range of tools for orderly closure and wind-down while preserving critical functions and minimizing costs.
- Recommended legal reform areas:
  - (i) Provide a clear ladder of triggers for public intervention.
  - (ii) Introduce robust resolution powers and tools: mandatory recapitalization, mergers, transfer of assets and liabilities (purchase and assumption transactions, bridge banks), mandatory debt restructuring; ensure authorities can assume all shareholders’ rights.
  - (iii) Strengthen supporting powers of the CMF: moratorium and stay of creditor actions; ensure continuity of services and functions; depart from equal treatment of creditors of the same class if necessary; stay temporarily early termination rights under financial contracts.
  - (iv) Safeguard creditors’ rights via NCWOL principle: introduce "no creditor worse off than in liquidation" (NCWOL).
  - (v) Introduce limitations on judicial review of CMF actions during resolution: limit scope of judicial review by law; the only remedy for affected parties should be monetary compensation; analyze feasibility under local constitutional and legal system.
  - (vi) Provide legal basis for public funding mechanisms for resolution financing: recognize systemic cases may require temporary public-sector backstop; public support subject to strict conditions and recovered from the industry; consider mechanisms in Chilean legislation, including explicit guarantee of the central bank to sight deposits.

### Annex III — Legal reform on consolidated supervision (summary)

### Recommended elements of an effective consolidated supervision framework (from 2011 FSAP)
- Adopt:
  - (i) an explicit definition of financial conglomerate (FC), common to all domestic supervisors;
  - (ii) clear allocation of powers and responsibilities for consolidated supervision of the FC;
  - (iii) access to information on the wider financial group on a consolidated and individual basis, as well as on all nonfinancial entities of the group;
  - (iv) ability to identify a de facto FC for consolidated supervision purposes;
  - (v) requirement for a prior authorization, necessary to establish abroad any financial institution part of the FC and to undertake investments or transfers of ownership that would affect the ability to conduct effective supervision or entail new material risks;
  - (vi) requirement that the local FC with cross-border parallel operations or with structures not suitable for consolidated supervision take corrective action;
  - (vii) capital adequacy, liquidity, corporate governance, risk management, disclosure requirements, limits on large and connected-party exposures, all at the level of the FC;
  - (viii) a corrective action framework to address compliance with the above framework.

### Recent legal developments and remaining gaps
- The recently approved Law addressed these recommendations partially. Proposed provisions on consolidated supervision fall short of international standards and good practices.
- Some provisions facilitating consolidated supervision were adopted in 2017 with approval of the CMF Law and the Law for the Financial Stability Council (e.g., power to request information and examine entities that are part of financial conglomerates).
- The new law on the integration of the SBIF into the CMF did not provide additional powers or tools to implement a robust framework for consolidated supervision of financial conglomerates.

### Box 2 — Suggested areas for an effective legal framework for consolidated supervision
- Scope of conglomerate supervision: define criteria to designate a group as a financial conglomerate and establish rules for assessing the “significance” of regulated activities within the group and vis-à-vis the financial sector.
- Designation and responsibilities: where the Superintendence of Pensions supervises entities in financial groups, designate and establish group-level supervisor responsibilities by law.
- Mechanisms for coordination and information sharing: extend the legal basis for exchange of information domestically (inter-agency) and with foreign authorities for consolidated supervision.
- Scope of supplementary supervision of regulated entities: establish requirements at the level of the financial conglomerate such as capital adequacy; liquidity risk, related-party exposures, related-party transactions, and intra group transactions; collecting and analyzing group structures, fit-and-proper status of shareholders and senior management of parent companies; assessing internal control mechanisms and risk management processes.
- Enforcement measures: enforcement measures pursuant to sectoral rules should apply to regulated entities in a financial conglomerate that do not comply with supplementary requirements.
- Legal enabling provisions: the new Law does not contain “enabling provisions” that provide legal basis to conduct consolidated supervision; to provide maximum flexibility, the law could provide a general framework for scope of supervision, principles, powers and tools available for consolidated supervision, coordination arrangements and decision-making procedures among sectoral supervisors; specific rules could be developed later in secondary regulations.

---

*Content summarized from 1chlea2020001 - Preface (IMF LEG-MCM mission report).*

### Preface.................................................................................................................

### 1chlea2020001 - Preface

### Preface: Mission background and contacts
- A joint IMF Legal (LEG) and Monetary and Capital Markets (MCM) Department mission visited Santiago de Chile during September 27–October 10, 2018, to advise on the planned integration of the Superintendencia de Bancos y Instituciones Financieras (SBIF) into the Comisión para el Mercado Financiero (CMF).
- The mission met with:
  - President, Mr. Joaquin Cortez Huerta, the Board and other senior staff of the CMF;
  - Superintendent, Mr. Mario Farren, and other senior staff of the SBIF;
  - Superintendent of Pensions, Mr. Osvaldo Macías;
  - Director of the Financial Integrity Unit (Unidad de Analisis Financiero - UAF), Mr. Javier Cruz;
  - Capital Markets Coordinator of the Ministry of Finance, Ms. Catherine Tornel;
  - Director of the Financial Policy Division of the Central Bank of Chile (BCCh), Ms. Solange Bernstein.
- In its final meeting, the mission presented its main observations and recommendations to the Board of the CMF and the Superintendent and Deputy-Superintendents of the SBIF.

### Executive Summary: Scope and high-level findings
- Mission scope:
  - Advised on: (i) internal governance structure of the new CMF (the CMF after integration of the SBIF); (ii) internal organizational structure; (iii) the transition process towards the new CMF; and (iv) cooperation arrangements with the Central Bank and other relevant Chilean supervisory authorities.
  - Provided medium-term recommendations on the legal mandates and autonomy of the CMF.
  - The Bills containing the amendments for integration of the SBIF into the CMF were approved on October 3, 2018.
- Legal-framework observations:
  - Approved Bills contain important enhancements to governance and regulatory framework, but several legal aspects would benefit from further clarification, including the mandate, objectives, powers, and governance of the CMF.
  - Short-term measures to address inconsistencies: changes in the CMF’s charter, internal guidelines and operational procedures, a clearly communicated mission statement, and provisions in an omnibus Bill to clarify the delegation framework for the CMF (Annex I contains a drafting proposal).
  - Medium- to longer-term measures: enhancements to CMF autonomy should be incorporated in the respective financial sector laws; definition of the mandate could be streamlined and aligned with the mission statement.
  - Main recommendations of the 2011 FSAP related to consolidated supervision and resolution still need to be addressed in the legal framework (Annexes II and III).
- Expected synergies from integration (core regulatory and supervisory functions):
  - Strengthening conglomerate supervision (e.g., internalizing coordination and data sharing).
  - Broadening the base for developing and efficiently using specialized skills (e.g., cyber risk).
  - Ensuring consistency of regulation across sectors (e.g., corporate governance regulations).
  - Consolidating and strengthening the research function.
  - Strengthening and harmonizing the approach to market conduct supervision across sectors.
  - Building on developed sanctioning processes within the current CMF.
  - Building on and harmonizing the well-established risk-based supervision process in the SBIF.
- Organizational blueprint:
  - A proposed internal “twin peaks” model is presented to help drive synergies (see Section V and Annex IV).
- Integration challenges:
  - The CMF’s collegial Board governance model was only established on January 1, 2018, and the organization and Board are still settling into the new governance structure and decision-making process.
  - Integration does not foresee inclusion of former senior SBIF staff on the Board.
  - Importance of CMF Board developing relationships with SBIF staff and understanding SBIF decision-making processes to ensure seamless integration on “Day One” (the date when the integration is legally realized).
- Transition governance recommendation:
  - Establish a Steering Committee and taskforce with CMF and SBIF involvement on an equal basis.
  - Early communication of the organizational blueprint is useful, but priority is achieving effective integration on Day One; moving to the blueprint in a timely manner becomes the next priority.
  - Relocation of all staff to a single building is recommended to build “esprit de corps” and break down siloes; options and timetable should be established.
  - CMF Board should consider establishing a clear ambition and supervisory strategy for the new organization to guide staff and enhance regulation, prudential supervision, and market conduct supervision in Chile (e.g., conglomerate supervision).
- IMF follow-up:
  - The IMF stands ready to provide follow-up TA, particularly on clarifying mandate and internal treatment of potential conflicts between objectives.

### Key Recommendations—Forming an Integrated Supervisory Authority (Table 1)
- Recommendations Relating to the Transition Process:
  - 1 Establish a Steering Committee comprising the President of the CMF and the Superintendent of the SBIF to oversee the integration process. ¶54 — ST
  - 2 Establish a balanced (with equal representation) taskforce, to direct and coordinate working groups dealing with “back-office” and other integration issues. ¶53 — ST
- Recommendations Relating to the Organizational Structure of the New CMF:
  - 3 Consider an internal “twin peaks” organizational structure for the new CMF to promote the objectives of integration. ¶30 — ST
  - 4 Setup a consistent and robust delegation framework to address the need for effective and adequate supervision. ¶27, 28, 32–35 — ST
  - 5 The CMF President delegate to a CMF Commissioner the responsibility for developing bilateral relationships with the BCCh and the Superintendence of Pensions, respectively. ¶43, 44 — ST
  - 6 Establish an operational framework providing explicit criteria to manage potentially conflicting objectives. ¶16 — ST/MT
  - 7 Take the necessary decisions and actions at CMF Board level to achieve the agreed structure in a timely manner. ¶53 — MT
  - 8 Relocate all staff in a single building to build an “esprit de corps” and break down siloes in the new organization. ¶55 — MT
- Recommendations for strengthening the mandate, objectives, and powers of the CMF under the current legal framework:
  - 9 Provide a hierarchy of the objectives of the CMF through an internal statement to be made public. ¶15 — ST
  - 10 Create a CMF charter that outlines clearly the mandates, objectives, and powers of the CMF, and elaborates in detail the division of responsibilities between the Board members, the President, and other senior staff. ¶15, 16, 17 — ST
  - 11 Clarify the allocation of responsibilities of the decision-making bodies of the CMF through amendments made by an Omnibus Legislation. ¶27 — ST
- Key Recommendations Needing Amendments to Financial Sector Laws:
  - 12 Introduce amendments to the CMF Law to strengthen the institutional, budget, functional, and personal autonomy of the CMF. ¶19-22 — MT-LT
  - 13 Revisit the need for the BCCh’s involvement in the microprudential regulatory and supervisory tasks of the CMF. ¶21 — MT-LT
  - 14 Adopt the recommendations for strengthening the legal framework for consolidated supervision and the resolution regime of supervised entities. ¶41 — MT-LT
  - 15 Clarify the CMF legal mandates, pertaining to its different supervisory responsibilities, in Financial Sector Laws and provide a hierarchy between them. ¶14 — MT-LT
- Timing legend:
  - ST = Short-Term (0 – 6 months)
  - MT = Medium-Term (6 month – 2 years)
  - LT = Long-Term (> 2 years)

### I. Introduction: Context and focus of the report
- The CMF requested TA on integrating the SBIF into the CMF; IMF joint LEG-MCM mission visited Santiago during September 27–October 10, 2018.
- The proposal for integration was contained in the Draft Law on Modernization of the Banking Legislation No. 63-365; in parallel, amendments were proposed to the CMF Law aimed at strengthening the collegial powers of the Board.
- The Bill of Law was approved by Congress on October 3, 2018, and was then awaiting promulgation.
- With integration, authorities expect several synergies including advantages versus siloed agencies, better coordination for supervision of capital ratios, a wider perspective over financial markets and supervised institutions, and introduction of a collective decision-making body to perform all functions (including those currently falling within the responsibility of a single person, viz. the Superintendent of Banks).
- Mission focus: (i) internal governance structure of the new CMF; (ii) internal organizational structure; (iii) transition process; (iv) cooperation arrangements with the BCCh and other supervisory authorities. The mission’s observations on consolidated supervision and resolution framework are included in Annexes II and III.

### II. Existing Supervisory Architecture: Institutional roles and coordination
- Institutional organization prior to integration:
  - SBIF supervises banks, their subsidiaries, the larger credit cooperatives, and credit card issuers.
  - CMF supervises insurance companies; securities issuers; fund managers; brokers; and financial market infrastructures, among others.
  - Superintendence of Pensions supervises pension and some social security benefits.
  - Ministry of Finance (MoF) is responsible for preparation of financial sector laws.
  - BCCh is responsible for monetary policy and exercises financial stability functions.
- Coordination forums:
  - Financial Sector Supervisory Committee (Comité de Supervision Financiera (CSF)):
    - SBIF, CMF and the Superintendence of Pensions are permanent members; BCCh is invited to all meetings as an observer.
    - Used as a platform for exchange of information on regulatory and supervisory developments.
  - Financial Stability Council (Consejo de Estabilidad Financiera (CEF)):
    - Mechanism for financial stability and macroprudential policy cooperation and coordination.
    - Chaired by the Ministry of Finance and consists of the CMF, SBIF, and Superintendence of Pensions.
    - BCCh is not a formal member but is a permanent advisor to the CEF; in practice, BCCh plays a lead role in preparatory work and discussions.
    - CEF can request information from its members and the BCCh necessary for identification of financial stability risks; its policy recommendations are non-binding.
- Governance model notes:
  - The capital markets and insurance supervisor’s collegial Board model (transition from Superintendencia de Valores y Seguros (SVS) to Commission (CMF)) was realized on January 15, 2018.
  - The collegial model is similar to BCCh governance and viewed favorably compared to a model concentrating all powers in a Superintendent.

*Italic line: Content summarized from 1chlea2020001 - Preface (IMF LEG-MCM mission report).*

### 10.      To realize a governance model similar to the CMF, and to achieve various synergies and

### 1chlea2020001 - 10.      To realize a governance model similar to the CMF, and to achieve various synergies and 

### Integration proposal and immediate organizational facts
- Proposal: integrate the SBIF into the CMF to realize a governance model similar to the CMF and achieve synergies and cost efficiencies.
- Staff counts: SIBF (278) and CMF (346) will have in total about 624 staff, with a mandate for prudential supervision, market conduct, and surveillance of all the above-mentioned financial institutions, including banks; and for ensuring the functioning, development, and stability of the financial market.
- Governance timing: The CMF and its collegial Board governance model were established on January 15, 2018, and the organization and its Board are still settling into the new governance structure and decision-making process.
- Integration design caveat: The integration does not foresee any change in Board composition or size to include former senior SBIF staff.

### Legal mandate and objectives — findings
- Importance: A well-defined legal mandate is essential to support the supervisory authority’s autonomy and accountability; mandates should define objectives, tasks, and powers.
- Potential conflicts: Multiple legal mandates may become mutually exclusive; legislation should provide mechanisms (prioritization/hierarchy of objectives, discretion to determine relative priority, or different governance structures for each objective).
- CMF Law objectives (as recognized in the organic law): (i) ensure the proper functioning, development, and stability of the financial market, and (ii) facilitate the participation of the market agents and promote the public faith. The law also requires the CMF to maintain “a general and systemic vision” and consider “the interests of investors, depositors, insured, and the public interest.” (See footnotes: Article 1, second paragraph of the CMF Law (as amended); Article 5.30 of the CMF Law (as amended).)
- Shortcomings identified:
  - The provisions do not discriminate between different legal mandates particularly regarding prudential mandate in its two key dimensions: micro- and macropudential aspects.
  - Recognition of the “development of the financial market” as an objective raises questions as to its appropriateness for a supervisory authority and potential conflicts with other objectives.
  - Several provisions refer to objectives in a general manner without identifying which legal mandate they correspond to, suggesting confusion between mandates and objectives (e.g., preventive and corrective measures not linked to a specific objective).
- Specialized laws misalignment: The General Banking Law, Insurance Law, and Securities Market Law do not provide clear objectives or are not coherently aligned with the organic CMF Law.
- Interim measures recommended:
  - Internally and externally communicated statements can mitigate weaknesses pending legal reform.
  - The CMF could elaborate a statement describing its understanding of mandates, objectives for each mandate, and perceived ranking between mandates in case of conflict; communicate this to Ministry of Finance, Parliament, and stakeholders within the CMF’s accountability framework.
- Legal reform recommendation:
  - Each specialized law (banking, insurance, capital markets) should expressly provide its precise objective.
  - The organic CMF Law should be aligned with these specialized laws and provide the different CMF’s legal mandates; it could also provide for its role in contributing to financial stability (see suggestion: “In addition, the CMF’s mandate consists in contributing to the financial stability, in accordance with the legal framework established by...”).

### Managing conflicting objectives — operational framework recommendations
- Need: An operational framework must be put in place to manage trade-offs where compliance with different legal mandates conflicts (examples: banks listed on markets; banks needing public financing where full disclosure may jeopardize financing).
- Two key actions (based on existing legal mandates):
  - Adopt a framework of rules governing the manner to manage these situations (e.g., internal rules for conflict of interest, rules for sharing of information between departments).
  - Design and implement an operational framework at staff and decision-making levels (see Section V for internal organization recommendations).
- Three-pronged approach for operational framework (to align with internal organization):
  - First level: Treatment of the case by each operational Department according to the sole objective of its mandate (e.g., conduct supervision) without self-censorship; ensure effective factual information communication between departments.
  - Second level: Identification of conflicting issues arising from the case; provide a committee-level framework reflecting different departmental responsibilities to propose arbitrage.
  - Third level: Decision by the competent decision-making body (Board) which assumes final arbitrage in accordance with prioritization of objectives.
- Overriding objective when reconciling conflicts: maintenance of financial stability.

### Powers — observations
- Transfer of powers: The necessary legal powers for banking supervision have been transferred to the CMF by replacing the SBIF with the CMF throughout the General Banking Law and in particular in Article 2.
- Legislative technique observation:
  - The organic law of an integrated supervisory agency should include general provisions governing broad and common powers and tools used across legal mandates instead of listing very specific ones related only to a particular mandate (e.g., Article 5 CMF Law).
  - Specific powers and tools should be reserved to the specialized laws (see Articles 112 and following of the General Banking Law).
- Note: A new paragraph is introduced in Article 2 of the General Banking Law: “However, the Commission will maintain the powers conferred by Law No. 21,000, which creates the Commission for the Financial Market, with respect to the supervised entities.”

### Autonomy — assessment and recommendations
- Four elements of robust autonomy: institutional, personal, functional, and financial.
- Improvements observed: Institutional and personal autonomy of the CMF strengthened compared to previous SVS and SBIF setup.
- Shortcomings and recommendations:
  - Institutional autonomy: Provide explicit autonomy for the exercise of CMF functions and prevent instructions from political organs or other bodies except as authorized by law.
  - Personal autonomy of Board members:
    - Tighten appointment criteria to require appropriate knowledge and several years of experience on banking, securities, and insurance sectors for Board members individually, and for the Board collectively to have required skills specific to markets regulated by the CMF.
    - Extend the “double veto” appointment procedure to the President of the CMF.
    - Grant a six-year term of office to the President as is the case for other Board members.
    - Provide the same due process safeguards for dismissal procedure to the President as those recognized to other Board members.
    - Restrict civil liability to cases of bad faith or gross misconduct found against officials for actions or omissions in the exercise of their functions under the law.
  - Financial autonomy:
    - Provide the CMF the power to propose to Congress its own budget adequate to fulfil its mandate, commensurate to (if not benchmarked against) the industry fees, and not subject to any ceiling imposed by the Executive during budget preparation or if so, according to a multiyear planning prepared by the CMF.
  - Secondary legislation could strengthen legal protection (personal autonomy) for CMF senior management and staff (e.g., insurance against liability).

### Functional autonomy and BCCh involvement — issues and options
- Current situation: Continued involvement of the BCCh in adoption of supervisory rules and decisions via prior approval mechanisms or issuing regulations (Banking Law and Central Bank Law prerogatives).
- Historical rationale: Involvement responds to need for checks and balances vis-à-vis SBIF single Superintendent regime, BCCh’s role as lender of last resort, and BCCh providing full guarantee over sight deposits.
- Considerations for reconsideration:
  - The CMF’s collegial Board provides an intrinsic checks and balances mechanism, weakening the historical justification.
  - External control of CMF actions is better addressed via a robust accountability framework to stakeholders.
  - Opinion on regulations related to BCCh macroprudential mandate would be more transparently provided to the CMF through the CEF.
  - Institutional arrangements for the financial safety net in Chile need reconsideration in line with best international practices; BCCh’s guarantee over sight deposits might be better addressed by adopting an effective resolution framework and creating a deposit insurance scheme.
- Practical timing option: Reconsider BCCh prerogatives regarding prudential supervision of banks when the financial safety net and crisis management framework are updated in line with best international practices.

### Compliance with Core Principles and resourcing concerns
- Shortfall: For banking supervision, the new arrangements appear to fall short of full compliance with the relevant Core Principles for Effective Banking Supervision.
- Essential elements stressed by the Core Principles: clarity of objectives, transparency, accountability, effective interagency coordination, and adequate resourcing of banking supervision.
- Resource concern: It is unclear how integration will affect resources available for banking supervision:
  - No reason to assume the new CMF will redirect existing bank supervision resources to other mandates.
  - The financial autonomy that the SBIF enjoyed—ability to present and argue for its own budget—will be lost because the budget for banking supervision will no longer be determined on a stand-alone basis but within the broader mandate and priorities of the new CMF.
- Importance: The new CMF must clarify internally and externally how it interprets and prioritizes its mandates.

*Source: IMF content unit 1chlea2020001 (chapter/section).*

### 23.      A good governance structure for a supervisory authority requires a clear and coherent

### 23.      A good governance structure for a supervisory authority requires a clear and coherent allocation of responsibilities between its decision-making bodies

### Allocation of responsibilities: principles and required functions
- Responsibilities to be defined include: (i) who manages the agency on a day-to-day basis (executive management); ( ii) who oversees the executive management (oversight function); ( iii) who formulates policies entrusted to the agency (policy formulation); ( iv) who adopts the normative instruments of general application (regulatory function); and (v) who adopts the supervisory decisions for individual application (individual supervisory decision-making).
- General principles to ensure a coherent framework:
  - each responsibility must be allocated to one of the decision-making bodies including residual powers (no gaps);
  - no more than one body per responsibility (no overlaps);
  - the allocation is clear and avoids ambiguities;
  - the allocation promotes checks and balances between and within the bodies to avoid concentration of power.
- All elements above are fundamental for coherence and to enable accountability.

### Current CMF structure (as established in its organic law)
- Two main decision-making bodies:
  - The Board: entrusted with the policy-making, oversight, and regulatory functions, and some strategic individual supervisory decision-making.
  - A President, chairman of the Board: in charge of the day-to-day executive management of the CMF and accountable to the Board for its executive management functions.
- Reference: See Articles 20 and 21 of the CMF Law.

### Identified inconsistencies and ambiguities in the CMF Law
- Residual competences and individual supervisory decision-making:
  - The law explicitly states the Board carries out the “superior direction” of the CMF and is responsible for exercising the powers and duties the law(s) entrust to the agency (Art. 8 p.1 CMF Law), indicating the Board exercises residual competence.
  - The law grants the President the status of “Chief of Service” which under general administrative law (Article 31 of the Law N° 18,575) is responsible for adoption of all administrative acts required for internal management and fulfilment of the legal mandate (including individual supervisory decision-making).
  - These provisions are in direct conflict, raising fundamental questions on which body has the residual powers for individual supervisory decision-making.
- Frequency of Board meetings and exclusivity:
  - The law mandates that the Board meets as a minimum twice a week (while the amended provision provides once a week) and when needed in extraordinary meetings.
  - The law states that Board members must perform their functions on an exclusive dedicated fashion to the CMF.
  - These provisions indicate the Board may have been contemplated as a unitary collegial executive management board.

### De facto arrangements and legislative amendments
- Current practice:
  - The CMF adopted a de facto (rather than de jure) structure allowing Board members to participate across the decision-making process: twice a week, Board members meet individually with staff to analyze regulatory and some important supervisory decisions of individual application.
  - Some issues are elevated to the Board for formal approval; others serve to guide staff on supervisory approaches and the President formally adopts the particular administrative act.
- Legislative changes to broaden Board powers:
  - New CMF law amendments broadened Board powers with respect to:
    - additional individual supervisory decision-making (e.g., appoint inspector, provisional administrator, or liquidator of a supervised entity; suspend the operations/activities of supervised persons/entities in serious and urgent cases; adopt all preventive and corrective measures, approve licensing, mergers and reorganizations of supervised entities) — Article 20 num. 10, 12, and13 of the new law.
    - residual competence to the Board by generally stating that the Board exercises the competences and functions that the law entrusts to the CMF — Article 20 num. 1 of the new law.
  - The grant of residual competence would need perfection through legal reform and secondary legislation to set up a flexible delegation system.
  - Delegation constraints: delegation must remain partial and must exclude acts considered “essential” or “having serious consequences.” (See Annex I for drafting suggestions and Annex VII (Box 3) on general delegation principles.)

### Organizational options to crystallize robust internal organization
- Two principal options within current framework:
  - Adopt a model closer to a unitary board:
    - Board members act essentially as executive members.
    - Establish a Committee structure between the Board and heads of intendancies, each Committee headed by a Board member.
    - Board retains decision-making powers; Committees prepare emerging important issues before Board decision.
  - Adopt a model closer to a two-tier system:
    - Create a layer of Executive General Managers (which could be organized as an Executive Committee) granted powers additional to individual supervisory decisions.
    - Board acts mostly as an oversight Board with policy-making and regulatory functions, and some strategic individual supervisory decision-making (as established in Article 20 CMF Law as amended).
- Between these models, delegation mechanisms offer a broad range of possibilities.
- Subsection V.B discusses the two main organizational decision-making/coordination mechanisms.

### V. BLUEPRINT FOR THE ORGANIZATIONAL STRUCTURE — A. Internal Twin Peaks (high-level principles)
- No single “best practice” blueprint for an integrated supervisory authority like the CMF; lessons suggest:
  - Clear separation of activities and accountabilities between prudential supervision and securities market surveillance.
  - A well-defined coordination framework for supervision of financial conglomerates and assessment of financial stability issues.
  - Integration of common procedures and activities (policy proposals, authorizations, research, statistics, financial analysis) to achieve economies of scale and scope (e.g., integrated policy department, integrated financial analysis group).
  - Centralization of all “back office” functions (human resources, finance, IT, etc.) to pursue cost efficiencies.
- Trade-offs between CMF objectives to be the responsibility of the CMF Board; the overriding objective in reconciling conflicts should be the maintenance of financial stability (priority not explicit in mandate of the new CMF but could be clarified in internal rules and a public mission statement; see paragraphs 13–17).

### V. BLUEPRINT FOR THE ORGANIZATIONAL STRUCTURE — Twin Peaks model specifics
- Model is an internal “twin peaks” variant (not pure twin peaks because peaks are not fully self-contained):
  - Benefits: organization by objective, explicit assessment of conflicts of interest and trade-offs at highest level, consistency in conduct rules across sectors, efficiency in development of specialized skills.
- Central feature: separation into four distinct groups:
  - Prudential supervision group: front-line prudential supervision activities of bank, insurance and securities markets intendancies (each remaining separate), plus a specialist risk department providing technical assessments and expertise.
  - Market surveillance group: oversight of market conduct and performance, bringing together consumer protection activities currently in separate intendancies.
  - Policy and research group: regulation, research, financial analysis, statistics activities currently duplicated; also processes applications for authorization to operate in the Chilean financial system, working with prudential supervisors.
  - Administrative group: general administrative responsibilities.
  - Small number of specialized units (internal audit, legal, enforcement, cabinet) reporting directly to the Board.

### Internal decision making and coordination (V.B)
- Preserve current discretion to heads of departments within the SBIF and CMF.
- Need for coordination within and between groups to prevent silos and ensure system-wide perspective on emerging risk, conduct and financial stability issues.
- Coordination mechanism: Committee structure between the Board and heads of intendancies, each Committee headed by a Commissioner:
  - Committees serve as “sounding boards” on emerging issues before full Board engagement and ensure timely information sharing.
  - Each Committee would have a Charter and defined intendancy-head-level membership; Committees would not have decision-making authority.
  - Committee examples:
    - Prudential Supervision Committee: heads of the four intendancies in that group, head of regulation, and Chair of the Policy and Research Committee.
    - Market Conduct Committee: heads of the two intendancies in that group, heads of regulation and legal; Chair may attend Prudential Supervision Committee if emerging conduct issues threaten reputational damage.
    - Policy and Research Committee: heads of regulation and research intendancies; includes heads of the four prudential supervision intendancies and Chair of the Prudential Supervision Committee because it is the focal point for financial stability responsibilities.
    - Administration Committee: heads of the three intendancies in that area.
- Advantages of Committee structure:
  - Draw on skills, background, and experience of Commissioners in allocating Committee chair roles.
  - Help avoid duplication and mixed signals by Commissioners in operational matters.
  - Free the Board to focus on high-level policy and strategic issues.
- Potential drawback:
  - Engaging Commissioners in day-to-day running may detract from the Board’s oversight role, which requires distance and objectivity.
- Alternative: layer of Executive General Managers (EGMs):
  - EGMs responsible for performance of respective groups and obligated to cooperate in areas envisaged for the four Committees.
  - EGM layer adds career progression incentive and retention device, but is costly and raises questions on using executive Commissioners’ talents day-to-day.

### Conglomerate supervision
- Integration of banking, insurance and securities markets supervision provides foundation for improved conglomerate supervision:
  - Facilitates a group-wide view by eliminating frictions to information exchange previously held in separate agencies.
  - Enables consistent methodology for assessing conglomerate risks (double gearing, contagion, conflicts of interest).
  - When legislative support is available, enables harmonized minimum prudential standards (corporate governance, liquidity, risk management).
- No single “best practice” for organization of conglomerate supervision; existing approaches include:
  - Supervisory “teams” cutting across industry lines with a lead supervisor.
  - Lead supervisor of dominant member “outsourcing” supervision of smaller members to industry department supervisors.
  - Separate departments responsible for conglomerate supervision.
- Recommended pragmatic first step for new CMF:
  - A “lead supervisor” model based on existing intendancies: supervisor of the bank that dominates a conglomerate designated as “lead supervisor” and able to draw on relevant supervisors in other intendancies for group risk assessments.
  - Supervisors remain in industry intendancies to minimize organizational disruption; coordination arrangements needed at head of intendancy level and staff availability agreed as part of the annual supervisory planning cycle.
  - Any disagreement over resourcing or priorities reconciled in the Prudential Supervision Committee or by the EGM, if either governance structure is adopted.

*Source: 1chlea2020001 - 23.*

### 39.      There is precedent for the “lead supervisor” model in the case studies of conglomerates

### 1chlea2020001 - 39.      There is precedent for the “lead supervisor” model in the case studies of conglomerates

### Precedent and approach for conglomerate supervision
- Case studies prepared under the auspices of the CFS have used a “lead supervisor” model, led by the supervisor in charge of the main financial activity of the conglomerate, to gain better understanding of conglomerate structure, business model, and risks.
- The case study structure provides the basis for “deep dives” into governance, solvency, and liquidity of conglomerates.
- Under the new CMF, these case studies will presumably be replaced by ongoing and structured risk assessments for all significant conglomerates.

### Developments since the IMF TA report (September 2015) and current practices
- Oversight of conglomerates has strengthened since the IMF’s TA report on conglomerate supervision in September 2015.
- Legislative changes have given supervisors capacity to require financial information from final owners of banks, insurance companies, and pension fund administrators, improving mapping of conglomerate structures and the information base for risk assessments.
- Information requests have largely been confined to public (audited) information on conglomerate members because of data quality concerns.
- The SBIF has been developing a methodology to provide a risk rating for conglomerates on three main criteria—solvency, systemic importance, and corporate governance and risk management—incorporating quantitative and qualitative assessments.
- The methodology is being applied to 17 bank-dominated conglomerates.

### Legal and authority gaps for consolidated conglomerate supervision
- The Chilean legal framework does not cover conglomerate supervision; recent legislative reforms did not address this shortcoming.
- Significant gaps remain relative to the Joint Forum’s Principles for the supervision of financial conglomerates (2012), primarily related to the medium-term recommendations of the 2015 TA.
- Current legal framework limitations:
  - Supervision authorized only for a financial institution and its subsidiary, not at the conglomerate level.
  - Supervisors lack power to set minimum prudential standards for corporate governance, capital adequacy, liquidity, and risk management for a financial conglomerate.
  - Supervisors lack authority to impose sanctions on or require corrective actions by a financial conglomerate.
- Note: The lack of powers for consolidated supervision potentially affects compliance with Principle 1 and Principle 12 of the Basel Core Principles.

### Recommended supervisory stance and initial actions for the CMF
- The new CMF should establish and use its “moral authority” to pursue conglomerate supervision actively, making maximum use of existing powers.
- Suggested initial actions:
  - The CMF Board and senior supervisors should meet with the Board at the top of each significant conglomerate to outline supervisory expectations for risk management and emphasize a “no surprises” approach.
  - These meetings should become part of the regular supervisory cycle.
  - Supervisors should adopt a more assertive approach to improving data quality in key risk areas rather than relying only on public data.

### Inter-institutional cooperation arrangements — microprudential and conduct
- Integration of the SBIF into the CMF could replace the CSF with bilateral relationships among BCCh, CMF, and the Superintendence of Pensions.
- The CMF and the Superintendence of Pensions share clear common interest in life and disability insurance regulation; BCCh is not an obvious party to that area.
- Recommendation: CMF should assign a specific Board member as first point of contact to maintain bilateral relationship and regular meetings with the Superintendence of Pensions.
- A similar bilateral relationship should be established between the CMF and the BCCh:
  - Several banking supervision issues remain microprudential and require prior BCCh approval; coordination currently occurs between SBIF and BCCh and should continue under CMF.
  - Assign a CMF Board member responsibility for coordinating the relationship with BCCh.
  - CMF and SBIF should set up a mechanism to involve the CMF in the interim period before integration to guarantee strategic continuity on Basel III regulatory framework issuance.
  - The steering committee structure proposed in Section VII could be instrumental.

### Inter-institutional cooperation arrangements — financial stability and macroprudential
- Integration changes banking supervision representation in the CEF: bank supervision will no longer be separately represented.
- The CEF Law allows members to be accompanied by persons as required; CMF should consider involving the responsible intendent (or EGM) for Banking Supervision and/or Policy and Regulation in the CEF to assure continuity.
- The new CMF may be better placed to contribute to CEF analytical work by consolidating and strengthening research, drawing on microprudential data across banking, insurance, and securities markets to develop a more holistic bottom-up view of emerging risks.
- Consideration should be given to the research function’s position in the internal organization and its priority in the CMF mission statement.

### Transition and integration: timeline, preparatory work, and governance
- Preparations must start quickly after Congress approved amendments on October 3, 2018.
- The mission organized four roundtable discussions involving staff from both CMF and SBIF as initial joint meetings; roundtables covered conglomerate supervision, enforcement, market conduct, and financial stability.
- Roundtable-identified potential synergies for the new CMF:
  - Strengthening of conglomerate supervision (internalizing coordination and data sharing);
  - Broader base for developing and efficiently using specialized skills (e.g., cyber risk);
  - Consistency of regulation across sectors (e.g., corporate governance regulations);
  - Consolidation and strengthening of the research function;
  - Strengthening and harmonizing market-conduct supervision across sectors;
  - Building on developed sanctioning processes within the current CMF;
  - Building on and harmonizing the risk-based supervision process in the SBIF.
- Short-term integration challenges and downside risks to manage:
  a) Timeliness of early supervisory intervention due to:
     - Slower and more formal CMF decision-making processes;
     - Potential loss of continuity in bank supervision knowledge at the highest management level;
     - Increase in issues requiring CMF Board attention due to integration.
  b) Quality of regulatory and supervision functions during transition:
     - Attrition of key supervisory and general administration staff because of lack of transparency and uncertainties;
     - Staff focus shifting to integration at expense of core functions;
     - Decreased authority and effectiveness of SBIF supervision if market participants focus on CMF Board during transition.
  c) Reputational risk from inadequately managed integration or a negative incident at a supervised entity.

### Transition governance, taskforce, and operational priorities
- To minimize uncertainty, clearly define and transparently communicate the transition process and integration objectives.
- Establish a dedicated taskforce separate from business-as-usual processes with equal CMF and SBIF involvement:
  - The mission sees merit in two CMF Commissioners and two senior SBIF staff closely and equally involved in the taskforce.
  - First task: inventory all issues needing resolution and set realistic timelines to achieve de facto integration within a short timeframe with least disruption; assign issues to separate working groups.
  - Priority practical issues: harmonizing employment conditions and integrating IT systems; intention to use specialist consultancies welcomed.
  - After de facto integration, taskforce should shift to fundamental restructuring aligned with the organizational blueprint in Section V.
- Set up a steering committee to guide the taskforce and take decisions to facilitate smooth transition:
  - Proposed interim steering committee: two-person committee of the President of the CMF and the Superintendent of the SBIF.
- Though not immediate, co-locating all staff in a single building is essential for building “esprit de corps” and breaking down siloes; options and timetable should be established.
- CMF Board should consider establishing a clear ambition and supervisory strategy to guide staff and elevate regulation, prudential supervision, and market conduct supervision (e.g., conglomerate supervision).

### Annex I: drafting suggestions for legal amendments (high level)
- Medium-term: clarify legal mandates of the CMF as an integrated supervisory authority regarding its different competences.
- Short-term (Omnibus Bill): technical amendments to clarify allocations of responsibilities between the Board and the President.
- Examples of suggested wording extracts for CMF Law, General Banking Law, Insurance Law, and Securities Law are set out to clarify supervisory missions, protection objectives (savers, investors, policyholders), and CMF supervisory instruments and responsibilities.
- Technical governance suggestion: taskforce and interim governance roles and Article modifications, including a proposed Article 8 and Article 20 responsibilities and delegation powers (e.g., appointment of delegate inspector, provisional administrator, or liquidator in accordance with specified provisions).

*Source: IMF mission report content unit 1chlea2020001 (excerpt).*

### 11. In particular, the Board shall:

### 11. In particular, the Board shall:

### Board reporting and accountability
- Prepare, within the first four-month period of each year, an annual public account detailing the work carried out by the Commission in the immediately preceding year, including:
  - a general evaluation of the behavior of the markets that are subject to its competence;
  - the actions of the Commission in normative and regulatory matters;
  - the number of sanctions imposed and their causes;
  - the number of sanctioning procedures in progress;
  - their participation in the design of public policies;
  - the resources used;
  - the level of compliance with the tax objectives and the performance indicators used;
  - the challenges and goals for the following year.

### Emergency and preventive powers
- Temporarily suspend, in serious and urgent cases duly qualified, totally or partially, by reasoned resolution:
  - the activities of a person or entity audited or the quotation or transaction of one or more securities;
  - adopt any preventive measure or corrective provided by law when necessary standards for proper development of activities are not met or when required by the public interest, financial stability or the protection of investors, depositors and insured are not met.
- Exception: for entities regulated by decree with force of law N° 3, of 1997 (General Law of Banks and other indicated legal bodies), the power of provisional suspension of activities will be exercised in accordance with the provisions of said law.

### Authorizations, registrations, and non-delegable powers
- Dictate the resolutions related to:
  - authorization of existence, operation and mergers or reorganizations of the audited entities, as appropriate;
  - any other authorization or registration that the Commission must grant within the scope of its powers.
- The Board alone shall exercise the powers to which items 1 to 12 of this article refer, and they may not be delegated to other employees or authorities of the Commission.

### Delegation framework and publication
- The Board may delegate certain of its powers other than its regulatory, policy of administration, authorization, registration and operation and sanctioning powers to:
  - the Chairman, other commissioners, other authorities or officials of the Commission;
  - in accordance with the provisions of its internal operating regulations.
- Internal operating regulations will:
  - precise the cases subject to delegation and the conditions under which the use of delegated powers is subject to.
- The delegation granted in accordance to this framework will be published on the Commission’s website.
- The Board may confer special powers to officials of the Commission for the execution of certain agreements.

### President of the Commission (department head)
- The President of the Commission, as the department head, shall be responsible for organizing and managing the Commission in accordance with the policy framework established by the Board pursuant to Articles 8 and 21.1.
- In accordance with the internal operating regulations establishing the delegation framework foreseen in Article 20, the president may delegate some duties or powers regarding Commission’s internal management as the department head of the Commission.

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### ANNEX II. LEGAL REFORM ON BANKING RESOLUTION

### Objectives and recommended scope of reform (2011 FSAP)
- Ensure resolution of both systemic and non-systemic cases:
  - can take place in an orderly manner;
  - do not incur in high fiscal costs;
  - maintain confidence in the banking system while preserving financial stability in Chile.
- Minimum areas recommended for comprehensive legal reform:
  - (i) broadening the available resolution tools, including P&A transactions, bridge banks, recapitalization without preemptive right of shareholders, forced bank debt restructuring;
  - (ii) providing the SBIF with the powers to write down capital as part of a bank restructuring;
  - (iii) strengthening legal protection for officials in charge of resolution;
  - (iv) establishing a clear priority of claims and allow for carve-outs on this basis;
  - (v) lifting legal restrictions for the use of public funds to facilitate cost effective resolution of systemic banks with the appropriate safeguards.

### Implementation efforts and shortcomings
- Good efforts were made to incorporate in the new Law provisions to amend the current bank resolution legal framework.1
- However, a number of fundamental shortcomings in these reforms may hamper the effectiveness of the resolution framework.

### Main weaknesses and suggested improvements
- The regularization phase could be further clarified and strengthened:
  - The regularization phase, as established by the new Law, appears to resemble early intervention; some triggers are posed late in a bank’s difficulty and may be more pertinent to early intervention or resolution.
  - Suggested adjustments:
    - (i) provide more clearly as triggers the lack of compliance of prudential requirements;
    - (ii) clarify the range of early intervention tools available to the CMF; an indicative list of measures could be provided in the law to grant ample flexibility to the CMF to address liquidity, capital, profitability, asset quality, governance, shareholder composition, etc.

Box 1. Description of the Proposed Bank Resolution Regime in Chile
- The new Law provides for three distinct phases for dealing with failing banks: (i) regularization, (ii) appointment of an “inspector” or alternately a “provisional administrator,” and (iii) compulsory liquidation.
- Regularization triggers (Article 112 of the General Banking Law as modified by the new Law) include:
  - (i) capital requirements mandated by law are breached;
  - (ii) losses observed during the past two or more months permit to predict that the bank will breach the capital requirements;
  - (iii) repeated events of noncompliance with the law, regulations or other instruments issued by the CMF;
  - (iv) noncompliance with liquidity requirements;
  - (v) recurrent need of Banco Central de Chile’s (BCCh) emergency financing;
  - (vi) it is foreseeable that the bank will not be able to meet its obligations in the next 30 days;
  - (vii) losses that surpass 10 percent of the paid capital and reserves;
  - (viii) excess concentration in related party lending or in favorable terms relative to comparable loans;
  - (ix) objections of external auditors to its financial statements;
  - (x) noncompliance with the development plan approved with the granting of the license;
  - (xi) any other event that could indicate that there is threat to the financial stability of the bank or poor management.
- Regularization procedure:
  - failing bank must present to the CMF a “Regularization Plan,” approved by its Board of Directors, detailing measures to remedy the situation and return to normal operations within the next six months (Article 113);
  - the CMF approves, rejects, or requests changes to the Plan;
  - if the Plan is rejected, or upon expiry of the maximum duration of the Plan and the financial condition has not been restored, the CMF appoints an “inspector” or a “provisional administrator.”
- Appointment of “inspector” or “provisional administrator” (Article 117):
  - inspector enjoys veto rights on Board of Director’s decisions;
  - provisional administrator is granted the same powers of the Board of Directors of the bank;
  - appointment of provisional administrator requires prior consent of the BCCh’s Board;
  - maximum duration of inspector appointment is one year, renewable for an additional year;
  - provisional administrator appointment is for one-year renewable as many times as considered necessary by the CMF.
- Compulsory liquidation:
  - can be initiated by the CMF at any phase of the resolution process;
  - triggers for liquidation are insolvency of the bank (Article 30);
  - CMF appoints a liquidator to collect and realize the bank’s assets and distribute proceeds to creditors in accordance with the priority set in the General Banking Law.

### Assessment of intervention and resolution powers
- The intervention framework in the new Law may not ensure an effective mechanism for expeditious and orderly resolution:
  - appointment framework for inspectors or provisional administrators lacks adequate triggers for prompt public intervention, necessary powers to assume absolute control, and a robust range of tools for orderly closure and wind-down while preserving critical functions and minimizing costs.
- Recommended legal reform areas:
  - (i) Provide a clear ladder of triggers for public intervention:
    - specific triggers for resolution should be provided in the law;
    - triggers can be qualitative and quantitative to give legal certainty and flexibility, and prevent regulatory forbearance.
  - (ii) Introduce robust resolution powers and tools:
    - include mandatory recapitalization, mergers, transfer of assets and liabilities (purchase and assumption transactions, bridge banks), mandatory debt restructuring;
    - ensure authorities can assume all shareholders’ rights; explore constitutional implications of suspending shareholder rights.
  - (iii) Strengthen supporting powers of the CMF:
    - power to impose a moratorium and stay of creditor actions;
    - power to ensure continuity of services and functions in resolution;
    - power to depart from equal treatment of creditors of the same class if necessary to contain systemic impact or maximize resolution value;
    - power to stay temporarily early termination rights under financial contracts if entry into resolution or exercise of resolution powers is considered an event of “default.”
  - (iv) Safeguard creditors’ rights via NCWOL principle:
    - introduce the "no creditor worse off than in liquidation" (NCWOL) principle in the General Banking Law to ensure no creditor incurs losses greater than in liquidation.
  - (v) Introduce limitations on judicial review of CMF actions during resolution:
    - limit scope of judicial review by law; the only remedy for affected parties should be monetary compensation;
    - analyze feasibility under local constitutional and legal system;
    - note: suspension of administrative decisions of the CMF during appeal (or illegality claim) is already restricted in amendments to the General Banking Law.3
  - (vi) Provide legal basis for public funding mechanisms for resolution financing:
    - recognize that systemic cases may require temporary public-sector backstop to preserve financial stability and continuity of essential functions;
    - public support should be subject to strict conditions and recovered from the industry;
    - consider mechanisms in Chilean legislation, including explicit guarantee of the central bank to sight deposits.

Notes and cross-references in the source:
- New Law, Title XIV, Articles 112 to 117 bis and Title XV, Articles 120, 121, 130 to 138, 141 to 144.1
- New Law, Article 117, fifth paragraph that prohibits application of acceleration contractual clauses; Article 135 of the Bill establishes moratorium in liquidation proceedings.2
- Suspension in appeal process provided by Article 70 of the CMF Law and Article 5.30 that applies this standard for corrective measures.3

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### ANNEX III. LEGAL REFORM ON CONSOLIDATED SUPERVISION

### Recommended elements of an effective consolidated supervision framework (from 2011 FSAP)
- Adopt:
  - (i) an explicit definition of financial conglomerate (FC), common to all domestic supervisors;
  - (ii) clear allocation of powers and responsibilities for consolidated supervision of the FC;
  - (iii) access to information on the wider financial group on a consolidated and individual basis, as well as on all nonfinancial entities of the group;
  - (iv) ability to identify a de facto FC for consolidated supervision purposes;
  - (v) requirement for a prior authorization, necessary to establish abroad any financial institution part of the FC and to undertake investments or transfers of ownership that would affect the ability to conduct effective supervision or entail new material risks;
  - (vi) requirement that the local FC with cross-border parallel operations or with structures not suitable for consolidated supervision take corrective action;
  - (vii) capital adequacy, liquidity, corporate governance, risk management, disclosure requirements, limits on large and connected-party exposures, all at the level of the FC;
  - (viii) a corrective action framework to address compliance with the above framework.

### Recent legal developments and remaining gaps
- The recently approved Law addressed these recommendations partially. Proposed provisions on consolidated supervision fall short of international standards and good practices.4
- Some provisions facilitating consolidated supervision were adopted in 2017 with approval of the CMF Law and the Law for the Financial Stability Council (e.g., power to request information5 and examine entities that are part of financial conglomerates).6
- The new law on the integration of the SBIF into the CMF did not provide additional powers or tools to implement a robust framework for consolidated supervision of financial conglomerates.

Box 2. Suggested Areas for an Effective Legal Framework for Consolidated Supervision
- Scope of conglomerate supervision:
  - define criteria to designate a group as a financial conglomerate and establish rules for assessing the “significance” of regulated activities within the group and vis-à-vis the financial sector.
- Designation and responsibilities:
  - where the Superintendence of Pensions supervises entities in financial groups, designate and establish group-level supervisor responsibilities by law.
- Mechanisms for coordination and information sharing:
  - extend the legal basis for exchange of information domestically (inter-agency) and with foreign authorities for consolidated supervision.
- Scope of supplementary supervision of regulated entities:
  - establish requirements at the level of the financial conglomerate such as:
    - (i) capital adequacy;
    - (ii) liquidity risk, related-party exposures, related-party transactions, and intra group transactions;
    - (iii) collecting and analyzing group structures, fit-and-proper status of shareholders and senior management of parent companies;
    - (iv) assessing internal control mechanisms and risk management processes.
- Enforcement measures:
  - enforcement measures pursuant to sectoral rules should apply to regulated entities in a financial conglomerate that do not comply with supplementary requirements.
- Legal enabling provisions:
  - the new Law does not contain “enabling provisions” that provide legal basis to conduct consolidated supervision;
  - to provide maximum flexibility, the law could provide a general framework for scope of supervision, principles, powers and tools available for consolidated supervision, coordination arrangements and decision-making procedures among sectoral supervisors;
  - specific rules (e.g., prudential and non-prudential requirements, assessment methodologies) could be developed later in secondary regulations.

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*Italic: Source — 1chlea2020001 - 11. In particular, the Board shall:*

### ANNEX IV. INTERNAL PEAKS MODEL

### ANNEX IV. INTERNAL PEAKS MODEL

### Strengthening the Autonomy of the CMF — institutional, personal, financial dimensions
- Institutional
  - Current framework:
    - The law provides that the CMF is a decentralized public entity that will “relate” to the President of the Republic through the Ministry of Finance.
    - The autonomy of the CMF is not explicitly provided for.
    - It is not fully clear if the sole nature of the CMF as a decentralized public service would prevent orders or instructions from the political bodies on policy grounds or for individual supervisory actions.
  - Recommendation:
    - By law: Provide explicitly the autonomy of the CMF for the exercise of its functions preventing interference from political organs or other bodies, including the industry.

- Personal — Appointment criteria
  - Current framework:
    - Board members are required to have recognized reputation, both professional and academic on financial related matters.
    - Additionally, it is required that the Board, as a whole, has the experience and skills specific to the regulated markets under the CMF’s competence.
    - Assessment: Too general and loosely worded.
  - Recommendation:
    - By law: Tighten criteria to require appropriate knowledge and several years of experience on banking, securities, and insurance sectors.

- Personal — Appointment procedure
  - Current framework:
    - For the President of the CMF: Appointed by the Executive.
    - For Board members: Double veto procedure (Executive appoints prior approval of the Senate).
    - Assessment: The appointment procedure for the President of the CMF does not allow a proper checks and balances mechanism and exposes the President to undue political pressures.
  - Recommendation:
    - By law: Extend the “double veto” procedure to the President of the CMF.

- Personal — Terms of office
  - Current framework:
    - For the President: A 4-year term that follows the presidential cycle.
    - For the Board members: a 6-year term, staggered.
    - Assessment: Connection of the term of office of the President of the CMF with the political cycle hampers his/her personal autonomy exposing the function to undue political interference.
  - Recommendation:
    - By law: grant a 6-year term to the President as the case of the other Board members.

- Personal — Dismissal grounds and procedure
  - Current framework:
    - Dismissal grounds: Incapacity, performance of functions on non-profit entities, serious non-compliance with duties and responsibilities (defined by law), or any of the incompatibility grounds.
    - Dismissal procedure: The President of the CMF is dismissed by the President of the Republic by Executive Decree. Board members are dismissed following a due process procedure before the Supreme Court.
    - Assessment: No due process safeguard for dismissal is granted to the President of the CMF.
  - Recommendation:
    - By law: Recognize to the President of the CMF the same due process safeguards than the rest of the Board members.

- Personal — Legal protection
  - Current framework:
    - Legal defence provided by the CMF in case of judicial actions.
    - Concern: Without protection from liability, the threat of litigation to CMF senior management and staff for undertaking their supervisory responsibilities may hamper their effective performance.
  - Recommendation:
    - By law: Civil liability must be restricted solely to the case of bad faith or gross misconduct found against the officials for actions or omissions in the exercise of their functions under law.
    - Transitional measure: As a transitional measure in secondary legislation or other legal instrument, insurance against liability can be provided.

- Functional autonomy
  - Current framework:
    - As a decentralized public entity the CMF does not depend on the actions of other public bodies.
    - Note: There are some prior approvals for regulatory and supervisory actions by the Central Bank (see Section III for details).
    - Assessment: Adequate regarding internal management autonomy.

- Financial autonomy
  - Current framework:
    - The CMF collects fees and other forms of contribution from the supervised entities. This is also the case for the SBIF.
    - The CMF does not have the competence to approve its own budget. Board proposes to the Executive the annual budget, within the ceiling determined by the latter earlier in the budgetary process. Then the budget is considered by the Executive and usually negotiations are taken to approve any deviation from the ceilings imposed by the Executive. The budget, along with all other budgets of public entities is sent to the Congress for approval.
    - The CMF does not have autonomy to establish its own budget according to the needs to fulfil its legal mandates. Even the preparation of the budget is already influenced by the ceilings imposed by the Executive.
    - There were some cases where cuts in the public spending were applied equally to the CMF and SBIF during the budget execution. This could hamper effective supervision.
    - In practice, the real contribution of the industry (insurance and capital markets) for the CMF budget is very low.
  - Recommendations:
    - By law: Provide the CMF the power to propose its own budget adequate to fulfil its mandate, commensurate to (if not benchmarked against) the industry fees, and not subject to any ceiling imposed by the Executive during budget preparation or if so, according to a multiyear planning prepared by the CMF.
    - Prohibit cuts in the State budget are applicable to the CMF or provide that any such measure carefully takes into account the adequacy of the CMF resources, in line with the Basel Core Principles.
    - Consideration must be given to increase the contribution of the supervised entities (for insurance and capital markets) to the CMF budget.

### Allocation of responsibilities between the Board and the President of the CMF (summary of functions, delegation)
- Regulatory
  - Function: Adopt regulations, circulars. (Art. 20.3)
  - Board: Can delegate? NO
  - President: Can delegate? [Not indicated as delegated]

- Policy-making
  - Board responsibilities:
    - Approve internal operating rules (Art. 8 ¶ 1), policies for planning, organization, direction, supervision, coordination and functioning of the CMF, acquisition and disposal of assets (Art. 20.2), and conflict of interests (Art. 16 ¶3).
    - Approve (Art. 1 Int. Reg.): Strategic Plan of the CMF, Supervisory Policy, Sanctioning Regime Policy, Internal organization of the CMF, Administration Policy, Acquisition and disposal of assets Policy, HHRR Policy, Budget requiring to be approved by the MoF and Congress, and propose modification of laws and regulations to the Executive.
  - Delegation: Can delegate? NO

- Oversight
  - Board responsibilities:
    - Oversight of the executive management (Art. 20. 2 and Art. 21.3). Obligation of the President to report to the Board periodically over the implementation of the policies and over the management of the CMF and monthly for the implementation of the decisions of the Board.
    - Monitoring the achieving the CMF’s global strategy, objectives and performance indicators, inspection plan, normative and sanctioning processes. Monitor of internal controls (Art 1 Int. Reg.)
  - Delegation: Can delegate? NO

- Executive Management
  - Role described as “Chief of Service” (Art. 21):
    - In charge of organizing and administrating the CMF within the internal organization framework approved by the Board (Article 18), supervise and control of staff (Art. 21 ¶ 1), execute the decisions of the Board (Art.21.1 and Art. 2 Int. Reg.), legally represent the CMF (Art. 21. 4), suspend the quotation and transaction of securities in the stock market in serious and urgent cases, establish regional offices (with the approval of the Board), determine the functions of each unit of the CMF (Art. 18).
  - Board: Can delegate? YES (Art.20.9 Reserved)
  - President: Can delegate? As Chief of Service, responsible for organizing and managing the Commission; delegation indicated (Art.20 ¶1 and 3, Art.20.9).

- Reserved Supervisory Powers
  - Board responsibilities:
    - Impose sanctions (Art. 4), appoint inspector, provisional administrator or liquidator of a supervised entity, suspend the operations/activities of supervised persons/entities in serious and urgent cases, adopt all preventive and corrective measures, approve licensing, mergers and reorganizations of supervised entities (Art. 20. 10 and 12).
    - Approve Results of the Evaluation, instruct corrective measures, resolve sanctioning procedures (Art. 1 Int. Reg.)
  - Delegation: Can delegate? NO
  - President: Authorize and approve registrations (Art. 20 num. 13) — Can delegate? YES

- Residual Supervisory Powers
  - Legal basis: Art. 8 ¶ 1, Art. 20. 3 and Art. 1 Int. Reg.
  - Delegation: Board: YES; President: YES (Art.20 ¶1 and 3; Art.20.9)

- Note on interpretation
  - It should be assessed the extent of the application of Art. 31 of the Law. 18.575 for the interpretation of the responsibilities allocated to the “Chief of Service” (“Jefe de Servicio”).
  - Text annotation: Text in black: CMF Law, Text in Red: Recent Modifications New Law; Text in Blue: Internal Regulations CMF.

### Implementing a system of delegation — general administrative law principles (summary)
- Delegation defined:
  - The delegation of powers is the act by which an authority (specifically, the competent body) - delegating - transfers (to delegate) the ability to adopt an administrative act, while retaining the overall responsibility for the relevant power.
- Two-step process:
  - a) Authorization to delegate:
    - Competencies conferred on a decision-making body are powers of attribution that the body may not, in principle, transfer without authorization.
    - The delegation of powers requires first an authorization to delegate in the organic law of the institution (in the case of the CMF, the CMF Law).
    - This authorization must designate the person or persons to whom powers may be delegated, usually through functions identified within the institution.
    - The authorization may entrust the policy-making body to elaborate the delegation framework under which delegation could be granted.
  - b) Act of delegation:
    - Within the authorization framework, the competent body may agree to delegate one or more powers to one or more persons.
    - These acts of delegation will identify:
      - the nature of the acts delegated (e.g., execution of framework decisions, emergency cases, questions of detail, current management);
      - the beneficiary or beneficiaries of the delegation; and
      - the arrangements that accompany the delegation.
- Limitations to delegation:
  - Delegation cannot affect the core responsibilities of the delegating authority and must remain partial; it must exclude acts considered “essential” or “having serious consequences” (e.g., power to impose corrective measures, sanctioning, regulation powers, or major acts such as granting or withdrawal of license).
- Modalities and safeguards:
  - Sub-delegation: Except where authorized, the delegate may not sub-delegate. If desired, the delegating act should provide for it and designate potential beneficiaries of sub-delegation.
  - Reporting: Reporting requirements may be imposed to delegates (reports, periodic communications, etc.).
  - Instructions: The delegating authority may reserve the right of giving instructions to delegates in the exercise of delegated powers.
  - Procedural adjustments: The delegating authority could develop procedural requirements such as prior consultations before deciding.
  - Delegation versus divestiture: Delegation does not divest the competent body of its powers; the mandate entrusted to the delegate remains precarious.
  - Revocation: The delegating authority may always revoke the delegation granted or restrict its scope.

_Annex text as provided in the source PDF._

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1chlea2020001.pdf_